The words ‘mortgage-backed securities’ understandably make some people jittery. They do have a lingering association with less innocuous terms like ‘toxic asset bundles’ and ‘global financial crisis’, after all. But American private equity firm Cerberus Capital Management clearly isn’t scared.
It just paid £13bn for Northern Rock’s pre-crash ‘Granite’ mortgages from the government's 'bad bank', UK Asset Resolution (UKAR), before immediately selling £3.3bn of them on to TSB, which is owned by Spanish bank Sabadell.
UKAR estimates that this will allow it to repay £5.5bn of the £49bn loan the government provided for bailing out Northern Rock and Bradford and Bingley in 2007-8, adding to the £14.6bn it has already repaid.
This all comes as good news for George Osborne, who’s also been selling government-owned Lloyds and RBS shares like there’s no tomorrow, generating nearly £20bn so far. The chancellor even seemed to say that today’s sale would effectively make a ‘profit’ for the state.
‘We are now clear that taxpayers will get back more money from Northern Rock than they were forced to put in during the financial crisis,’ he said. ‘The highly competitive process, unprecedented scale, and the fact that these mortgages have been sold for almost £300m more than their book value demonstrates the confidence investors have in the UK.’
It’s true that the assets were sold for more than their book value as it stood at the end of June, but it’s quite absurd to consider it a profit. The bailout loans were themselves funded by expensive interest-bearing gilts, and the money itself could have been put to other uses, such as paying off pre-existing debt.
Indeed, the National Audit Office says that ‘once the opportunity cost and risks are factored in, the schemes have represented a transfer from taxpayers to the financial sector’, though disgruntled Northern Rock investors whose shares were effectively taken without compensation might contest that particular assertion.
What the UK and US bailouts achieved was almost certainly preserving the financial system and therefore the economy from an even more catastrophic collapse. In that sense talk of getting taxpayers’ money back is essentially missing the point.
The most important thing about today’s sale is not therefore the effect it has on the deficit or whether the government made a good sale, but what it says about confidence in the financial markets.
The government is clearly confident that the markets can handle these potentially risky loans, and the markets (especially Cerberus and TSB) are clearly confident that house prices aren’t going to tank again and cause a repeat of the subprime crisis. Let’s hope they’re both right, eh?