A Northern Rock Partnership

The "conventional wisdom" is that there are only two options for Northern Rock: "Public" - through nationalisation and State ownership; and "Private" through continuation as a Public Limited Liability Company backed by possibly unlimited "tax-payers' money".

In fact, there is another way - a new synthesis of Public and Private - in which Northern Rock could be restructured, and for which all of the elements are already in place and which requires neither legislation nor a single penny of "tax-payers' money".

The enabler of this solution is that simple but infinitely flexible new corporate body - the Limited Liability Partnership" ("LLP") now coming into use throughout the commercial and public sectors in ways never envisaged in April 2001 when the LLP was introduced to limit the liability of professional partnerships.

Examples include: City of Glasgow (twice); Standard Life's private equity operation, "SLIPE"; Scottish Widows; First Hydro and an innovative LLP involving the Hilton group.

Introducing the Capital Partnership
A Capital Partnership LLP is not an "Organisation" but a framework within which "stakeholder" Members "self organise".

A Custodian owns the assets of the enterprise as a "steward" or "trustee" and may also have certain governance powers as a guardian of the purpose - or "Aims" - which the enterprise was incorporated to achieve.

An Investor or Capital member introduces money or "money's worth" of (say) land, buildings, intellectual property.

A Developer/ Operator Member uses the Capital to achieve the purpose of the enterprise, and shares the revenues with the Investor in agreed proportional "units" or "Equity Shares". e.g. millionth's or billionth's.

A Northern Rock Partnership could be structured as follows.

Custodian
Firstly: the Northern Rock Foundation already owns 15% of Northern Rock Plc, and receives 5% of profits which it has historically applied, extremely successfully, to good causes.

Secondly; as has been recently documented in the Press, the Northern Rock "Granite" vehicle is an exemplar of the SIV's which have been constructed throughout the UK mortgage industry to allow securitisation of mortgage loans and involve technical "ownership" of assets by charities which are typically not even aware of the staggering scale of assets and liabilities nominally held in their names.

Shareholders would transfer their shares to the Northern Rock Foundation, and would in return become Investor Members - see below. The existing trust arrangements for the Granite assets would also be transferred from the Down's Syndrome North East Association (UK) - the unwitting existing beneficiaries - to the Northern Rock Foundation.

Investors
The key Investor is currently the Bank of England, while the Treasury has a minor direct interest through the 1.25% penalty payment being applied to Northern Rock, and which is "rolling up" as a "subordinated loan". The Treasury also has a very large contingent liability, in respect of deposit guarantees.

As Tim Congdon revealed in the FT recently, politicians, press and public alike are under a misapprehension as to the true position.  The money being loaned by the Bank of England has in fact never been anywhere near a tax-payer and is created by the Bank of England by the "stroke of a pen" - or more likely, with a "click of a mouse" - in the same way as it creates bank-notes, also to provide necessary liquidity.

The privilege of money creation gives rise to income known as "Seignorage" and the true position, as pointed out by Tim Congdon, runs entirely contrary to general perception. The 5.5% interest levied by the Bank of England on its loans is in fact pure profit, since the cost to the Bank of England of this credit creation is zero.

So the true position is that the greater the loan, and the longer this goes on, the greater will be the "profit" to the tax payer in terms of seignorage, and of course this "profit" will be available to offset any potential loss to the taxpayer if shareholder funds were insufficient to cover Northern Rock losses.

My proposal, building on a suggestion from Hector Sants of the FSA, is that it is possible for the Treasury to make a virtue out of necessity by routing all "seignorage" payments by Northern Rock to the Northern Rock Custodian member of a Northern Rock Partnership and for the resulting "Pool" of funds to constitute a "Default Fund". Clearly the Treasury/FSA etc would require representation on the board of the Custodian.

After making the necessary provisions into the Default Fund, the balance of Northern Rock net revenues would be divided between the other Investors ie the shareholders and the Developer/Operator which would essentially constitute a "Cooperative" of staff and management not dissimilar to the John Lewis Partnership, and bolstered by new and innovative management.

A New Asset Class?

In Canada there are essentially two Capital Markets: the conventional market in listed Company stocks, and a parallel market in "Income Trusts" consisting of units in the gross revenues of these listed Companies, created using trust law.

It would be straightforward for a market to develop in proportional "units" or "Equity shares" e.g. billionths of gross revenues flowing through a Northern Rock LLP. While for tax reasons this would not be currently practicable for UK pension investors, it would be attractive to overseas investors not least because the structure is to all intents and purposes a "Sukuk" in structure, and Islamically sound at a deep level.

The effect for existing shareholders would be that they would be participating in the revenues of Northern Rock alongside, rather than after, the management and staff - which is the not unattractive proposition which accounts for the popularity of Income Trusts in Canada.

Outcome

In summary, Northern Rock Plc would be gradually "dis-intermediated". Any necessary money not available from Depositors will be created either by the Bank of England, or directly by the Treasury, and a provision (essentially a charge for the use of the government guarantee) - set at a suitable level - would be levied upon Northern Rock and held as a "Default Fund" by a Custodian.

A proportion of the net revenues would be shared between the existing shareholders - now as Investor members of the Capital Partnership - and the management and staff, thereby aligning their interests. Any excess from the Pool/ Default Fund could be available for public purposes, such as investment in affordable housing.