There were three liabilities valued at a maximum of just under £5 billion:
■ the "basis swaps". The yield on the mortgages assets in Granite varies as some are fixed but many vary with Bank base rate. In order to match interest amounts received and paid, Northern Rock enters into a swap arrangement where it provides Granite with interest at LIBOR plus a margin and Granite provides it with the actual cash interest on mortgages. Northern Rock then has the option to hedge this interest mismatch, which it does to a certain extent. Northern Rock is therefore exposed to the extent that it is not completely hedged or chooses not to hedge certain risks on the basis that to do so would be poor value. For example, Northern Rock does not hedge the movements between Bank base rate and three month LIBOR. The potential liability was in the order of £200-300 million, depending on changes in the difference between the two interest rates. These swap contracts were covered by the Treasury's guarantee arrangements from 18 December;
■ Northern Rock provides mortgage servicing arrangements to Granite. These requirements are set out in a servicing contract between Northern Rock and Granite. To the extent that Northern Rock fails to perform the duties set out in this contract it could be required to pay contractual damages for breach of contract;
■ Guaranteed Investment Contract accounts. These accounts are the bank accounts of Granite. They receive the interest on mortgages and are used to make payments to bondholders. In most cases, the accounts are held with Northern Rock and it has a contractual liability to ensure that the accounts are available where necessary to meet Granite's cash requirements. As with the basis swaps, this liability is covered by the guarantee arrangements announced on 18 December, so there was an exposure to the taxpayer but it was limited to the size of the accounts, which stood at £4.2 billion on 21 February 2008. Northern Rock announced in November 2008 that its share of Granite (the seller's share) had fallen below the minimum level required on two consecutive dates. As a result of this "non-asset trigger event", Granite moved into pass-through. Holders of Granite bonds will therefore receive the principal repayments from the underlying mortgages within Granite. Northern Rock will not receive any payments of principal from the underlying mortgages until the bond holders have been repaid. Northern Rock's business plan in public ownership assumed that Granite would gradually wind down as the company reduced its balance sheet. The move to pass-through changes the timing and order in which the Granite bonds are repaid.