Northern Rock: Back to old habits?
I asked someone to pinch me this morning when I saw that Northern Rock had launched its first securitisation issue since its great crisis of 2007.
The bank is raising less than £400m from parcelling up mortgages into bonds and selling them on to investors - which is equivalent to around 2% of its balance sheet. And Northern Rock would argue that it is prudent to diversify its sources of funds - and not be wholly dependent on retail deposits.
But as you will know, it was Northern Rock's excessive dependence on raising money from securitisations, from selling asset-backed bonds, which almost killed it three and a half years ago, when the market for those bonds closed down.
So here is the question: Is it good news that those markets have recovered enough, and Northern Rock's reputation has improved enough, for the bank to be able to raise money in that way again?
Or does it show that banks are still too dependent on what some would see as a failed financial technology?
To be fair to Northern Rock, the size of this bond sale is pretty small. It would be wrong to accuse the Rock of falling off the wagon, in the sense of getting drunk again on allegedly easy money from wholesale markets.
But it is nonetheless striking that this bank which is now tiny doesn't think that it might be more sensible to have no gap at all between what it lends to households and the money it takes in from households.
Arguably if banks got back to their position of 2000, when in aggregate there was no gap between what they lent and what they took in from customers - and therefore they had no net dependence on funds raised from bond markets and wholesale providers - the UK financial system would be more solid.
So given that Northern Rock is nationalised, there is powerful symbolism in the implied decision of the Treasury to allow the Rock to engage in securitisation again.
That symbolism is even more powerful when for banks in general, both here and throughout the EU, there is still a substantial refinancing problem stemming from the previous boom in securitisations. Over the next couple of years, vast amounts of maturing debt, including emergency loans from taxpayers made to fill the gap created when commercial markets closed, will come up for repayment.
So for example the Financial Services Authority, the City watchdog, disclosed last week that more than £110bn of bank debt guaranteed by taxpayers under the Credit Guarantee Scheme is still outstanding and is due for repayment within two years. And something like £100bn has to be repaid to the Bank of England in 2011 as a result of the winding up of the Special Liquidity Scheme.
On top of that, there's at least a further £100bn of bonds that aren't guaranteed by taxpayers which has to be repaid by the end of 2012.
Now on the one hand, it looks like good news if banks can raise money again from asset-backed bond markets to repay these debts, because it means they are under less pressure to curtail what they lend to households and businesses - and it means that there's less of a drag on our economic recovery from constraints on banks' ability to provide credit.
However, there is another argument which says that if the borrowing habits of the years leading up to the crash of 2007-8 were so dangerous, it would be better if banks increased their loans in the longer term only in proportion to the money they take in from reliable customers like you and me.
Update 13:44: Northern Rock tell me the main reason they are selling the bonds now is that raising money in this way looks relatively good value.
They are keen for me to point out (which of course I already did in my last note about their annual results) that as of now - and following the break up by the government of the old Northern Rock into an active deposit-taker and a separate organisation managing the repayment of historic loans - they have lent less in mortgages than they have taken from individuals in the form of deposits.
So, for the avoidance of doubt, the sale of bonds should be seen as a signal of how the bank see their future financial needs.