Some encouraging news today; Northern Rock’s ‘bad bank’ has made a profit. Northern Rock Asset Management (NRAM) is the part of the nationalised bank which held onto all the toxic assets so that the rest of the bank would be free to start again with a clean slate. NRAM owns all Northern Rock’s risky mortgages and the infamous mortgage-backed securities which kicked off the financial crisis.
NRAM is in profit because the scale of the mortgage defaults is not as bad as most commentators initially feared. The remaining mortgages on NRAMs books are continuing to yield revenue and so, despite not generating any new business, the bank is making money on its existing loans and securities.
The financial crisis was precipitated by a loss of confidence in mortgage-backed securities. This was not because all the CDOs were made up of toxic loans – it was just that the mortgages had been sliced and diced to such an extent that no-one knew which assets were at risk, therefore confidence in the whole market collapsed. At the time, a few people argued that it was extremely unlikely that all these assets would turn bad but their voices were drowned out in the general panic.
In January 2009, economist Ben Broadbent concluded that the maximum liability the government faced for covering the banks’ toxic assets would be £120bn; still a lot of money but not a complete disaster. One or two brave souls even suggested that the taxpayer might make a profit from these assets. At the time they were ridiculed, or at best ignored, but last month, the government’s Asset Protection Agency forecast a £5bn profit for the taxpayer from insuring toxic bank assets.
It’s still way to early to call but it seems that the level of mortgage and loan defaults has not been as bad as most people thought it would be when the banks were bailed out in 2008. Low interest rates have helped, of course. Had rates not been cut so drastically more loans and mortgages would have defaulted and the state’s liabilities would have looked a lot riskier.
The reduction in bad debts has also driven up profits at HSBC and will probably do the same for other banks when they report later this week. That’s the trouble with good news from the financial sector. While it is, on the whole, good for all of us, especially now we part-own some of the banks, we still have to put up with all the hubris that goes with it.