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Northern Wreck

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Last night the world learned that the Bank of England bailed out Northern Rock. And they're blaming America.
How's that work? You see, the whole world is angry that our subprime mortgage lending seems to be a bubble that broke the world. And every failing financial institution from Bombay to Barcelona is going to cite the subprime-led credit crunch as causing its problems.
So what's really going on? Northern Rock was basically addicted to mortgage securitization. It was built on an insane "alternative" financial structure. Where most banks fund their loans with customer deposits, Northern Rock was hugely dependent on the market for securitizing those loans to generate cashflow. When the market for mortgage backed securities seized up, it discovered it couldn't originate new lending business and risked defaulting on its own liabilities. Enter the Bank of England's bailout.
So what's next? Well, Northern Rock won't go under but that's only because it has friends in high places. Now the bank is a likely takeover target. The only way it will escape being acquired is if it finds a friend. Think Countrywide hitting up Bank of America.

European stocks drop on Northern Rock bailout