Junk bond policy hit by market downfall

Abbey National is valued at £10bn by the stock market, yet its innovative approach to international finance has allowed the bank to build up an investment portfolio worth close to £100bn.

It has been able to do this by borrowing money cheaply and lending it at higher rates to companies around the the world.

As a traditional mortgage bank, with its lending secured on people's houses, Abbey has a strong credit rating. This allowed it to raise tens of billions at preferential rates. This money has then been invested in a huge array of as sets, including "junk bonds."

This is "non-investment grade" financial paper, where there is a higher than usual risk of the issuing company failing to pay their interest bill or going bust.

For taking that extra risk, Abbey will have been paid handsome returns - fine during the boom years, when big company failures were a rarity. But large corporate failures are now commonplace, and any attempt by Abbey to wind down its exotic lending business will be difficult while stock markets continue their precipitous falls.