Investment Markets » Banking and Finance
Panic At Bradford & Bingley
The men in bowler hats have got it badly wrong, with disastrous consequences for shareholders.
History repeats itself, first as tragedy, second as farce, remarked Karl Marx. As a summertime share speculator himself, he would surely have recognised the truth of that in connection with the recent events at Bradford & Bingley. Another former building society from the North, which had its head turned by the apparent magic of the money markets, has admitted its business model has gone badly wrong – and has been forced to beg for cash.
The hiatus surrounding B&B's botched fundraising isn't half as serious as Northern Rock: there was no run on the bank and it ended up being bailed out by US private equity group Texas Pacific, rather than the taxpayer. But it is still deeply troubling, highlighting not just the parlous condition of Britain's housing market, but an industry-wide banking failure.
Bradford & Bingley's problems began back in May when, contrary to previous assurances, it asked shareholders to stump up an extra £300m and signed up UBS and Citigroup to underwrite the rights issue, initially priced at a sizeable 48% discount to its share price. But as renewed gloom over the credit crunch set in, the shares fell, until the difference had narrowed to a tiny margin.
Meanwhile, the board uncovered more bogeys: growing bad debts in its UK buy-to-let business and an £89m hit on US subprime investments. When it knew a profit warning was inevitable and that shares would fall below the rights issue price (making it unsellable), it sold a 23% stake to the Texans, and discounted the rights issue still further.
Ordinarily, it's the responsibility of the underwriters to pick up the pieces. However, UBS and Citigroup hadn't been told the extent of the trouble when they signed up for the deal and made it plain that if they were lumbered with unwanted B&B shares, they would dump them... possibly triggering a panic.
This jaw-dropping tale of management incompetence takes some beating. It's not surprising that chief executive Steve Crawshaw has stepped down. If he hadn't been overcome by a serious cardiovascular problem, he'd certainly have been fired.
It was reasonable to assume that the men in bowler hats knew what they were doing. Plainly they did not, either in terms of managing the mortgage book or their rights issue. Given the fragile confidence in Britain's banks, this is a dangerous situation.
RBS is set to complete its own £12bn rights issue, but in light of the aftermath of the B&B bungle, bank chiefs may well find that the stock market is, in effect, closed to further rights issues.
Vericool Related Articles
- The Fall Of Lehman Brothers
- Who Should Pay For Equitable Life?
- Fannie and Freddie
- Chaos At Bradford & Bingley
- Knives Out At Mansion House
- Why Are Bonuses Not Falling?
All articles are free to reproduce on your website as long as you provide a link to the source of the article on the Vericool Finance website.