Investment Markets » Banking and Finance
Chaos At Bradford & Bingley
The authorities have leaned on the banks to rescue Bradford & Bingley. Has another Northern Rock been averted?
Jaw dropping as it might sound, Britain is facing the possibility – small, but growing ominously – of another Northern Rock. There are, of course, differences.
Britain's largest buy-to-let merchant, Bradford & Bingley, is not insolvent and there have been none of the queues that sealed Northern Rock's fate. But following the failure of the lender's latest attempt to raise cash via a rights issue, the City is back in emergency mode, amid fears that financial contagion could once more tear across the banking system.
This is white-knuckle time for everyone with an interest in Bradford & Bingley. Shareholders must be in despair; but depositors have no reason to panic. The full weight of Britain's financial establishment has pledged to back the cash-raising, even if they sustain hefty losses. B&B will have enough cash to operate at least until the end of the year.
This time there are no easy get-outs for the underwriters to the rights issue. All the high street banks are acting as sub-underwriters and the Financial Services Authority is standing in the wings in case anyone suffers a wobble in the manner of TPG, the spineless private equity crew from Texas whose withdrawal, following a downgrade at Bradford & Bingley's debt by the ratings agency Moody's, prompted this latest crisis.
So why did shares, already down 90% on the year, plummet further once the rescue had been confirmed? Because the market is waking up to the fact that life for B&B, even after successful fund-raising, looks very tough. The question has always been how its portfolio of buy-to-let mortgages would perform in a severe housing downturn. "Badly," is what Moody's is saying.
They're not the only ones. Brokers Pali International have assigned a price target of 0p on Bradford & Bingley's shares, raising the likelihood that B&B has no future whatsoever as an independent entity. The crucial thing now – for the credibility of the whole City – is to complete this £400m rights issue without further fuss. To fail again would be crippling.
That such a relatively modest sum should now become system critical to UK banking reveals what a state things are in. The only positive note is that the FSA seems to have learnt the lessons of Northern Rock. It is fully engaged with what's going on and appears in charge.
Let's hope it remains in full head-bashing mode until the whole sorry business is wrapped up. After that should come a well-organised despatch to corporate history, because Messrs Bradford & Bingley, in their now tattered bowler hats, are two dead men walking.
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