B&B nationalised as meltdown continues

As the drama continues in the financial markets, the Government reveals its cunning plan for Bradford & Bingley...

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Last Updated: 31 Aug 2010

After another weekend of frantic negotiations, Bradford & Bingley has officially become the second UK bank to fall foul of the financial crisis. The Government confirmed this morning that it will take control of B&B’s £50bn loan book, while flogging its £20bn savings business to Spanish-owned rival Santander. The main goal is to stabilise the industry, but the deal should also mean that savers’ deposits are protected, many of B&B’s branch staff get to keep their jobs, and other banks will end up footing most of the bill for any losses. In the circumstances, it could have been a lot worse.

Shares in B&B have tanked by over 90% in the last year as investors worried about its funding problems (like earlier casualty Northern Rock, it was heavily reliant on the wholesale money markets) and its exposure to the fruitier end of the mortgage lending spectrum. After a £400m rights issue two months ago (at the Treasury’s behest), its balance sheet was actually in better shape than many of its high-street rivals – but this clearly failed to calm the jitters. On Saturday the Financial Services Authority put it out of its misery by deciding it was no longer a viable bank.

On the plus side, this did mean that B&B qualified for the industry’s Financial Services Compensation Scheme. So even though a private sector white knight couldn’t be persuaded to ride to its rescue, the Government at least has the consolation that the first £14bn of any losses incurred will be covered by the industry. As a result, the newly-nationalised B&B will have to go a long way into the red before taxpayers end up losing out. And with the Government persuading Santander, the owner of Abbey, to pick up B&B’s retail arm, there’s even a chance that some of its branches will be salvaged.

But it’s not all good news. It’s taken £4bn of taxpayers’ money to persuade Abbey of the deal’s merits, while the Treasury is also stumping up £14bn up front to cover the insurance scheme (this being a bad time to squeeze the money out of the banks). And the loan book we’ve all been left with is pretty ropey – it includes lots of dodgy buy-to-let and self-certification mortgages, where arrears rates are steadily increasing. So the Government may be forced to kick a lot of people out their houses to get our money back, which is hardly an attractive political prospect. The only consolation, as Vince Cable pointed out today, is that this loan book has been bought for practically nothing – so even the Government will have a hard time losing money on it.

Of course we’re hardly alone in our troubles: on the other side of the Channel, the governments of Belgium, Holland and Luxembourg have just announced an €11.2bn joint nationalisation of banking giant Fortis, which becomes the first big casualty of the credit crunch in continental Europe. And on the other side of the Atlantic, it looks as though the US Government has finally managed to reach agreement on its $700bn bail-out plan (amid rumours that Wachovia was feeling the heat).

This B&B deal is pretty small fry in comparison – but unless it restores a bit of confidence, there could yet be worse to come. And judging by the markets' continuing slump this morning, as the banks digest news that they'll be forced to shell out billions in compensation, confidence is still in very short supply...


In today's bulletin:

B&B nationalised as meltdown continues
Mortgage lending slumps to new low
MFI gets another lifeline with £25m MBO
Mobiles pay as they go global
More silvertops urgently required

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