It all kicked off after a morning results statement from Paragon. Like Northern Rock, the specialist buy-to-let lender relies on the credit markets for its funding (rather than taking deposits from savers), so its share price has already been slumping in recent weeks amid fears it would run into the same problems – even though its profit expectations have remained on course.
Sure enough, on Tuesday Paragon admitted that one of its credit lines runs out in February, and so far it’s not been able to negotiate a new one. Currently, the only alternative is a rights issue to raise the money from its shareholders – but it wants to avoid that. The result, it says, is ‘a material uncertainty... which may cast significant doubt on the Group's ability to continue as a going concern.’ In other words, if it can’t get its hands on £280m from somewhere quickly, it could be toast.
Paragon’s share price rapidly plummeted by more than 50%, and several other banking stocks got caught in the crossfire – Alliance & Leicester, Barclays and RBS also took a pasting. Northern Rock itself plunged to a new low on Tuesday morning after reports that Cerberus, one of the main contenders, has decided not to bid for it after all (at one point the Rock was trading at a measly 60p, less than 5% of what it was worth a few months ago).
Meanwhile there was a mixed reaction to news that Bradford & Bingley had sold two property-backed loan books worth £4.2bn. The bank said it was selling non-core assets to raise cash for ‘higher-margin opportunities’ in residential mortgages of all things – which seems a bit improbable in the current climate. And given that it’s selling at a loss of up to £40m, it’s hard to believe the sale was entirely by choice. Still, at least it now has cash in the bank – which is presumably why its share price rose afterwards.
Indeed, most of the banks went on to bounce back in later trading. These stocks are jumping up and down so much at the moment that it’s hard to keep track - which is good news for hedge fund managers, who will presumably be increasing their vast fortunes still further, but not such good news if you’re a Paragon shareholder...