Nationalisation of Bradford and Bingley is 'least worst option'

Published on Sunday 28 September 2008 22:30

THE Bradford & Bingley bank last night became the latest British high street name to lose its independence as it was confirmed Santander is to take over its retail and branch network.

And Treasury officials were locked in negotiations to nationalise the rest of the struggling bank in a bid to stave off disaster when the markets opened this morning at 7am. The deal, which could cost the taxpayer billions of pounds, was being done after B&B's efforts to save itself by shedding 370 staff last week appeared to have been in vain.

Santander, the Spanish banking giant that owns Abbey, will take over B&B's high street outlets and 22.2 billion worth of deposits, held by 2.5 million savers.

It appeared that B&B's portfolio of 50 billion of loans, including 40 billion of mortgages, would be taken on by the Treasury and brought together with those of Northern Rock, the other bank to be nationalised.

Yesterday, the Treasury minister, Yvette Cooper, warned a rescue package was necessary for the good of the whole banking system. "We've been very clear that the priority is to make sure that depositors, that ordinary savers, are properly protected, but also that we can support the financial stability of the banking system as a whole," she said.

However, there was little comfort for the bank's shareholders whose shares had already dropped from 2 in April to 20p on Friday. They look set to lose everything when the bank is nationalised, though they may get something if one of the private banks steps in as a rescuer.

B&B's demise follows the takeover of HBOS by Lloyds. B&B, which dates from 1851, becomes the last of the old building societies that demutualised after the 1986 Building Society Act and became banks, to disappear off the high streets. Abbey National, Alliance & Leicester, Halifax and Cheltenham & Gloucester have all been merged or bought up in recent years.

The problem with finding a private sector rescuer for B&B centred around its exposure to bad debt with twice the average amount of defaults on mortgages. Nearly 9,000 customers were more than three months behind with payments in the first six months of the year, with 717 repossessions.

Its biggest problem was that it had specialised in the buy to let market, which is struggling at the moment.

The writing had appeared to be on the wall for some time. The company uses money markets to help fund its business, but lending rates between banks have soared as banks fearful of losses refuse to lend to each other.

B&B fell 26.7 million into the red in the first half of this year amid spiralling arrears and bad debts, its former chief executive resigned for health reasons and it lost the confidence of the City with twice-rehashed plans to raise funds from its shareholders.

Vince Cable, the Liberal Democrat Treasury spokesman, said if there was no private sector rescuer for B&B the government was right to step in, but needed to be more decisive than it had been with Northern Rock.

"In these circumstances, nationalisation is the least worst option," he said. "After all, the Bush administration has come to the same conclusion by nationalising a large part of the American mortgage industry."

Meanwhile, David Cameron, the Conservative leader, refused to join others in blaming the banking and financial sectors for the crisis as First Minister Alex Salmond did with his "spivs and speculators" jibe.

Mr Salmond said the B&B developments underlined the extent of the financial crisis. The bank has around a dozen high street outlets in Scotland.

Derek Simpson, joint general secretary of Unite, said workers must not be allowed to fund massive tax concessions for the super rich and Britain's top companies. He said: "The Bank of England is having to bail out Britain's banks because of greed and excess. I say to the government tax the culprits of the credit crunch, not hard-working families. The government must close the loopholes that let super-rich individuals and corporations avoid paying their fair share of tax."

What deal could mean for you

B&B had a reputation for being safe. What happened?

In 2000 it changed from a building society to a bank. This allowed B&B to change its business model to a far more speculative one, relying less on guaranteeing loans through the savings it held and more on the ability to borrow from other banks.

In short, it copied the business model of Northern Rock, which had to be nationalised earlier this year.

So how badly exposed is it – is the situation retrievable?

Bradford & Bingley has 40 billion of mortgages as part of a 50 billion loan portfolio, with double the national average in default rates. Nearly 9,000 customers were more than three months behind with payments in the first six months of the year, with 717 repossessions.

With just 22 billion of money deposited at the bank, it has been left highly vulnerable in the current crisis and unable to guarantee its debts.

Just how big is B&B?

Although not one of the UK's banking giants, it still has a significant showing on Britain's high streets with 200 branches and 2,862 employees.

So what is the impact of B&B's demise on Scotland?

It will not have the same potential impact as the HBOS takeover. However, B&B has 12 outlets in Scotland and several hundred staff. It's believed that the high street branches will be sold off as a going concern, so it is likely more jobs will be lost. B&B's loss will be most keenly felt in West Yorkshire where it is based.

I'm a saver at B&B. Is my money safe?

Savers are in many ways the only people whose money is safe. The government has a scheme that guarantees your savings up to 35,000, and this will soon be raised to 50,000. The government is saying that all savings will be safe whatever happens – either as part of a nationalisation deal or selling off that part of the business to another bank.

I have a mortgage with B&B. What will happen to it?

At the moment this is unclear, but whatever the deal, the mortgage will continue either with the Treasury taking it on as happened with Northern Rock or new owners.

It is likely that mortgage holders will be encouraged to find alternative providers because whoever takes on the 40 billion portfolio will want to reduce the amount of mortgages on the books.

I am a shareholder. Am I about to lose out?

Probably. If the bank is nationalised, then there will be no shareholders – although there is a chance of some compensation. Back in April shares were worth 2, as trading closed on Friday they were 20p. Today they may be worth nothing.