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B&B will be rescued soon

• Robert Peston
• 26 Sep 08, 04:50 PM

Today's 6% fall in 's share price means its days as an independent bank look numbered - and there probably aren't many days before we see some kind of rescue takeover.

So before we go on, here's my statutory reassurance: I don't see any reason for those with retail deposits in B&B to get the willies. There's too much at stake (including the stability of our banking system) for the government to allow B&B savers to lose a penny (and there are a lot of ordinary savers' pennies in B&B, more than 拢20bn of them).

So as and when the worst comes to the worst, B&B will be steered into safe harbour. And unlike the Lloyds TSB takeover of HBOS, taxpayers' money probably will have to underwrite a deal that protects the bank from the fearsome storms in markets

Here's why it's almost impossible that B&B can survive on its own.

At its all-time low closing share price of 20p, this former FTSE100 bank is valued at just 拢289m. This tiny market capitalisation supports a gargantuan 拢52bn of assets and - as importantly - 拢22bn of retails deposits plus 拢27bn of non-retail deposits.

To be clear, the market cap is not the same thing as regulatory capital.

But what the market cap tells us is that investors believe, rightly or wrongly, that Bradford & Bingley's 拢1.5bn of equity in its balance sheet - as per its interim statement less than a month ago - will be all-but wiped out by future losses on buy-to-let and self-cert mortgages that go bad.

So the leverage in this bank, as judged by the ratio of loans and assets to its market cap, is a staggering 180 - greater than the most swashbuckling hedge fund at the height of the bubble.

The best way of thinking of B&B is as an inverted pyramid, with a vast mound of buy-to-let and self-cert mortgages bearing down on a tiny and unstable base of quoted shares.

It means that if there are any serious accidents unanticipated by investors, well the whole thing could topple over.

That image ought to be keeping the chancellor awake at night.

And B&B's immediate vulnerability is that the lack of a substantial market-cap foundation makes it harder and harder for it to persuade money-market funds, other banks and financial institutions to provide it with the wholesale deposits and loans on which it depends.

Today's announcement by the that it is providing 拢40bn of new three-month loans to British banks may buy B&B a bit of time - since it may be able to swap some of its mortgage assets for these loans.

But the Bank of England is only prepared to take AAA-rated asset-backed securities in exchange for these three-month loans. And it's moot whether, with so much pessimism around about our housing market, B&B would be able to package enough of its buy-to-let loans into AAA form to receive substantial funding from the Bank of England.

For me, what really matters is that B&B made three announcements this week that in normal times would have been viewed by investors as positive: it reduced the toxic investments on its balance sheet; it announced measures to reduce overheads; and it cut by a useful 拢1bn its commitment to buy from GMAC a portfolio of mortgages with an above-average arrears problem.

But its share price kept on falling, in spite of what should have been seen as good news.

That focuses minds in the B&B boardroom, the and at the City watchdog, the .

What it will tell them is that B&B is unlikely to regain a sound footing without external help, including a prop (probably) from taxpayers. Which means that a rescue deal can't be far away.

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Central banks to the rescue

• Robert Peston
• 26 Sep 08, 07:28 AM

The Bank of England and other central banks have announced massive financial help for the banking system - which has been seizing up because of fears of further bank collapses.

They are taking co-ordinated action to lend vital funds to banks for a week, to tide them over till some kind of stability returns to the banking system.

The Bank of England's share of this will be $30bn in one-week money, to be auctioned today, and $10bn of overnight money.

Perhaps more importantly in a UK context, the Bank of England will also on Monday auction a substantial 拢40bn of three-month loans (which is what I've said in recent blogs was necessary).

And banks will be able to swap their hard-to-refinance mortgage assets for these three-month loans.

This should bring three-month interbank interest rates down a bit, and reduce the pressure on banks to increase what they charge us for finance.

Also, it should reduce the risk that weaker banks will topple over, because of the difficulties they're experiencing in raising funds from the banking system and wholesale markets.

The central banks are responding to a couple of shocking events last night - neither of them completely unexpected, but both of them chilling.

The Republicans in the House of Representatives decided to blow up the Paulson plan.

And although there'll be desperate attempts to put it back together today, my examination last night of whether the $700bn Septic Bank will do an effective job of detoxing the banks and quarantining the poison, well that may turn out to be academic.

We may have to start wondering again what the financial world will be like without the Septic Bank.

There was a glimpse of that overnight, when we saw the biggest banking collapse in US history.

, the giant mortgage lender, was . That will lead to massive losses for holders of WaMu's shares and bonds - even though has already acquired many of its assets for $1.9bn.

It's by far the largest failure ever in the US With $307bn in asssets, it's 10 times the size of .

Think of it as some kind of horrible Olympic record, since the biggest bank failure till today was that of Continental Illinois in 1984.

Bottom line of all this is that the Age of Anxiety is far from over (but then I never thought it would be, even if Paulson's Septic Bank were built).

UPDATE, 04:00PM: A quartet of central banks have given the White House and Congress a few days to sort themselves out, with their co-ordinated action to lend tens of billions of dollars to banks for a week.

Will that be long enough for a workable rescue package to be agreed by the squabbling legislators?

Well, weren't exactly reassuring, viz: "the proposal is big and the reason it's big is because it's a big problem".

Okay. I don't know about you, but I am not sure that provided great grounds for optimism.

The most powerful politician on the planet also said: "there are disagreements over aspects of the plan, but there is no disagreement that something substantial must be done."

Hmmm.

Is it time to put all our money into gold coins, baked beans and shot guns - or those essentials for a severe recession as famously recommended by Jim Slater, the investor who helped to engender mayhem in the British banking system in the early 1970s?

Surely not, though I might buy a couple of extra tins this weekend.

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