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B&B to be nationalised

• Robert Peston
• 27 Sep 08, 09:41 PM

I have learned tonight that the Treasury has taken a decision to nationalise Bradford & Bingley, using the special legislation it put through when it took Northern Rock into public ownership earlier this year.

The nationalisation, which could be announced tomorrow night or first thing Monday morning, underlines the scale of the global banking crisis.

However the Treasury will almost instantaneously sell to a bank - or even a number of banks - Bradford & Bingley's 200 branches and its savings business.

So B&B savers, who had more than 拢20bn deposited in the bank just a few weeks ago, will find themselves customers of another bank.

The Treasury and the Financial Services Authority will spend tomorrow negotiating with banks interested in buying these parts of B&B. These possible buyers included Santander of Spain, HSBC and Barclays.

By contrast, B&B's 拢50bn of loans - including 拢41bn of residential mortgages - will not be sold and will be nationalised on a long term basis.

Because of the downturn in the British housing market, it would be impossible to sell these now for anything but a cripplingly low price.

It is possible that these mortgages will be given to the nationalised Northern Rock to manage.

The nationalisation and break up of Bradford & Bingley will represent a momentous event in the history of British banking, because it will mean that every building society that floated on the stock market in the wave of demutualisations of the past two decades will either have collapsed or been sold to a conventional bank.

It may well be seen as proving that demutualisation of building societies has been a colossal mistake, both for the institutions themselves and for the British economy (I will return to this theme in the coming days).

B&B experienced significant withdrawals of cash from its branches and its online bank today, because of customers' concerns about the health of the bank.

However there were no significant queues, except for at four branches before doors opened, because hundreds of B&B staff gave up their day off and volunteered to man the tills.

The Treasury's decision to sell B&B's savings business means that retail depositors and savers should not lose a penny.

B&B's shareholders and holders of its subordinated debt may not be so fortunate.

The Treasury and the Financial Services Authority decided they had to act to nationalise B&B because the bank was perilously close to seeing a demand from investors for the return of billions of pounds - which it would have been unable to find.

The reason it faced this calamitous threat was because credit rating agencies had been downgrading the rating of its covered bonds, a form of funding which involves packaging up mortgages for sale to investors.

It only required one more downgrade, according to a banker, for those investors to be able to demand their cash back. With wholesale funding markets in a state of seizure, it would have been impossible for B&B to borrow more billions to pay off these covered bonds.

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B&B: taxpayers on hook for 拢40bn

• Robert Peston
• 27 Sep 08, 04:22 PM

Santander, the giant Spanish bank that owns Abbey and Alliance & Leicester, may end up owning a chunk of Bradford & Bingley, such as its branches and savings business - because it's been looking at the business (not with any great enthusiasm) for a while now.

The ambitous Spanish bank may know B&B a bit better than some of the other banks being sounded out by the authorities as participants in a rescue, and may be in a position to sign up quicker to a deal.

But the important point is that the Treasury will be unable to do any rescue of B&B that doesn't include taxpayers becoming financially exposed to between 拢40bn and 拢50bn of B&B's loans.

Here's why.

B&B's total assets are 拢50bn, including 拢41bn of residential mortgages made by B&B, some commercial property loans and other investments.

The mortgages, in particular, are simply unsellable in the current climate of pessimism about the outlook for the UK housing market.

There remain several permutations of what could happen to B&B. It does have some attractive sellable stuff, such as savers with 拢20bn plus of deposits and the branches.

As I mentioned, these could be hived off and sold (to Santander or another substantial bank).

The big question is what will happen to B&B's 拢41bn of buy-to-let and self-cert mortgages.

These are B&B's millstone, because of two fears fears:

1) that self-cert borrowers will have growing difficulties keeping up the payments;

2) that increasing numbers of buy-to-let borrowers will hand back their keys, and stop making the payments, as and when the value of their properties sinks below the value of their respectived mortgage debts.

No private-sector bank will take on these mortgages in the current climate of uncertainty without protection from the Treasury - in other words from taxpayers - against potential future losses.

There are only two realistic choices for the Treasury.

It could pass the mortgages on to a private bank, but provide some form of insurance to the purchaser against future losses.

Or it could opt for the cleaner solution, of keeping all these mortgages in the public sector - and perhaps inject them into Northern Rock - in the hope that over time they will in fact yield a profit.

When markets are in mayhem, as they are right now, the Treasury has a luxury unavailable to the private sector: it can take the long view.

If the Treasury took B&B's mortgages directly on to the public-sector balance sheet, it would not have to worry too much about short term cash flow or profits.

It could simply sit and wait for as many years as necessary for market conditions to improve so that the portfolio of loans could be sold back to the private sector.

Or it could wait even longer for most of the borrowers to repay, so that the loans simply run off.

The big point is that for an owner with the resources to sit out the downturn in the housing market, B&B's mortgage book should at least break even and could even generate gains.

Only the public sector, that's us as taxpayers, is able right now to invest through this horrible housing-market

PS Well done to B&B and its staff today. I am told that hundreds of staff volunteered to come into the branches to handle the anticipated demand from customers for information on what's going on and for their savings.

As a result, there were queues in just four branches.

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How will B&B be rescued?

• Robert Peston
• 27 Sep 08, 08:17 AM

The position on B&B this morning remains as per my note of yesterday afternoon.

In other words, the Treasury and the Financial Services Authority are trying to organise a rescue - but are some way from a decision about what that rescue would be. As I pointed out, any takeover by another bank or banks of B&B (which could involve breaking the business up) will probably need some kind of financial support from taxpayers.

Full nationalisation, which could well include merging B&B with Northern Rock, is very much a last option - not impossible, but the final resort if all else fails.

There are two ways of looking at a merger of B&B with the Rock.

In theory, it could be a sensible way of using taxpayers' money to create a new force in retail banking that could one day be returned to the private sector. And there would be substantial efficiency benefits from eliminating duplicated overheads.

The other way to view such a merger would be as a potentially huge headache for all of us, in that we as taxpayers could end up owning one very big bad bank, generating horrible losses on mortgage lending made at the height of the credit bubble.

Which is why it makes sense for the Treasury and the FSA to attempt to spread the financial risk with a private-sector bank or banks - although in the current climate of fear in banking markets, a solution involving the private sector may turn out to be impossible.

UPDATE 09:37

For the avoidance of doubt, officials from the Treasury and the Financial Services Authority, and executives from Bradford & Bingley, are working this weekend to find a way to put the bank on a more stable footing.

A decision on B&B's future may well be made by the chancellor and the prime minister by Sunday night, before markets open on Monday morning.

One option which I haven't so far mentioned would be to take B&B into public ownership and then immediately - or almost immediately - sell on some of its assets to a private sector bank.

But as of today, the preferred option has not been identified - although it's clear that taxpayers' money will have to be deployed in some way.

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