Bradford & Bingley and its underwriting advisers Citigroup and UBS were accused yesterday of failing B&B shareholders and of damaging the reputation of the City of London because of the former building society's botched capital-raising.

Senior City figures and institutional investors lined up to denounce the decision by B&B to allow Citigroup and UBS to walk away from their promise to guarantee a critical £300million rights issue on Monday.

Terry Smith, the chairman of Collins Stewart, said: “This can't have done the reputation of the City of London any good.” Underwriting standards had been falling for years, he said, adding that this failure would make it more difficult for other banks planning rights issues, including HBOS, which wants to raise £4billion.

He contrasted the embarrassing B&B saga with a bond issue by IBM in December 1941 that was underwritten by Goldman Sachs, which stood by the client even when the Japanese bombed Pearl Harbor. “That's when men were men,” he said.

Someone was at fault, he added, but, without seeing the fine print of the agreement, it was hard to say who. Either B&B had failed to have the material adverse change clause defined narrowly enough or the underwriters were failing in their duty. “One party or another has done something not terribly good,” Mr Smith said.

Gavin Oldham, a champion of small investors' rights and chief executive of The Share Centre, the retail stockbroker, said that the failure of the original rights issue had damaged the City. “It's deplorable that the underwriting has fallen to bits,” he said. “It's extremely bad news for the City. Issuers in future will not want to come to London if they believe their underwriting is not very secure.”

He attacked Citigroup and UBS for not standing by their promises, even though it was B&B that made the final decision to abandon the original terms. “They are big boys and they shouldn't fall back on the fine print,” Mr Oldham said.

One fund manager at a big institution said: “I think the investment banks argued their case and B&B blinked - and they shouldn't have done. It's disgraceful. It discredits the rights-issue process.”

B&B stunned the City on Monday when it gave a profit warning and said that it was abandoning the original rights issue and allowing the underwriters to walk away. Instead, it would proceed with a more steeply discounted £258million rights issue and also issue a new 23 per cent stake to the US private equity group TPG Capital for £179million.

The affair has also incensed institutional shareholders because of the apparently favourable treatment afforded to TPG, which is being allowed to buy a blocking stake at the new rights price of 55p and given other benefits.

Alex Potter, a Collins Stewart banking analyst, advised B&B shareholders to vote against the new rights issue in an attempt to persuade management to revert to the old one.

He expressed astonishment that the underwriters appeared to have been rewarded with bigger fees for guaranteeing the second, smaller and cheaper rights issue. Fees have grown from £37million to £47million.

B&B said that it would not revert to the old rights issue. UBS and Citigroup had no comment.

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