The Financial Services Authority took the unprecedented step of pressuring Britain’s five biggest banks into supporting the revised rescue capital-raising at Bradford & Bingley last week, The Times has learnt. HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS are understood to have each agreed to sub-underwrite £20 million-worth of the reworked £258 million rights issue.

The banks agreed to step in when Citigroup and UBS, the lead underwriters, could find no one to whom they could lay off some of the risk. Underwriters typically pass on some of the risk to institutions known as sub-underwriters. The FSA, worried that too much Bradford & Bingley stock would be left with UBS and Citigroup, which are already under pressure, decided in the middle of last week to ask the big five to take some of the risk. Earlier, it had asked them for a Bradford & Bingley back-up rescue plan in case the revised restruc-turing hammered together nine days ago fell apart.

It is unheard of for the FSA, which is responsible for bank supervision, to orchestrate a back-up rescue in this way. HSBC is understood to have offered to take a bigger role in the event of a complete failure of the issue.

Bradford & Bingley stunned the City last Monday when it tore up its original £400 million rights issue plan after deteriorating trading. It replaced the plan with a more drastic one to sell 23 per cent of itself to TPG Capital, the private equity group, together with a smaller, more steeply discounted, rights issue, at 55pa share.B&B shares rose yesterday 2¼p to 72p.

HBOS was targeted by short-selling hedge funds, pushing its share price much lower in a move that threatens to imperil its £4 billion capital-raising. All bank shares were marked lower after Lehman Brothers revealed that it had lost another $4 billion (£2 billion) from plunging mortgage-backed securities and other investments and said that it needed to raise $6 billion.

HBOS was hit worst, leading the FTSE 100 fallers, its shares slumping by 7 per cent to close at 307p as hedge funds and other sophisticated investors took down bets on the share price in search of low-risk arbitrage profits. At one point the shares were trading at 300p, only 25p above the 275p rights issue price. When the bank announced its capital-raising on April 28, its shares were 496p and the comfort cushion was 221p a share.

The lead underwriters are Morgan Stanley and Dresdner Kleinwort, which have been paid £125 million for promising to buy any unwanted shares at 275p. A source close to the capital-raising said: “Hedge funds are definitely having a go.” However, he was confident that the shares would rally when the prospectus and up-to-date trading statement were issued next week. More than 55 million HBOS shares changed hands yesterday.

The bank is the victim of a classic arbitrage play by hedge funds dealing in the shares of companies seeking rights money. They short-sell them in anticipation of buying the rights cheaply from shareholders not interested in increasing their investment. It is vulnerable because of its army of two million private shareholders, which owns 27 per cent of the business. Many will not have cash to spare or will not bother to take up the rights to their £1.1 billion of new shares.

Traders were also concerned that Barclays, whose shares slid to a nine-year low of 318½p, could not have escaped the souring credit conditions hitting Lehman Brothers, the American investment bank.

The RBS shares not taken up by shareholders were sold in the market at 230p, raising £690 million. RBS shares fell 5 per cent to 233¾p.

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