Standing in front of a room full of City analysts on the last Friday in
August, Chris Willford had some good news.
Flashing up slide 10 on his presentation, the finance director of Bradford &
Bingley boasted that a recent £400m fundraising “reinforced our position as
the best capitalised UK bank”. His chairman, City grandee Rod Kent, agreed.
“We have regained our position as one of the best capitalised banks in the
UK,” he said.
The claim raised eyebrows. Despite Kent’s assurances about the cash injection,
savvy shareholders were aghast at the trading figures the bank was
unveiling. It had lost £26.7m over the previous six months, thanks to
growing mortgage arrears — customers not paying back their loans — and an
embarrassing mortgage fraud.
The sceptics also knew that the much vaunted fundraising had happened only
because the Financial Services Authority (FSA), the City’s policeman, had
twisted the arms of key shareholders to approve it at the third time of
asking. The cash was scraped together after the private-equity firm TPG had
walked away from making its own cash injection.
But at least B&B, which had strayed about as far as it could from its roots as
two prudent Yorkshire mutuals established in 1851, had some vital breathing
space.
“Only where we have stretched credit criteria have we had a problem,” said
Richard Pym, the City veteran who was installed as B&B’s new chief executive
when the less than impressive results were revealed. “We are not going to be
doing that again. We are well capable of riding out the current storm.”
Pym had no idea how strong the storm would become. This weekend B&B, which has
2.5m customers and 1m shareholders, is on the rocks, with the FSA, the Bank
of England and the Treasury all involved in an attempt to stop it sinking.
Two options are being explored. One is a sale to Santander, the acquisitive
Spanish bank that has already snapped up Abbey National and Alliance &
Leicester. The second is nationalisation, a Northern Rock-style bailout by
the taxpayer.
Alistair Darling, who normally flies north to his Edinburgh constituency at
weekends, stayed in London yesterday to be on hand for the crisis. While the
FSA has been in the lead, a team of Treasury officials, led by John Kingman,
the man who handled the nationalisation of Northern Rock, has also been
closely involved.
Privately, the Treasury is keen to avoid wholesale nationalisation of B&B,
even though one straightforward solution would be to merge it with Northern
Rock in state hands.
One option being seriously considered is that if a successful takeover is
engineered for B&B’s good assets, the Treasury will take on the rest to
avoid contagion through the financial system, in a mini-version of America’s
“Tarp”, the Troubled Asset Relief Programme being hammered out in Washington
this weekend.
Officials stressed that a number of schemes were being considered for B&B.
“There are contingency plans. We are in close discussions with the FSA and
the Bank of England. A decision hasn’t been taken,” a senior official said.
However, privately informed sources acknowledged that B&B no longer had any
future as an independent private bank.
B&B’s recent history epitomises the risky rollercoaster that British banking
boarded. Long gone are the sober, bowler-hatted duo, Mr Bradford and Mr
Bingley, who appealed to savers and borrowers looking for a solid home for
their money.
They have been replaced in the bank’s latest advertising by an impish young
woman — wearing a bowler hat to provide some link with the company’s
trademark — skipping down the high street, promising to make dreams come
true. Put another way, borrow now, worry later.
B&B traces its roots to the Bradford Equitable Building Society, set up in
1851 to help local mill workers purchase property and land. In 1964, it
merged with the Bingley Building Society.
By 1999, it was the second largest society in Britain, with 2.5m members; and
it was renowned for its conservatism.It was one of the last building
societies to float as a public company, following the procession of the
Woolwich, Alliance & Leicester, Halifax and Northern Rock to the stock
market.
Nevertheless, Christopher Rodrigues, the then chief executive, fought against
demutualisation, saying he did not want to impinge on democracy. B&B had
previously defeated one demutualisation attempt, led by Michael Hardern, a
former butler whose erratic style did little to win over B&B’s shareholders
in its straight-talking Yorkshire heartland.
But Stephen Major, a 35-year old plumber who forced the crucial vote in April
1999, proved to be far more credible.
Rodrigues’ campaign, which cost members £5m, argued that by changing status,
consumers would be hit by more expensive mortgages and poorer savings rates.
Two-thirds of members sided with Major and against the board. In July 2000,
after the board had switched its stance, a second vote endorsed the wishes
of a majority of members to convert to a plc.
They got an early introduction to the disappointment that would follow. Each
saver and borrower received a windfall of £600, half that handed out by
other converting societies.
Although reluctant to convert, B&B adapted to the new world with aplomb. Out
went the steady savings and loans model, on which B&B had thrived for
decades. Citing tough competition and falling margins, Rodrigues turned B&B
into a third-party distributor of other people’s financial products,
snapping up the mortgage broker John Charcol.
Takeover talk was never far from B&B, always one of the smallest lenders. It
was something Rodrigues did little to dispel.
“When we float we are obviously responsible to shareholders and would look at
any one who comes along with a large, cleared cheque,” he said in 2000.
It was under the stewardship of Rodrigues’ successor as chief executive,
Steven Crawshaw, that the seeds of B&B’s demise were sown. He slimmed down
B&B’s offering of independent financial advice, putting a string of assets
up for sale, and fattened up the bank on subprime loans.
In 2002, he struck a deal with GMAC, the lending arm of General Motors, to buy
its loan book bit by bit. In September 2002 it acquired a £650m loan. The
following March it spent £470m, and then another £480m the following
February.
This was risky lending, which promised higher returns. For a banking minnow,
it was a compelling route. The bigger banks had cornered the market in
offering creditworthy borrowers the best value deals.
Crawshaw hunted for niches where B&B could thrive, turning the bank into the
biggest buy-to-let lender, cornering 18% of the market in 2007. “Many big
banks have tried
and found they don’t understand it,” he explained in 2004.
Just like Northern Rock and to a lesser extent HBOS, B&B decided to pay for
the rapid growth by funding its new lending not from its reserve of customer
deposits, but from the riskier wholesale lending markets. About 60% of all
its business is funded this way.
B&B was booming at last. Its shares soared above 500p in early 2006, more than
twice the price at which it demutualised. From those heady heights, it was a
slippery slope, made all the worse when Northern Rock was nationalised last
autumn.
“Nobody, but nobody, envisaged the queues outside Northern Rock,” Crawshaw
said in February. “Now there isn’t a soul that has worked in financial
services who could have witnessed those scenes without empathy for the staff
in those branches and the customers in that state of bewilderment and panic.”
Crawshaw’s own reputation was about to be shot to pieces. In April he denied
reports that B&B was about to launch an emergency rights issue — a month
before it admitted it would be forced to tap the market for £300m.
The fundraising fell apart after due diligence showed up a collapse in trading
in April and May. It did not take long for the process to descend into a
farce that bewildered B&B’s 930,000 small shareholders.
By early June the private-equity group TPG was put forward as B&B’s saviour —
just as Crawshaw stepped down for health reasons. Clive Cowdery, who had
corralled together zombie life funds in his Resolution vehicle, offered to
effect his own restructuring.
Both pulled back in the end, leaving the FSA to persuade top shareholders
including Standard Life and Legal & General to lend their support. At a
sparsely-attended shareholder meeting in mid-July, Kent, with typical
understatement, admitted the fundraising “had taken a few twists and turns”.
B&B has been on the Treasury’s “at risk” register for some months. Along with
HBOS, it was the one remaining British bank that was heavily dependent on
wholesale funding. It has about £40 billion of loans and about £20 billion
of customer deposits. The £20 billion difference has to be made up through
loans from the financial markets — markets which are now effectively closed.
After HBOS fell into the arms of Lloyds TSB, amid mounting concerns about its
viability as a standalone entity, it was only a matter of time before B&B’s
frailty surfaced.
“You can argue that they would have been able to carry on fine, but this is
all about confidence,” said one senior investment banker. “As soon as you
get the first sign that customers are going to take their money out, the
whole thing falls in on itself very quickly.”
The Financial Services Authority stepped up its efforts to find a buyer for
the bank last weekend, making desperate calls to all of Britain’s large
banks.
“It was all a bit pointless,” said one banker. “We had already told the
authorities repeatedly that we weren’t interested in doing a deal. Frankly,
we would be very surprised if anyone else wanted to buy it either.”
B&B itself seemed largely oblivious to what was going on for most of last
week. Sources close to the company insisted they weren’t involved in talks
with anyone. Last week, it effectively began to run itself down, axing its
remaining branch-based mortgage advisers, cutting back its intermediary
sales team and shutting a mortgage processing centre in Borehamwood,
Hertfordshire, with the loss of 370 jobs to save £15m a year.
The negotiations were going on, however, and had assumed a strong political
hue. By Friday night, the prospect of a clean private takeover of the bank
had begun to diminish. Nationalisation was beginning to loom large as the
only clear option. By Saturday, as fears of a customer run on the bank began
to grow, Santander re-emerged as a possible bidder.
The Spanish would only play ball, however, if certain conditions were met.
They would need government guarantees to take on B&B’s problematic assets.
It would need a promise that the Competition Commission would not intervene
— an assurance Lloyds secured to facilitate its takeover of HBOS two weeks
ago.
Opposition politicians said the government had to avoid the indecision it
showed over Northern Rock.
“If the bank is in serious difficulty, the best option is if it were taken
over by another bank and without any involvement by the taxpayer,” said
Vince Cable, the Liberal Democrat Treasury spokesman.
“I just hope this time the government doesn’t faff around for four or five
months getting this sorted out.”
Bryan Sanderson, the former chairman of Northern Rock, said: “Nationalisation
is in danger of getting to be fashionable. It’s got to be absolutely the
last resort. It’s easier to get into than it is to get out of.”
How could this have happened to a bank that, although small, has retail
savings deposits of £21 billion and total assets of £52 billion? In the
meltdown of the global banking industry, the only surprise is that it didn’t
happen sooner.
Unstoppable rise of Santander’s Botin
IF Emilio Botin manages to bag Bradford & Bingley (B&B) it would cap an
extraordinary run of deals that has allowed the septuagenarian banker to
take Spain’s Banco Santander from a standing start to the top rung of
Britain’s high street in just a few years.
Barely two months he struck a £1.3 billion deal to buy Alliance & Leicester,
which was struggling to stay afloat in tightening credit markets.
He will knock that together with Abbey National, another beleaguered high-
street group he bought four years ago in his first swoop on Britain.
Adding B&B to the mix would give the group more than a quarter of the mortgage
market and one of the largest branch networks in the country, cobbled
together from a set of assets that others thought too risky.
Botin is used to succeeding where others fail. Of the three partners that
bought ABN Amro last year, he is the only one to come up smelling of roses.
Sir Fred Goodwin, chief executive of Royal Bank of Scotland, had to apologise
to his shareholders after he went cap in hand to them to raise new funds
just months after closing the deal.
Botin is famous for his ability to stamp out ineffici- ency and get big
organis- ations back on a solid footing.
He is the third generation of the Botin family at the helm of 150-year-old
Santander, and the younger generations are already in training — his daughter
Ana Patricia is in charge of the Banesto subsidiary.
