Taxpayers will ultimately bear the burden of the nationalisation of Bradford & Bingley’s after it emerged last night that the Spanish owners of Abbey and Alliance & Leicester had been persuaded to take on the stricken bank’s depositors and branches.

Banco Santander agreed to pay £400 million in order to take control of £21 billion of deposits and 200 branches. B&B’s savers will be transferred to Abbey. B&B’s £50 billion mortgages and loans business will then be taken over by the Government, using the same powers employed to seize control of Northern Rock.

Alistair Darling, the Chancellor, will make a statement before the markets open this morning, but financial experts and politicians all predicted that taxes would inevitably rise to pay for the deal.

George Osborne, the Shadow Chancellor, was concerned that the taxpayer would be taking on a “huge risk” and could lose a lot of money. He proposed a Bank of England-led reconstruction, which would mean the large institutional creditors to the bank bearing the risk, not the taxpayer.

“I think people will wonder why on earth the British taxpayer is being asked by Gordon Brown to bear the full risk of the mistakes that were made, not just by the management of Bradford & Bingley but also by the regulatory system that Gordon Brown set up,” Mr Osborne said.

One source close to the negotiations, which lasted well into last night, said that ministers had been determined about one thing — that a firm deal must be announced by this morning. If no private sector partner had been found for the savings business, then full nationalisation would have been necessary. And even though that seems to have been avoided, the future of the bank’s staff remains in doubt and shareholders are likely to be largely wiped out.

The Tripartite Authorities — the Treasury, Financial Services Authority and Bank of England — had hoped to persuade someone to take on the whole of B&B, but those hopes faded on Saturday and nationalisation of some sort became the only option.

The effect on the public finances will depend on the precise structure, but it looks as if the Exchequer will have to take on £50 billion of liabilities. Analysts suggested that the Government may have to provide a guarantee of about £20 billion to cover Santander for the B&B deposits.

If the borrowers behind the assets, which include £25 billion of higher-risk buy-to-let mortgages and £9 billion of self-certified mortgages, default in large numbers, it seems likely that taxpayers would have to foot that bill. Self-certified mortgages are given to borrowers without proof of income and are seen as particularly risky.

Richard Jeffrey, head of strategy and economics at Cazenove Capital Management, said: “This is a potential further burden at at time when the public finances are looking extremely fragile. Eventually taxes are going to have to go up in some form.”

One plan under consideration by ministers was to merge the rump of B&B with Northern Rock. Yvette Cooper, the Treasury Chief Secretary, said yesterday that the priority was to make sure that ordinary depositors were properly protected and the stability of the banking system preserved.

She stopped short of explicitly guaranteeing all B&B deposits — the assurance that the Government ultimately had to give in the case of Northern Rock. However, it has repeatedly said that depositors would not lose out. In addition, the Financial Services Compensation Scheme, supported by all UK banks, guarantees the first £35,000 of any ordinary deposit.

Vince Cable, the Liberal Democrat Treasury spokesman, said that nationalisation was the “least worst” option. “It would have been better if B&B could have been saved with a private-sector purchase, without recourse to the taxpayer. But in the absence of a buyer, the Government had no alternative but to learn the lessons of Northern Rock and act decisively.”

Nationalisation is bad news for shareholders. One option would be to appoint an independent adjudicator to decide if they should receive any compensation, as was the case with Northern Rock, but it is thought likely to be little or nothing.

Most B&B shares are held by large financial institutions and the other high-street banks, who were pressured into supporting an emergency capital-raising plan last month. However, the bank also has more than 800,000 private shareholders, who were given free shares when B&B gave up its building society status to become a shareholder-owned bank.

Shareholders were angered at the potential move. One, Jon McKnight, called it “the most blatant case of legalised bank robbery this country has ever seen”.

B&B had 2,480 full-time and 700 part-time staff in June. Their future is also precarious as it is unclear whether Santander will keep the branches open in the long term.

‘I owe them, rather than them owing me, so I’m not bothered’
Case study: the borrower

John Keogh, a retired Marine who has been in the buy-to-let market for more than 20 years, is reviewing his property portfolio. He plans to pay off his outstanding mortgage of £80,000 with Bradford & Bingley by selling one of his three properties.

“We have been in it for the long term. But we are slowly coming out of the buy-to-let market now, mainly to release capital,” he said. Mr Keogh and his wife, Roma, from Devon, let out two modern homes in Tavistock and one former weaver’s cottage in the village of Coombe on Dartmoor.

The couple are soon to turn 70 and want to enjoy the money they have amassed. But as the housing market continues to be buffeted by falling prices and banks continue to be reluctant to lend, Mr Keogh is aware that “to let” signs are appearing in many residential streets. He will discover the extent of the problem next month when one of the Tavistock homes is put up for rent. “It’s the luck of the draw if we get a tenant quickly or not. We’ve never had to wait for more than a couple of weeks for a new one in the past,” he said. Their plan to pay off their mortgage was taking longer than expected, he said. They had put the Coombe cottage on the market at £199,950, but had had only one offer, nearly £25,000 below the asking price.

He is not worried about Bradford & Bingley’s problems. “I owe them money, rather than them owing me, so it doesn’t bother me.”

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