The government has averted what would almost certainly have been another Northern Rock style run on the bank by taking action to nationalise B&B – the UK’s 8th largest bank – before the doors open on Monday. It is said that depositors will not lose any money. Apparently they are still looking for buyers for the various parts of the business although the bit that nobody wants will be kept in public ownership. In other words the UK tax payer will keep hold of the self-certification and buy-to-let mortgage portfolios.
There are some really interesting features both of the events themselves and of the media coverage that it has so far received.
1. There seems to be anger at the nationalisation, not because taxpayers are once again taking on the undesirable parts of the business, but because shareholders are losing their money.
Shareholders who invested £400m in B&B during its rights issue last month are likely to be enraged at a nationalisation. Northern Rock was nationalised earlier this year and shareholders are likely to receive zero.
Are they saying that B&B might not have gone bust? You must be kidding. Nobody was going to come in and buy them because events are moving too fast for appropriate due diligence to take place. No bank can afford to take on the risk of buying a failing bank without proper research. It would be irresponsible to their own shareholders. And who is expected to compensate them anyway? The same taxpayers who’ve just bought up the risky mortgage book that only exists because of the irresponsible lending activities that had previously been earning profits for the shareholders? The FT continues:
However it is possible that the level of compensation paid to investors in this case could be higher, as unlike Northern Rock, B&B was not being supported by an emergency Bank of England loan.
Incredible. Even more incredible as the FT also says this in the same article:
A further rating downgrade could also make it more difficult for B&B to access the Bank of England special liquidity scheme which some analysts estimate funds around 15 per cent of its loan book.
Don’t they read their own articles?
2. I’ve written about the Credit Default Swap (CDS) market before and it’s interesting to note what happened to B&B just prior to nationalisation.
B&B, which was downgraded to one notch above junk status, saw its shares sink to an all time low of 20p on Friday. It was facing the possibility of another credit rating downgrade which would have made it almost impossible to raise money in the wholesale markets. Its credit default swaps have ballooned to 1500 – one of the highest of any bank in Europe – making it very difficult for the bank to fund itself in the wholesale markets.
THE CDS market doesn’t always predict a bank’s demise but it is certainly a very good indicator of what the markets think about the potential for default.
3. Customers were voting with their feet at the first whiff of danger.
On Saturday B&B pulled in additional staff into its 200 branches to help deal with the larger than usual volumes of customers withdrawing money. There were queuing problems reported in just three branches – Doncaster, Finchley and Southport.
Is it time to increase the Financial Services Compensation Scheme maximum to £50,000? Or would people still panic and withdraw their money? I wish I had some statistics to answer that question.
Meanwhile we await news of Wachovia and Fortis…