Bradford and Bingley- Another Bank Cracks Under Credit Crunch Pressure

By: Nadeem_Walayat

The Bradford and Bingley, Britain's biggest buy to let mortgage lender is expected to announce another profits warning later today as its Chief Executive abandoned the sinking ship ahead of a £300 million originally heavily discounted rights issue at 82p, which given Friday's close of 86p and today's expected price slump looks increasingly vulnerable.

Way back in August 2007, well before the credit crisis broke across the mainstream media, I specifically warned of three mortgage banks that are especially vulnerable during the next housing bust Of the three the first one to go was Northern Rock in spectacular style and much earlier than one could have imagined during Sept 07, by way of the first run on a British bank in 150 years. The Government eventually did another u-turn by nationalising the bank in January 08.

Bradford and Bingley appears to be trending towards a similar fate despite huge amounts of funds made available to the bank by the Bank of England in an attempt at averting the credit crisis contagion from spreading across the decimated UK banking and mortgage finance system.

The Bank of England and Treasury will be out in force attempting to arrange a potential rescue package for Bradford and Bingley by one or a group of larger banks BEFORE it reaches the stage of Northern Rock, as the last thing Gordon Browns beleaguered government needs is the nationalisation of a another big UK bank.

As I warned in November 2007, the Buy to let sector will be hit the hard in the quarter April to June 2008 as contrary to Bradford and Bingley's assertions, it will be these speculative investors that will be the most eager to bail out ahead of sharp price falls, which is now coming to pass. The outlook for Bradford and Bingley looks grim for several more years as the share price suggests having collapsed from £4.50 to just £86p (80%) with a further plunge expected on today's opening.

Those hoping for an early turn around in the UK housing market are in for a great deal of disappointment. The UK housing market forecast for a 15% fall over 2 years (Aug 07 to Aug 09) has proved remarkably accurate to date as the above graph illustrates, and given the Nationwide's latest news of a slump in May 08, there is no silver lining visible on this dark cloud hanging over the mortgage sector. In fact my most recent analysis concluded that the UK housing market is expected to fall by at least 19% in nominal terms over 3 years (Aug 07 to Aug 10), which equates to a 33% drop in real terms (RPI).

Home owning consumers accustomed to gains in house prices equivalent to their salaries which induced them to use their housing equity as ATM cards are now facing the deflationary impact of an annualised loss in equity of equivalent to as much as 50% of their salaries. Under these circumstances, the recent tax cut of £120 a year, is but mere peanuts given the scale of the impact on the economy of the housing bust that will be most forcibly felt during 2009.

As an example of how overvalued UK house prices are internationally, one only needs to compare against the US housing market.

Meanwhile the vultures are circling amongst the carcasses of decimated financial institutions such as Bradford and Bingley, we already saw JP Morgan buy up Bear Stearns for 10 bucks a share against $160 a year earlier. A large part of the collapse followed a panic and short-selling driven mark down in the week before the takeover that was accompanied by a $30 billion sweetener from the Fed. Nomura of Japan is the latest to announce the formation of a $3.3 billion credit crisis fund to buy up illiquid and thus heavily marked down securitised debt assets as a gamble on the unfreezing of the interbank market at some point in the future. Expect large chunks of Bradford and Bingley to also be sold off in the near future.

The consequences of the credit crunch has resulted in governments throwing out their monetary policy rule books. As an example the expectation is for the Bank of England to quietly forget that its primary objective is to target 2% CPI Inflation, perhaps it will be announced by Gordon Brown in another U-turn later this year? The western world continues to drift into an era of stagflation under which circumstances panicking governments will increasingly be tempted to buy votes ahead of elections, as Labour illustrated by the announcement of £2.7 billion tax cut ahead of the May elections. The result of this strategy of inflating the money supply will just prolong the pain as Japan learned following its own credit crunch in the early 1990's the consequences of which are still evident today.

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By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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