Bradford & Bingley's Dream Turns Into a Mortgage Default Nightmare

By: Nadeem_Walayat

The credit crisis continues to hit Bradford & Bingley bank that has heavy exposure to the speculative buy to let mortgage market. The bank ran a string of glossy, visually appealing TV adverts shortly following the spectacular Northern Rock collapse last September, the management tried their hardest to give assurance to the public that it was a case of business as usual for B&B. Despite many signs at the time that the number 2 slot after Northern Rock for credit crisis and housing market risk woes was reserved for Bradford & Bingley.

The dream has fast turned to a nightmare for all concerned, the bank, the stock holders and the mortgage customers. Over the past 9 months the share price has collapsed from £4.00 to a low of 60p. At the start of the week B&B announced a loss of £8 million for Jan to April 08 against profits of £100 million last year, mortgage defaults soared by 35% on Dec 07, with more than 2.15% of borrowers in default, and the Chief Executive jumped ship.

(Chart Courtesy of Bigcharts.com)

The latest bad news for mortgage customers was the announcement that Bradford and Bingley would raise mortgage interest rates by approx 0.5% on the buy to let mortgages and 0.1 to 0.2% on standard mortgages, this despite no interest rate change at Thursdays Bank of England MPC meeting which held rates at 5%.

The people to blame for the mess at B&B are the management of B&B, more so than even Northern Rock as B&B sought out the riskiest US mortgage toxic waste AFTER the credit crunch broke. Whilst banks were attempting to offload the increasingly illiquid collaterised debt obligations in the form of mortgage backed securities, B&B were out buying them by the bucket load, having bought an estimated £3 billion illustrates the poor lack of management judgment.

Another big mistake, were the rights issues denials in April when other banks were taking action only to be forced into a confidence destroying u-turn in May by the announcement of £300mln rights issue.

Where Next for Bradford and Bingley?

In an amazing turn of events that is still not entirely clear, Bradford & Bingley withdrew from the £300 ml rights issue price of 82p a share. Normally the under-writers should cover the difference between the market price and the rights issue price after all that is what they are paid to do. But not this time, UBS and Citigroup apparently threatened to withdraw from the deal, probably citing the worsening profits situation. The issue price has now been set at 55p for £265mln. The losers here again are the shareholders.

On the plus side B&B received an injection of £179mln from Texas Pacific in exchange for 23% of the banks equity. Which probably saved the bank from complete meltdown on Mondays announcement of a surprise loss of £8 million for the period Jan to April 08.

However, the dark cloud still hangs over B&B, the eventual cash injection and the rights issue are not going to be enough to see B&B through both the US and UK housing bear markets that is expected to see UK house prices drop by as much as 25% from last August's peak. Not forgetting B&B's heavy exposure to the Buy to let market which I forecast in November 2007 would trigger a UK housing crashette in the quarter April to June 08, which now seems to be transpiring and in large part responsible for B&B's profits collapse. On top of this there's the potential of further bad news that may come out of B&B in the near future on what other big mistakes the bank has made that have yet to be fully revealed or understood, especially in regards to exposure to US Mortgages.

The Bank of England have learned lessons from the collapse of Northern Rock, in that they will now do everything in their power to avert the nationalisation of a second bank. The most likely outcome at this time is for a take over of the bank either by another bank or by a consortium of banks, the expectation is that any deal would be sweetened with tax payer money in the form of financing of bad debt for UK treasury bonds. However time is running out for the bank, the rights issue cash will just buy the bank time. The Bank of England and the FSA NEED TO ACT, as the consequences of continuing dithering WILL eventually result in the nationalisation of Bradford & Bingley as the bank's prospects of continuing as an independent are more or less dead.

Whilst the shares have rallied marginally from their lows, much of this can be put down to short covering. From £4.50 a year ago to 69p Friday, the next milestone will be an assault on the new rights issue price of 55p, and a year from now?, that's' if the bank is still independent ?

Meanwhile the FSA is investigating short selling of the banks stock, though where was the regulator when they should have been ensuring more competent management at the bank?

The tortoise building society that demutualised into the hare is paying the price of wanting to join the big boys much as Northern Rock had wanted to do and failed at the first crisis to come along. It was a case of do what the big banks are doing but only with more risk. Somehow I think the members of other building societies no longer need to worry about carpet baggers pushing the remaining building societies towards demutualisation.

Who Could be Next ?

Well my original list of UK mortgage banks most at risk as a consequence of the credit crisis and UK housing bear market has Alliance & Leicester next on the list. Though no one could have foreseen the depth of the current depression in the banking sector so early into the UK housing bear market, where even the impregnable giants such as RBS and HBOS are quacking in their boots. It really is serious when it gets to the stage that a mining company such as BHP Billington has a greater market capitalisation than ALL of the UK banks put together.

To watch the B&B TV Ad mentioned earlier, click here

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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