B&B’s rights issues made the losses bigger
With hindsight, Bradford & Bingley obviously had no value when the bank collapsed in 2008 so there is no compensation for shareholders. But why were the owners of shares asked to inject new capital just before the crash?
The independent valuer’s conclusion is no surprise, especially after his equivalent considering whether Northern Rock investors should receive any payment reached the same conclusion. It does not take a conspiracy theory that they are obeying orders from a Treasury with no money to hand out.
The Rock’s collapse in September 2007 came a whole year before B&B failed – during which time HBoS and Royal Bank of Scotland had asked their investors for huge sums of new money while in the US, Bear Stearns was rescued and Fannie Mae and Freddie Mac were bailed out. Lehman went days after B&B.
Bradford & Bingley was haemorrhaging cash during that summer of 2008. Only half its residential mortgage book was financed by retail money and the credit crunch meant the City was unwilling to lend. B&B had to raise its rates to attract savings, but that cut its trading profit to almost nothing and escalating bad debts left the bank with rising losses that eroded its reserves.
Without Bank of England support B&B was not a going concern: a bank needs a certain level of solvency to continue but B&B was actually insolvent so an administrator would have made no distribution to shareholders.
The credit-rating agencies cut B&B’s rating just before it gave up the fight – the government taking on its loans while Santander bought the savings balances – but just weeks before the crash, the bank’s City advisors tried to raise more money to buy it time.
The rights-issue terms were cut from £300m to £258m as underwriters balked at the falling share price – but they still kept their fee. US investor Texas Pacific was brought in to boost the proceeds to £400m – then withdrew. So the small investors – almost 1m of them – got stung but the costs of this pointless capital raising were £55m.
It does not need hindsight to see this was a futile and expensive exercise that merely resulted in shareholders losing even more money. Perhaps compensation should come from the City rather than the Treasury?
July 6th, 2010 at 1:51 pm
Richard, you have a rather large error in your submission.
In brief, the rights issue failed miserably, very few shareholders took up the rights issue, thus leaving 72% of the issue with the underwriters. Those same banks that earned the commission for underwriting the issue.
Also, those same banks underwrote on the condition that there was a holding period (in effect they could not sell). So in truth, they ended up still holding the shares when the company was nationalised.
i.e. The banks lost on the deal, period.
Banks exist as long a confidence is high, when confidence fails so do they. No bank, even today could survive every deposit holder withdrawing their deposit, none.
The real saviour of the banks was HMG, they acted (somewhat belatedly) and gave depositors the confidence to stay invested.
Perhaps compensation should come from the media, because it was a media frenzy that created the run on the banks in the first place.