The problems besetting Bradford and Bingley started on 14 April 2008 when it denied reports that it intended to raise funds through a rights issue of new shares and sought to reassure depositors, shareholders and the market that it had a strong capital and liquidity base.
On 22 April, Mr Stephen Crawshaw, the Chief Executive, stated that he saw 'excellent growth' during the first quarter of 2008 and that the bank was well funded.
However, on 14 May, B&B announced a rights issue, priced at 82 pence a share in an effort to raise GBP300 million from shareholders. Mr Crawshaw apologised.
This attempt to mislead the markets had backfired, and the share price, which stood at around 185 pence at the end of April, went into free-fall.
On 2 June, B&B issued a profits warning. Mr Crawshaw resigned and was replaced by Mr Rod Kent. At the same time, B&B announced that it planned to sell a 23% stake in the bank to TPG for GBP179 million, by way of new shares. TPG, formerly Texas Pacific Capital, is a global financial institution. A further GBP258 million was to be raised via a revised rights issue at 55p per share. The rights issue was to be underwritten by Citigroup and UBS.
On 23 June, an alternative offer was made to B&B by Mr Clive Cowdery, who represented four of B&B's largest shareholders - Legal & General, M&G Investment Mangers, Standard Life, and Insight Investment. Mr Cowdery was offering to buy stock at 72 per share. The talks stalled due to B&B's refusal to open its books to Mr Cowdery. At the time, B&B took the view that the proposal by TPG was more attractive and described Mr Cowdery's bid as 'uncertain' and criticised it for ceding too much control to his Resolution investment group.
On 3 July, TPG stated that it intended to withdraw from the deal due to Moody's reducing the credit rating of B&B from A3 to Baa1. The credit rating agency cited B&B's obligation to buy mortgages of up to GBP350 million per quarter from GMAC, a global finance company, until 2009.
The general reaction to this news was one of hysteria and an avalanche of criticism from UK institutions. However, B&B admitted that TPG did have an option to withdraw, should there be a downgrading of its credit rating. Therefore, TPG was not only well within its right to withdraw, but probably correctly concluded that B&B had severe problems of which they had not been previously aware.
The quality of this dubious GMAC portfolio continues to attract severe criticism from shareholders. Moody's also expressed reservations about B&B's buy-to-let mortgages and self certification loans, although these were overshadowed by the GMAC commitment. Several independent commentators have suggested that B&B could lose in excess of GBP400 million, due to write downs, in a final reckoning of its unwise commitment to GMAC.
In addition, the bank remains tied into deals with Aire Valley Master Trust, who have some GBP13 billion of mortgage assets. B&B has GBP11 billion of mortgages in its Aire Valley securitisation programme, which is triple A-rated.
However, Moody's downgrade of B&B's own credit rating means the bank does not enjoy the sufficiently high rating required under the interest rate swap that it provides to the Aire Valley trust.
B&B has to address this matter within 1 month. There are three possibilities - firstly, it could inject an undisclosed amount of extra cash, secondly, it could nominate an intermediary as a counter party, or thirdly, it could find a guarantor.
On 4 July B&B claimed that it had a renewed commitment from the four major institutions who were originally part of the Clive Cowdery offer. This would enable the GBP400 million rights offer to proceed at 55 pence a share.
Behind the scenes, the Financial Services Authority (FSA) was working hard to ensure that B&B did not collapse, as had Northern Rock.
The FSA rescue on Thursday 3 July made an undisclosed facility available to B&B. It has been described as a classic bank of England lifeboat operation. The lifeboat refers to the activities of the Bank of England in lending funds to small financial institutions in the 1970s.
At the same time, the Bank of England has exerted influence, some would say pressure, on some of the largest British banks in an effort to ensure that the underwriting of the rights issue by Citigroup and UBS goes ahead.
At the current market price, which is considerably less than 55p, the underwriters will end up purchasing all the new shares. However, due to the Bank of England's efforts, these losses will now be shared with HBOS, Lloyds TSB, Barclays, Abbey, RBS and HSBC. This will amount to purchasing some GBP230 million or a 33% share in B&B.
Meanwhile B&B has disclosed that the chaotic rights issue of GBP400 million will now cost GBP54 million. This is because the prospectus is now in its third version. Worse still, Goldman Sachs will receive a fee for introducing TPG to B&B. This is despite the fact that no deal was done and TPG walked away.
It now looks that B&B is safe, for the moment, from bankruptcy or being taken into public ownership. However, the rights issue will place the other leading UK banks into a loss making situation. The disaster at B&B was precipitated by a lack of honesty in the statements of the Chief Executive. Once his attempts to mislead the markets were publicised, the share price went into free fall.
Duplicity, or lying, by chief executives of banks is a most dangerous and unwelcome development. Banks operate on the basis of trust, namely depositors entrust them with their life's savings. Bank managers have traditionally advised borrowers to be cautious and ensure they can meet their commitments. This is now exposed as a sham. B&B issued self certification mortgages to anyone who could fill out an application form, and engaged in ill considered deals with global giants such as GMAC.
The embarrassment of announcing a rights issue of new shares was unfortunate, but the fact that the prospectus had to be revised on two successive occasions demonstrates incompetence and ineptitude.
The only player who has emerged from this saga with an untarnished reputation is the Bank of England. In the aftermath of their disastrous handling of Northern Rock, they have regained some credibility.
This has not been achieved by the granting of any new powers to the Bank of England. On the contrary, they have reverted to their traditional and historic role as a lender of last resort. Bankers who were in trouble would arrive in Threadneedle Street at 3pm and drink tea with the Governor. After talking about, Ascot, Wimbledon, Eton or whatever, the banker would indicate that his bank was insolvent and would be forced to declare bankruptcy on the next day. At this point, the Governor would offer a loan, and the matter would be concluded with a handshake.
It is gratifying to see that the Bank of England understands its role in turbulent times.