As we reported yesterday, Britain’s eighth biggest bank, Bradford and Bingley (B&B) got into trouble and was rescued from collapse after incurring losses in the first four months of this year and obtaining an emergency cash injection of over $A300 million from US private equity group, TPG, which gave it 23% of the bank.
B&B shares plunged 24% in London, after being down 32% at one stage. It undermined the entire London banking sector, hit the value of sterling and sent tremors around the world’s money markets as nascent concerns about the lingering impact of the credit crunch were re-ignited.
But what worries many analysts in London is the emerging reason for the problem at B&B. It actually lost eight million pounds before tax and after one off items, while underlying profit plunged 44% as arrears and bad debts ballooned. That was caused by losses on dodgy US mortgages, it seems.
It will now raise a total of 400 million pounds from the TPG placement and a reworked rights issue to shareholders instead of the 300 million pounds as planned last month.
One of the reasons for the loss was a write-down on assets, and it now seems these troublesome assets are mortgages the bank has committed to acquire from the struggling US car financier and subprime mortgage lender, GMAC. It’s in the process of trying to find $US4.3 billion in new funding for its Rescap mortgage subsidiary: if it can’t then the viability of GMAC itself may be affected. But it has been revealed that B&B must buy about $US4 billion of mortgages by the end of next year from GMAC
B&B first agreed in 2002 to buy loans from GMAC, but the just departed “sick” CEO Stephen Crenshaw renewed the deal in December 2006 and committed to buy as much as four billion pounds of loans a year through 2009. B&B said that arrears on these US loans are 5%, or more than double the arrears rate for its own mortgages. Rising loan defaults were the biggest factor in B&B’s decision to sell the 23% to TPG.
B&B thus becomes another UK bank effectively crippled by poor management decisions and board oversight. Northern Rock has been nationalised and Royal Bank of Scotland and HBOS are trying to raise $US16 billion in new capital, at deep discounts to try and “bribe” shareholders to support them. RBS is also looking to raise another $US10 billion or so in selling non banking assets. It expects to raise over $A1.5 billion this week from selling its Angel Trains business to a group of investors led by Australia’s Babcock and Brown.
And to make matters worse for UK banks, the Bank of England said overnight that mortgage approvals have more than halved since their peak at the end of 2006, thanks to tougher credit conditions, lending standards and the continuing fall in home prices.
The Bank said the number of mortgages approved for house purchases fell from 63,000 in March to 58,000 in April – 55% under the peak of almost 130,000 in late 2006 and the lowest since such records began in 1999.
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Not helping quell those fears was a series of developments in the US:
- Morgan Stanley, Merrill Lynch and Lehman Bros saw their shares sold off after Standard and Poor’s cut their credit ratings;
- S&P also said that it had revised its outlooks for Bank of America Corp. and JPMorgan Chase to negative; while Citigroup has been taken off review for a downgrade and given a negative outlook;
- Goldman Sachs rating was reaffirmed by the ratings group has the investment banking industry on a negative outlook because of the possibility of another round of big write-downs and losses as US house prices continue to fall;
- Wachovia, America’s country’s fourth biggest bank, sacked its CEO. This ended months of agitation of big shareholders over the bank’s billions of losses in subprime lending and other investments, as well as a huge bail out two months ago . There are now renewed fears that the bank, which bought a big subprime lender for $US26 billion in 2006, is facing more losses and capital needs. Wachovia shares have shed more than 50% in value in the past year. S&P put Wachovia on credit watch negative for a possible downgrade after the CEO’s departure;
- Washington Mutual, the country’s largest savings and loan and now controlled by B&B’s rescuer, TPG, separated the roles of chairman and CEO in a telling move about allocating responsibility for running the bank;
- Major global money manager, State Street Bank of Boston, surprised with news of an issue to raise $US2.5 billion in new capital, 9% of its market value, because of the threat of more losses from investments in failed subprime mortgages and associated securities. State Street is a major player in global money for fund managers and the like.
No doubt US and UK financial markets are keen for these black clouds to clear.