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UK banking shares plunge as crisis deepens

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Graeme Wearden and Jill Treanor, The Guardian
September 29, 2008

FSA chairman warns nationalisation of Bradford & Bingley is not the end of the banking crisis

Shares in Britain’s banks plunged today in febrile market conditions caused by bail-outs of banks in the UK, continental Europe and the US.

The nationalisation of Bradford & Bingley, the rescue of Dutch-Belgian financial group Fortis and the rescue takeover of US bank Wachovia by Citigroup further hit sentiment in an already nervous market.

Royal Bank of Scotland tumbled by over 20%, while Lloyds TSB lost 15% and HBOS shed 12.5% – putting their merger in doubt.

Under the deal hammered out during a weekend of intense negotiations, the taxpayer is taking on B&B’s £41bn of mortgages and handing Spanish giant Santander £4bn to persuade it to take on the Yorkshire-based firm’s savers and branch network.

The cost of the deal, including hundreds of millions of pounds in interest payments on a £14bn loan that underpins the deal, could eventually fall on the UK’s banks.

They could also face further losses in three years if the government cannot recover these costs.

Lord Turner, head of the Financial Services Authority, warned that the nationalisation of B&B is not the end of the banking crisis.

“We are not necessarily right at the end of this process,” he told BBC Radio 4′s The World At One. “At the moment we believe our other high street banks are well capitalised and in a reasonable condition but we will have to keep this situation under review.”

As well as the bailout of Fortis by the governments of Belgium, Luxembourg and the Netherlands, and Citigroup’s takeover of Wachovia, the Icelandic government has taken control of the country’s third-largest bank, Glitnir.

The sharp banking losses knocked 213.3 points off the FTSE 100 index by 3.15pm today, sending it 4.2% lower to 4875.2.

Fear in the market

The mood was little better on Wall Street, where the Dow Jones lost over 300 points in early trading despite overnight progress on the $700bn banking bailout.

Analysts were mesmerised by the share price movement in Lloyds TSB and HBOS, following the £12bn takeover agreed two weeks ago. Analysts said it showed the level of fear in the market.

“I’m trying to be open-minded about other surprises there might be,” said James Eden of Exane BNP Paribas.

“Can you imagine Lloyds walking away from HBOS? I can’t image they would. The share price is telling you there is a chance of that happening,” Eden added.

B&B is the biggest buy-to-let operator in the UK, and was unable to continue operating in the ongoing crisis in the financial markets.

The chancellor, Alistair Darling, insisted that he was taking “decisive action” to avoid the troubled lender going bust, which would have “destabilised the whole industry”.

This comes seven months after the government nationalised Northern Rock. Alex Potter, analyst at Collins Stewart, commented today that the taxpayer now owns two of the most poorly performing loan books in the country.

As well as the mortgage book, the government will take control of B&B’s personal loans, along with all its other debts and its headquarters.

Santander, which already owns Abbey in the UK and is buying Alliance & Leicester, is paying a total of just over £400m for B&B’s branches and its 2.7 million customers, whose savings total £20bn. It agreed the deal in return for £4bn from the taxpayer to cover retail deposits that are not protected under UK law.

B&B is particularly exposed to the falling housing market because of its focus on buy-to-let and self-certification mortgages. Darling confirmed that any losses will be clawed back from rival banks, who have weathered the ongoing financial crisis better than B&B.

“We are not going to do that immediately, because in the current climate that would be absolutely daft. But it does mean that as things get better, if there is a shortfall then we will collect it from the industry,” he said.

Savers saved

Shares in B&B were suspended this morning, having fallen by 93% this year to just 20p. Its investors will be wiped out following the deal.

Standard Life Investments is the largest single shareholder in B&B with a stake of just under 10%. It said it was disappointed that the bank had fallen into public ownership.

“As long-term shareholders we stood by the company and supported its recent fundraising. This regrettably did not lead to the desired outcome,” said David Cumming, head of UK equities at Standard Life Investments.

Legal & General, which also backed the rights issue, said: “We are disappointed that a well-capitalised bank which in more normal circumstances might have been expected to trade through its current difficulties has been nationalised.”

The government insisted today that deposit-holders will not suffer from nationalisation.

“Branches will be open this morning as usual, and internet, call centre, and all other transaction services will operate as normal,” explained the Treasury.

Many of B&B’s workforce would have woken up to find that they are now employed by Abbey, which Santander owns.

“They should all attend their workplace in the normal way. Savers’ money remains absolutely safe and secure. Borrowers should continue to make their payments in the normal way,” the government added.

Vince Cable, the Liberal Democrat Treasury spokesman, suggested that in the long run the deal could be beneficial for taxpayers.

“The UK government is getting these assets for free. So it could turn out to be quite a good deal,” Cable said on the BBC Today programme.

Darling himself was 40 minutes late for his slot on Today.

“Rather unusually, the chancellor is not available. He’s having a rather busy day,” commented presenter Evan Davis.

After the deal was confirmed, Darling crossed swords with shadow chancellor George Osborne, who said that the collapse of B&B showed that “you can’t build an economy on debt”.

Source | See Also: Congressman Ron Paul Schools Fed Chairman Bernanke on the Bailout Plan | Bailout is “petty cash”, Inflation is the Federal Reserve’s real crime | Private Federal Reserve Makes Power Grab as Bush, McCain Urge Congress to Approve Plan | Last major investment banks in U.S. change status | U.S., British market regulators ban short-selling | Next Federal Reserve bank bailout round could cost taxpayers 1$ Trillion Dollars | Bank of Canada piles on in global inflationary swindle | Central banks continue inflating global economy | Central Banks Move to Transfer Wealth from Taxpayers to Banks | Crisis on Wall St. as firms collapse | Goldman-Sachs Alumni Hold Reins of Financial System | Frontrunners emerge in scramble to save another major bank | Lehman Brothers on Verge of Collapse, Wall Street Fears | US Treasury nationalizes Freddie Mae, Fannie Mac | Cities Debate Giving Away Public Infrastructure to Bankers | Court Grants Big Banks Immunity from Lawsuits over Derivatives Losses | Bush Calls for New Highway Tolls, More Private Funding of Roads | US mortgage firm bailout includes rider clause to expand police state: all credit card transactions now to be reported to IRS | Global ‘liberalization’ illusion under threat. Economist calls for world economic regime, Keynesian saviour. Irony? | Federal Reserve cites global stakes in Fannie and Freddie rescue | Financial ’super cop’ role for Fed | What Really Killed Bear Stearns? | Soros points out regulated markets fail to operate on market fundamentals, calls for more regulation | Competition study calls for lowered barriers to foreign ownership, bank mergers | Massive overhaul urged on foreign investment in airlines, media, and banks | Bilderberg Seeks Bank Centralization Agenda | Secretive Bilderberg Group Reverses Policy, Releases Press Release and Attendance List | Banks face “new world order,” consolidation: report

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