Sunday, September 28, 2008

B&B: Was There An Alternative?

On my way to Birmingham last night I was listening to Five Live when the news was announced (in the usual way, by Robert Peston, for it is he) that the Bradford & Bingley was being nationalised. I wonder how much this had added to government debt. Presumably Gordon Brown will be too shameless to mention the 37% figure again. With Northern Rock it was 43.4%, so presumably it is now much higher.

The only people who will lose out are the B&B shareholders and the pension funds who still had investments in it. Robert Peston was at pains to point out that mortgage holders and depositers will be unaffected.

Did the government have any alternative to do what it did? Should it have allowed the B&B to go to the wall? Will it be the last bank to be rescued?

Discuss.

37 comments:

John M Ward said...

You will be pleased to know that our PM is already working on raising the funds to cover this additional burden...

Unsworth said...

"The only people who will lose out are the B&B shareholders and the pension funds who still had investments in it. Robert Peston was at pains to point out that mortgage holders and depositers will be unaffected."

And the Taxpayer?

Brown is ramping up debt on an unprecedented scale. This is yet another damn dangerous move.

B&B? Who else is he going to 'take into public ownership'? Who or what else is he going to sell off cheaply to foreign ownership?

mitch said...

It should have been left to die.Where do you draw the line? Airlines,Insurance,manufactures...political parties how much debt can gordon get before he is carried off.

Farmer said...

Yes there is aperfectly reasonable alternative and one that is the usual process for an insolvent company. Tax payers do NOT need to get involved other than to temporarily guarantee small savers deposits until the branch network and deposit base can be sold off to another bank.

Allowing the B&B to be put into administration would allow the continued orderly collection of interest and principal on the mortgages/loans it made. Meanwhile selling off the branch network and transfer the deposit base to another bank with the proceeds used to pay off the small depositors up to the £35k Govt guarantee limit.

By nationalising the B&B the Govt has effectively guaranteed the B&B bond holders will get paid out as well. The ordinary shareholders will lose all their investment for sure but the junior bond holders and preference shareholders should also lose - they were professional investors, could have taken out insurance against default and therefore should have no complaint about losing their investment.

All the Govt has to do is ensure an orderly unwinding of the bank and prevent sytemic collapse in the money markets - not guarantee everyone in sight against ever losing money.

con-trarywise said...

just as an aside, why the proto-personality cult within the bbc that means that business reports always have to be bigged up with things like 'our business editor, robert perston, says ...'

at one point the rolling scroll on news 24 even had ham feature as the headline! (As in 'Robert Peston, the bbc business editor, has discovered....'

watch and see, it's really annoying!

Arkangel said...

I agree wholeheartedly with Mitch and Farmer. Let it go to the wall but guarantee small savings.
And how much in the way of bonuses will the cretins who ran this empire be allowed to pocket?

javelin said...

HSBC were the only alternative. I was expecting HSBC to take one for the team on this one - but they didn't. Losing 1100 jobs from the HSBC investment bank this week was not strategically necessary but strategically positioning themslves for the upturn.

In the olde days the Gov of the BofE would have locked the door on the Big4 and told them to find a buyer. Today Gordon Brown had to arm twist the HBOS deal and HSBC must have flatly turned down any offer from the BofE or Gordon Brown.

It just shows how out of touch the regulators are from the global economy, they created, because what has happened with BarCap (buying Lemans US and not a UK bank) and HBOS.

Gordon Brown has gotten this ALL wrong for the past 5 years.

Eddie said...

As the B&B is nationalised because it's mortgage assets are worth considerably less than the mortgages they are underpinning, we will no doubt hear from the Government that the loss to the taxpayer is technical and may not actually materialise.

We must recognise that, as the Government try to persuade us that this is simply an illusionary "paper loss" that will come good, it is exactly equal to the illusionary "paper profit" that Gordon Brown has relied on to keep the economy afloat over the last 10 years, in his misguided belief that he had ended boom and bust.

The illusion is of course to assume that as house prices increase, as a house owner, you become wealthier. You don't, you have exactly the same asset as you did to begin with, you can only make the illusion come true if you sell the property, and do not need to buy another.

Those "technical" paper profits that were spent, as has been found, can disappear in the same illusion that bought them.

...and when the illusionary profits vanish, having been spent supporting the Brown Boom - we get the Brown Bust.

A few hundred years ago we suffered from tulipomania - where misguided invested saw prices of tulip bulbs that they owned rocket in price. The value was illusionary, they still only owned a tulip bulb. They were only wealtier if they sold the bulb, made a profit, and did not reinvest in another bulb.

Today we laugh that people could be so foolish to assume that a tulip bulb could be worth so much.

Perhaps in a few hundred years people will talk of bricks and mortaromania.

Anonymous said...

Gordon Brown claims he does not use his children as props...

By increasing public debt he is spending his children's money, and our children's money to prop up his economy.

So whilst he might not use them in photographs he imposes a stealth tax on them instead.

kinglear said...

Three points. I wholeheartedly agree this should have gone to the wall - as should have Northern Rock -capitalistic destruction MUSTbe allowed to work.
Secondly, did you watch Marr interviewing Cameron? Compare and contrast the constant interruption and changing of subject when Marr discovered he had answers, to the fawning silence when interviewing Brown.
And finally, on the asumption that Northern Wreck added about 4 % to the National debt, this will add about another 2%

Anonymous said...

When you don't expect to be around when the bill comes in it's dead easy to spend money....

Anonymous said...

Enough talk of the US subprime mortgage crisis. This is the UK subprime crisis. B&B was an extremely lax lender. It also owned Mortgage Express (google 'same day BMV') a UK subprime lender. To top that it was buying £billions of subprime UK mortgages from the US owned Gmac.

I shudder to think about the amount of fraud that has been going on here. A generation of surveyors, solicitors, property developers, estate agents and bank staff have been complicit in some very dodgy goings on.

In northern outposts like Bradford and Newcastle, far from the prying eyes of the City or the government, the children got their hands on the keys to the sweet shop. Now the taxpayers will foot the bill.

CityUnslicker said...

there were no private buyers; no one could see how a profit was to be made here. Not even Santander with all their Spanish practices (taxbreaks).

So it is inconceivable as to hwo the taxpyer will magically not take a big hit here.

of course it should have been left to the administrators. They key question is would that have created a domino effect? the answer is clearly no.

Labour are loving the return to the 1970's

trevorsden said...

There must be losses as the govt are taking on billions of bad debts and a load of declining assets.

Surely an alternative was administration?

Buy to lets have flourished thanks to 2 things.

The govt taxed and ruined the pensions industry and people turned to property as an alternative.

This was encouraged by the govt (Prescott) forcing developers to build thousands of flats - these have plummeted in value.

Houdini said...

Did the government have any alternative to do what it did?

Let it disappear and the assets would have been picked up, As it is we are now in hock for the lot, and who is going to protect me as a taxpayer?

Let them go bust and let the market find its own level is the only long term answer. Nationalisation is not gong to help but hinder; we went from a year of pain before NR to two years of pain, now to 2.5 years of pain.

Theo said...

There are reports that we are going to pull out of the Navy's JSF project 'cos we are short a billion or so. We can't afford a proper defence policy yet we can bung billions at failing banks.

trevorsden said...

PS - I have just heard Robert Peston talking about the debacle.

In passing he talked about the FSA as "the city watchdog"

Watchdog? what was it watching? What a complete joke, a complete non sequitur.

The phrase' the dog that did not bark in the night' is one which is much over used, usually in a wrong context.

In this case though, in true Holmes tradition we should question why this dog did not bark. It was of course because it saw no need to bark at its master, its creator.

Anonymous said...

in interviews with the senators and congressmen involved in the proposed multi million dollar 'bale out' of the us banks,constant mention is made of the need to protect the 'taxpayers interests'.

judging by the almost total lack of similiar comments ,none of the political parties seem to quite so concerned on this side of the atlantic.

still, easy come , easy go !

simon said...

Letting B&B go got the wall, while protecting savers, must have been a tempting option. The ideological justification is to let the market do its work of creative destruction.

Given the complex intertwining of bank liabilities and the general lack of confidence in the banking sector, the fear is that B&B might have brought a bigger bank or banks down with it, with unimaginable consequences for the economy. True proponents of unfettered capitalism would argue that intervention/nationalisation is wrong, even to prevent such an extreme outcome and that ot of the rubble would emerge a stronger, healthier system.

They might be right (Lamont and Major's debacle over the EMF shows that this sort of thing can happen), but I wouldn't want to be the politician who had to take this decision.

The Republicans are really struggling with precisely this dilemma at the moment and McCain has vacillated horribly on it. It will be interesting to see if Cameron and Osborne address it head on, or carry on avoiding the issue.

The other option was for another bank to step in - probably HSBC, as Javelin says. Either they resisted the arm-twisting, or their own situation is more parlous than is realised (in which case, I need to put my savings under the mattress!).

Anonymous said...

The "let the market sort it" brigade are usually people who (perhaps foolishly) feel isolated (usually by personal "wealth") from the inevitable consequences. Mass unemployment. Hyper-inflation. Total loss of confidence. Whole industries laid to waste. Eg, exactly what happened in the 1930s.

Those same people who sing the free market can sort it claptrap often come unstuck themselves. They don't realise that their ultimate masters are a few super-rich island-owners who are genuinely insulated. The cheerleaders fool themselves that their paltry assets will survive the mega-downturn and of course they don't give a fig for what happens to millions of their fellow citizens. Let the strong survive they think. Alas, many come to realise eventually that they are not amongst the strong.

The last time this was tried out, the result was Hitler, Mussolini and their bedfellows.

Of course, the Soroses, Rockefellers and Rothschilds will always do well, but it really is the product of delusion to imagine that one's interests as a small capital-owner are the same as theirs.

Anonymous said...

Cameron would prefer the B of E to restructure B and B, rather than go for nationalisation.

Does anyone understand how these two options are essentially different?

bobthedog said...

Surely it is for situations like this that walls are built. Any company (banks included) that operates itself irresponsibly deserves to go to the wall, and its officers and directors should be financially liable for their decisions. Why should the taxpayer provide a soft landing for them.

Let it hit the wall.

neil craig said...

Doing nothing would have meant a run on B&B tomorrow. I think it improbable that that would not have had a domino effect on other lenders & of course the government would have had to bail out most depositor's money anyway.

I think nationalisation, so long as it is accepted the shares are virtually worthless, or putting it into administration with a government guarantee to lend to stop it running out of money, which is pretty much the same, are the only practical alternatives. With nationalisation there is the possibility that we might actually make a profit, depending on how toxic their portfolio is.

The difference between this & the Rock is that the dithering then prevented HBos (?) & Branson saving it.

Anonymous said...

Imagine having the Government as your landlord, still my prediction of endless programmes about negative equity and house repossessions has come true. Makes a change from "Changing Rooms" I suppose.
So now you have to have John Prsecott round if you want to move a light switch and assume Alistair Darling will have to pop in and give his approval if you want a mural.
freedom to prosper

Anonymous said...

"So now you have to have John Prsecott round if you want to move a light switch and assume Alistair Darling will have to pop in and give his approval if you want a mural.
freedom to prosper"

This is exactly how it is now, but this will not change while our real government is the European Commission.

Steve Horgan said...

The only reason to take B&B into public ownership is to guarantee an orderly shutdown of its business. However, that is a good reason if that is the approach adopted. There can be no pretensions about restoring B&B to health and returning it to the private sector. That brand is gone and all that remains is to minimise the damage to the rest of the economy. The changed circumstances also calls into question the strategy for Northern Rock. Given the changes in the banking landscape over the last few months, the prospects of that that ever re-emerging as an independent entity are very slim. It might be better to acknowledge the new reality there and move to break-up too.

Paul said...

"The only people who will lose out are the shareholders and the pension funds..."

"And the Taxpayer?"

And the staff?

Anonymous said...

Does anyone seriously think that Cameron & Co would be doing anything of material difference right now if they had been in office?

Anonymous said...

Pension funds - quasi-nationalised via Pensions Protection Fund

Banks - nationalised or as good as. Next one unable to sell itself will also get nationalised.

PFI - looks like a debt, pays like a debt, just doesn't need to be written on the balance sheet.

PAYG state pension

PAYG public sector pensions

Is this ALL going to be financed by the increase in Northern Rock & B & B's house prices?

Anonymous said...

Neil Craig ... Doing nothing would have meant a run on B&B tomorrow.

Perhaps, but options weren't just guarantee everything or guarantee nothing. Government could have limited guarantee to deposits.

neil craig said...

We aren't guaranteeing everything. Specificly it seems we are not guaranteeing share holders a chance to bounce back, as the US deal does. Maybe they will get a few pence in the £ but that is a token - nor do I think we should. We probably are guarasnteeing the loans other institutions gave to B&B which would not happen in a bankruptcy. Could argue that either way but if we expect banks to start lending to each other again we probably have to. We have already effectively guaranteed depositors whatever we do. The question is it worth laying out a little extra to make the close down orderly & possibly even profitable. We cannot know for sure because none of us know how deep the hole B&B got themselves into is but my general feeling is that it is worth the extra outlay.

The government really screwed up the Rock by not acting quickly but this time I think they have got their act together. Credit where it is due though as mouse 4.14 says the Tories would have done equally well.

wonkotsane said...

£50bn liabilities, £41bn of which is mortgages. The assets will be sold off and the liabilities will stay with the taxpayer. There is a suggestion that Northern Rock will end up with the mortgages. Which is nice.

Anonymous said...

If the shareholders of B&B get their fingers burned this is an object lesson in picking the Officials who run the company correctly. They all have votes on the composure of a board, so they should have picked better and maybe steered a less risky course for the bank.

If they get nothing on the pound thats enough!

Anonymous said...

Yep let the Miners welfare fund go down the shoot in both Northern banks

Anonymous said...

So Banks can Chery pick the good stuff that Gormless Gorden has allowed to be sold off on the back of his by to resale the residual over and over again

Joe said...

1. National Debt excludes Pension liabilities for civil service etc, or would be nearer 80% of GDP
2. B&B should have been allowed to go bust, taken over by Bk of England and wound up in an orderly fashion.
3. Next target- Royal Bank of Scotland (shares down almost 20% Monday)- weakest of big 4 after ABN purchase, their partner Fortis just went... and that would be both Scottish banks gone under. Expect emergency action by Brown

Anonymous said...

Anonymous said...

"Whole industries laid to waste. Eg, exactly what happened in the 1930s."

Yes, but tories get turned on by thinking of that happening to other people i.e the poor.

"The last time this was tried out, the result was Hitler, Mussolini and their bedfellows."

Yes, but England missed out on that occasion. This time will be different. We need a good sort out.