Bradford Bingley Seizure; FTSE Down 5%

123jump.com Staff
29 Sep, 2008
New York City

Bradford Bingley, the troubled mortgage lender was seized by the UK Treasury and sold to Abbey National for

[R]1:00PM New York, 6:00PM London – UK seizes the troubled mortgage lender Bradford & Bingley and sell it to Abbey National controlled by Banco Santander of Spain.[/R]

The stock market indexes fell sharply in today's trading in London after Bradford & Bingley was nationalized in UK and Fortis was forced to seek rescue package from the governments of Benelux. Fearful investors worry that the U.S. credit market crisis may spread to Europe.

Commodity stocks also plummeted as metal and oil prices declined on fears of a global economic slowdown.

Market Sentiment

In London trading FTSE 100 fell 5.3% or 269.7 to 4,818.77.

Of the FTSE 100 index stocks, 1 rose, 100 declined, and 1 was unchanged. WM Morrison Supermarket was the only gainer in the index shares with a rise of 0.51%.

U.K. Takes Over Bradford & Bingley

U.K. Treasury reported that it has seized all the shares in Bradford & Bingley after it consulted with the Bank of England and Financial Services Authority. The decision from the Chancellor of Exchequer was swift after the bank failed to finish its rights offering and global markets have been jittery.

The Bradford & Bingley was sold in a competitive bidding to Abbey National, part of Spanish financial group Banco Santander for £612 million that includes £20 billion of mortgages and personal loans and a network of 197 branches.

The company shares were cancelled before trading began this morning in London. The fourth largest mortgage lender had relied for wholesale market to access capital for loans and fueled its growth party by lending to what is commonly known as buy-to-let borrowers. Many of them defaulted on loans after the housing market weakened in UK and land lords of second and third homes could find tenants and rents to cover the no money down mortgages.

The remaining assets and liabilities of Bradford & Bingley that includes mortgage book, personal loan book, headquarters and relevant staff, and treasury assets and its wholesale liabilities has been taken into public ownership through the transfer to the Treasury of the company's shares. The UK Treasury will be responsible for assets of £41 billion will reap rewards or losses from the sale of it.

The statement on the UK Treasury Web site noted, “Under the Transfer Order, the FSCS (Financial Services Compensation Scheme) has paid out approximately £14bn to enable retail deposits held in Bradford & Bingley and covered by the FSCS to be transferred to Abbey.

The Treasury has made a payment to Abbey for retail deposit amounts not covered by the FSCS, amounting to approximately £4bn. In return, the FSCS and the Treasury have acquired rights in respects of the proceeds of the wind-down and realization of the assets of the remaining business of Bradford & Bingley in public ownership.”

The depositor insurance of 14 billion will be paid by the UK government agency and which will be later collected from the other banks such as HSBC and Royal Bank of Scotland and Barclays. The UK depositor insurance plan know as compensation plan covers up to £35,000 and Santander will pay £4 billion to protect depositors larger than that limit.

The mortgage lender at the end of 2007 had assets of £52 billion and buy-to-let mortgages were 45% of total assets, UK Treasury bonds were 18% and self-cert mortgages were 16%. Other mortgages were 15%. The lender was the number one player in the buy-to-let mortgage market and generated 91% of its business through intermediaries.

For the first half of 2008 ending in June the loss before tax was £26.7 million compared to £180.4 million a year ago and loss per share was 2.80 pence compared to 20.4 pence of profit in the prior period.

In the last one year Bradford Bingley traded as high as 325.5 pence in November 2007 and as low as 16.50 pence September 2008 before the nationalization.

Two companies were established in 1851 as Bradford Equitable Building Society and Bingley Building Society owned by customers and merged in 1964 that created the current shareholder lender Bradford & Bingley plc.

U.K. House Prices Falls 6.2% in September

The cost of a house in England and Wales dropped 6.2% to £165,300 pounds in September from the same period a year earlier as reported by Hometrack Limited. In particular, prices in London have slumped by 7.1% in the past year.

Separately, the Royal Institution of Chartered Surveyors reported that houses are selling at 9% below asking price, with sellers in some regions being asked to accept 12.5% off their advertised price.

According to the report, the gap between selling and asking prices has also widened as in the North vendors are accepting offers averaging 12.5% below market price, while in the North West, East Midlands, West Midlands and Wales offers are averaging approximately 10% below. However, in London the offers are at 8.5%.

Simon Rubinsohn, RICS chief economist said, ""With housing transactions currently at a 30-year low, many vendors are being forced to lower their asking prices to achieve a sale in an ever-shrinking market or they are being forced to rent their property until the market picks up.""

Belgium, Luxembourg and Netherlands Invest 11.2 billion euros in Fortis

Fortis reported on its Web site today that the Government of Netherlands has agreed to invest 4 billion euros in Fortis Bank Nederland and the Government of Belgium will invest 4.7 billion in Fortis Bank, while Luxembourg will seed 2.5 billion euros in Fortis Banque Luxembourg.

Governments that have invested in the lender will have board representation in the Fortis banks. The company will also sell its acquired activities in ABN AMRO, excluding asset management for 24 billion euros, a development that will naturally impact on core equity as the financial crisis begins to take casualties in Europe.

It is estimated that the total value of adjustments that will be made to deleverage the balance sheet will be at 5 billion euros after tax. After the cash injections and subsequent provisioning, core equity for the company will rise to 30 billion euros, which is 9.5 billion euros more than required.

Maurice Lippens will step down from the board of directors and his replacement will be recruited from outside the company.

Gainers & Losers

WM Morrison Supermarkets Inc was the sole gainer in the index shares with a rise of 0.51%.

ICAP Plc led decliners in the FTSE 100 index shares with a fall of 23.58% followed by losses in Man Group of 18.26%, in HBOS Plc of 18.06%, in Xstrata Plc of 17.47%, and Eurasian Natural of 15.34%.

HBOS Plc fell as news of the nationalization of Bradford & Bingley unnerved investors. Royal Bank of Scotland slid 12.98%, and Standard Chartered slumped 11.07%.

Europe Markets Review

In London FTSE 100 Index closed lower 269.70 or 5.30% to 4,818.80, in Paris CAC 40 Index decreased 209.90 or 5.04% to close at 3,953.48 and in Frankfurt DAX index lower 256.42 or 4.23% to close at 5,807.08. In Zurich trading SMI decreased 315.39 or 4.63% to close at 6,500.13.