Monday, 29 September 2008

Sorting out the Bradford & Bingley

Here's a quick summary of B&B's balance sheet, once you include a sensible ten per cent write down on all their dodgy mortgage assets:

I woke up this morning to find out that our Gummint had decided to nationalise the B&B, or as I like to call it "open up yet another Black Hole for taxpayers' finest". Had the gummint OTOH adopted the 'debt-for-equity' plan mooted by me and since adopted by Messrs Cameron & Osborne*, the balance sheet would show a healthy Tier 1 capital ratio of 13%, depositors and employees would be protected, no branches would have to be shut and all would be well with the world, as follows:

"What's the trick," I hear you gasp, "how did you do that?"

It's easy. It's called a capital reconstruction. The precise details of the legal, tax and accountancy side are devilishly complicated, but Big Picture-wise, what you do is, say to the bond holders "For every £1 face value of bonds that you hold, we will give you new bonds with a face value of 61.5p, and shares with a nominal value of 23p." Then there's a bit of netting and cancelling etc, far too arcane to go into here.

So, if you were dumb enough to originally subscribe for £1's worth of bonds issued by B&B, which had a market value of (say) 80p in the £ before the nationalisation, you would end up with shares worth 23p** and properly secured bonds worth 61.5p, so your original £1 investment is now worth 84.5p. That's a nasty 15% loss, but nothing compared to the shareholders who get more or less wiped out. Quite what the shareholders are whining about is not clear to me, as they were given these shares free on demutualisation anyway.

* My sympathies are increasingly with the Tories on this. They are being bashed for accepting donations from short-sellers in The Daily Mirror but are they being given as much credit for saying that 'reckless investors' should bear the brunt of the fall out of the credit bubble bursting rather than the taxpayer? Nope, thought not. AFAIAC, a gamble is a gamble. If you sell short and win, good for you; if you are conned into investing in 'mortgage backed securities' and you lose 15% of your money, well tough, frankly. There are worse things at sea.

** Actually, seeing as shares in Bankrupt & Bailout plc were still trading at 20p each last week, when the Better & Better plc shares are relisted, they might well be trading at 30p or 40p, in other words, the loss faced by long-term bondholders might be much less than 15%, and the original shareholders might recoup some of their losses. That's up to The Markets to decide.

UPDATE: if the B&B nationalisation was supposed to reassure the banking sector, it has failed miserably. Can we try it the old fashioned way the next time a bank fails, please?

UPDATE: and of course a reconstruction like this is not subject to EU rules against State Aid, which IMHO are an example of that rarest of things, 'Good EU rules'. The problem being that the rules are never enforced when France, Germany or Italy subsidise or protect 'national champions'. Ah well.

UPDATE: NB, comment 4, seems to be the only person over at LabourHome who has grasped this.


Anonymous said...

Mind you, 51 less 4 ain't 46.

Simon Fawthrop said...

Isn't this this the same as the debt for equity swap that saved the channel tunnel operators? The same one that has been used for decades to rescue private companies?

Strikes me as a good solution except that:

1. The major shareholders are likely to be pension funds and therefore a politically dangerous

2. There are lots of little old lady shareholders who will get wiped out, therefore politically dangerous

3. Crock was nationalised and if they don't nationalise B&B there will be some blowback about sacrificing jobs from their union paymasters, politicaly dangerous given Labour is in need of nationalising to get rid of its own debts

Mark Wadsworth said...

D, well spotted. That now reads 51 - 5 = 46

GS, exactly, there is nothing new or radical about this, this is the good old fashioned way of doing things.
1. Tough, shareholders have already lost 90% of their value over the past year or two. In any event, under nationalisation it is not clear they will get anything. See also footnote**.
2. See footnote**. These were originally free shares, don't forget.
3. There'd be no particular job losses, the bank continues as a going concern! Mortgage salesmen would retrain as debt counsellors and debt collectors, and that's the end of that.

Anonymous said...

Despite the bail-out this indicates that many of the jobs at risk are in Bingley which is in a Conservative-held constituency (Shipley). Obviously Darling - under the delusion that all seats north of Watford are Labour-held - made a mistake here.

MW - I agree with you. As usual with this government, although there's already on the statute book a perfectly straightforward and efficient procedure to deal with this kind of failure, Brown and Darling prefer the expensive and ponderous nationalisation route. Of course, with nationalisation B and D can play the Lords Bountiful and scrape a bit of popularity (at the taxpayers expense) with the knuckleheads still supporting Labour.

Snafu said...

It's just a pity that the Government decided to sell all the branches for £612m..

How can they legally do this!?!

Anonymous said...

It also assumes that that the current 10% fall in house values will be it or that if the fall is significantly more mortgage payers will not, in large numbers, just hand back their keys. The 2nd assumption is probably true but only probably.

Mark Wadsworth said...

The worst case losses on total £1,200 billion mortgage advances will be around 5% of the total, even assuming house prices fall 40%from peak - turnover in the last few years was very low, don't forget. I have done the calculations (based on BoE figures) but I haven't posted them yet.