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Collapsing Bradford & Bingley Forced Bailout by Major UK Banks

Companies / Banking Stocks Jul 09, 2008 - 04:18 AM

By: Nadeem_Walayat

As I warned on 8th and 15th of June 2008, the problems for Bradford and Bingley and its rights issue cash call were far from over and that the bank was on the brink of a Northern rockesque style collapse with the market now extremely reluctant to entertain cash calls from banks spiraling downwards towards ZERO. The last few trading days have seen Bradford and Bingley shares collapse straight through the 55p rights issue price trading down all the way to just 30p yesterday or 45% below the rights issue price.

The bank on the verge of collapse prompted the FSA and Bank of England to take urgent action so as to prevent a Northern Rock style panic and bailout. The regulators put immense pressure on the UK Major banks to step in and act as sub-underwriters to the rights issue i.e. to buy unsold stock at the rights issue price of 55p. This effectively puts a temporary floor under the Bradford and Bingley shares as the Big Banks may have committed to buy as much as a 1/3rd of the Banks stock to ensure the rights issue succeeds, this also means that the new shareholders will be looking at an instant loss on their holdings if the shares are still trading at 35p, off 20p or 36% from the rights buying price, with an estimated loss at that price of £70 million. However speculators of the hedge fund variety may step in to buy (usually followed by false rumours, this case bullish) given the now virtual 100% security that the rights issue will succeed at 55p therefore implying B&B share price rising towards the issue price on a short-term basis.

The ground work for bank bailouts was laid earlier in March and April 08 on the announcements that the Government would loan £50 billion to the Banks in exchange for toxic illiquid mortgage backed securities in an attempt to unfreeze the interbank market , at the time I warned that this is just the first step and that eventual liability would extend to several hundred billions which would still be a drop in the ocean compared to the ongoing deleveraging of a 500 trillion derivatives market which has highly deflationary implications for the credit and asset markets.

Deposits and Savings Secure ?

At the present time officially the first £35,000 of savings are secure at 100%. The government aims to raise this to the first £50,000 by the end of this year. However as we saw with the Northern Rock bank collapse, when the government stepped in to guarantee the first £100,000 of savings that the consequences of fear that savings are not 100% secure would lead to the panic spreading to other banks and hence a potential collapse if the whole banking and financial system. Therefore this suggests that if the worst came to the worst that the Government would step in to secure 100% of savings on the first £100k with immediate effect. However at this time, to be on the safe side it is probably better to continue to limit exposure to any single banking group to no more than £35,000.

UK Housing Bear Market

The UK housing market has barely begun its bear market with the trend on target for a 15% fall over 2 years from August 07, however the housing market may remain depressed for as long as the next 10 years as analysis of the long-term trends suggest. Therefore there is much more bad news in the pipeline for mortgage banks such as Bradford and Bingley, Alliance and Leicester and the once mighty HBOS as well as the wider banking sector and not to mention house builders, estate agents and buy to let specialists as witnessed by a string of announcements in recent days including today's from house builders Bovis Homes and Redrow slashing their work forces by 40%.

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