U.K.’s Bradford & Bingley – Another Financial Sector Casualty

The U.K. government will be nationalizing the bank’s mortgage business, while Spanish group, Banco Santander, has stepped in to acquire B&B’s savings deposit customer base and branches, reportedly for around £150 million. Savings customers have been reassured that their money is safe. However with savers having already withdrawn about £1 billion since June, it is expected that more B&B savers will do the same. B&B’s more than £41 billion mortgage business is likely to be merged with the recently nationalized Northern Rock bank.

Bradford Equitable Building Society and Bingley Permanent Building Society were both established in 1851 in an effort to build a better future for the people working and living in northern mill towns. In 1964 the two companies merged to form Bradford & Bingley Building Society. In July 2000, Bradford & Bingley demutualized and in December 2000 listed on the London Stock Exchange. In recent years B&B shifted focus to an aggressive strategy of attracting new customers by offering buy-to-let loans to property investors, as well as extending higher interest rate “self-certification” loans to a high risk market, such as borrowers who are self-employed, or are holding down more than one job. B&B also granted “lifetime” mortgages which allow borrowers to tap into the equity they have built up in their primary residence. In hindsight, many agree that it is this shift in focus that set B&B on a downhill slide.

The new marketing campaign and shift in lending policies coincided with a housing boom, and therefore appeared to be very successful. House prices were increasing, defaults remained low, and due to charging higher interest rates to high risk customers, B&B’s profits continued to climb. However, since the beginning of the year, the housing market has gone into a nose-dive, the global economy is in turmoil, unemployment is on the rise and it is estimated that currently in Britain one in every 150 mortgage holders is behind by as much as three months in payments, with one in every 43 B&B customer battling to make monthly payments.

Traditionally, building societies lend out funds equal to their savings, thereby relying on their savings customers to fund their mortgage business. However, following its demutualization, B&B turned to international money markets to enable it to lend larger sums of money, and now has around £41 billion in mortgages, compared with £22 billion in savings deposits.

Analysts estimate that the cost to each British taxpayer for the nationalization of Bradford & Bingley will be the equivalent of £5,500 in mortgage debt. In a British currency comparison it is estimated that in the $700 billion U.S. bailout plan, American taxpayers will be saddled with the equivalent of £2,750 in mortgage debt. Looking at just one example, Richard Pym, who joined B&B on 18 August as the new chief executive, stands to receive a payout of an estimated £1.5 million if he loses his job. The fact that board members and executives of failed companies walk away with huge payouts is a particularly bitter pill for taxpayers to swallow, and is one of the key issues being addressed with current and future assistance to struggling financial institutions, bearing in mind that decisions taken now by both U.S. and U.K. lawmakers and authorities are likely to set a precedent for future bailouts – which many believe are inevitable.