Bradford & Bingley: The search for a solution to the balance sheet black hole
Everyone knew a deal had to be completed over the weekend, because B&B could not maintain its radio silence to the market any longer and would have to issue a profits warning on the Monday.
One senior source said: "It was an incredibly aggressive timetable and, given that private equity is usually due diligence heavy, it was remarkable that it got done."
Over last weekend, the situation hotted up. Sir Callum McCarthy, the FSA's chairman and John Kingman from the Treasury kept in regular touch to ensure the company thrashed out a rescue plan by Monday morning to avoid a run on the bank.
The prime minister Gordon Brown also asked to be regularly updated while Mervyn King, governor of the Bank of England and the chancellor, Alistair Darling, who was spending the weekend in Scotland, were also on the phone monitoring the situation.
Those involved have played down the idea that the underwriters threatened to invoke the MAC clause, but confirmed that talks between Citi and UBS, the company and TPG over the new financial terms of any deal were "lively".
TPG insisted it would not pay 82p a share for its stake.
At the same time, B&B thought it had to cut the rights issue price to avoid a scenario where TPG got a massive bargain on its shares while other investors endured further pain.
By Saturday night, a deadline set by the FSA, B&B had firmed up its internal numbers and the underwriters did two hours of due diligence. That continued all day Sunday. For much of that time, Goldman kept the underwriters and TPG in the dark about the position of the other, in order to squeeze the best deal out of both.
TPG succeeded in beating down the price, while the company extracted an agreement that the firm would only get equity on the same basis as other shareholders and not receive preference shares.
By midnight a deal was done and some of the senior people went home. The race began to get the legal documents ready by the time the market opened.
In the event, the lawyers missed and B&B's shares had to be temporarily suspended until an announcement could be made, saying TPG would buy a 23 per cent stake for £179m, and the rights issue would also be cut from 82p to 55p a share. B&B would now raise £400m, up from £300m, the company said.
The market reacted positively to the TPG investment but traders' jaws dropped at the drastic action on the rights issue and a profit warning revealing three-months arrears and repossessions had jumped from £800m to £1.1bn.
One City veteran said: "I have never seen anything like this. The board looked in terrible trouble".
Bradford & Bingley: the sleepwalk towards the abyss
Just weeks later, reports surfaced that events had turned further against B&B with a deterioration in global financial markets, forcing the bank to contemplate a rights issue.
The suggestions were vigorously denied, both by Crawshaw and his spin doctors at PR firm Finsbury.
But just three weeks ago Crawshaw was forced to admit he'd got it wrong and would, after all, be tapping his shareholders for £300m to shore up the bank's worsening finances.
And last week, the latest act in the tale was played out. First Crawshaw said he was stepping down as chief executive citing ill health. Then, just two days later, Kent revealed that the terms of the rights issue had been watered down amid fears the markets would give the original offer a thumbs-down.
Investors would now be offered rights at 55p a share rather than the 82p first announced. Just one year ago, B&B shares were trading at over 400p each.
And the final ignominy: TPG, led by the no-nonsense David Bonderman (see facing page), would be taking a 23 per cent stake in the company at a deeply discounted 55p, costing the US group £179m – a near 50 per cent discount to book value.
The positions of long-suffering small shareholders would be diluted further, while Kent also dangled the increasingly likely prospect of the dividend being scrapped too.
Shares in B&B shed a quarter of their value in a day. Analysts predicted that much worse was to come.
So far, the group has had to write off more than £130m in assets that have deteriorated in quality during the credit crunch. A further £89m loss was revealed last week. Analysts expect pre-tax profits to halve this year compared to 2007, and there are no signs of a let-up in the soaring cost of wholesale borrowing.
And B&B has another potential disaster looming. Last September, when the first effects of the credit crunch were being felt and most people were running the other way, B&B entered into a £1.1bn deal with US finance giant GMAC to buy a portfolio of mortgages when most people were running the other way. The commitment to buy another £2.1bn worth of assets in this contrarian play looks set to cause further woes, with analysts describing delinquency rates at GMAC as "startling".
In the wake of last week's volte face at B&B, a number of revelations have surfaced about the group's handling of the credit crisis. Not least is the reporting system used by the firm to assess its financial strength. We learnt that internal profit figures were generated 31 days in arrears. Even Northern Rock got its numbers together quicker.
The English gentlemen failed at B&B. But can the Texans succeed?
Most Sunday mornings, Rod Kent, chairman of Bradford & Bingley, can be found selling his home-made yoghurt at the farmers' market in Winchester, near his home. Kent, tall and debonair, looks every inch the gentleman farmer too. But this Sunday he won't be at his stall; he'll be trying to catch up on the sleep he has lost after what he describes as "10 days of hell".
It's been 10 days in which Kent had to issue profit warnings, reconstruct a rights issue and invite the Texans in to become the biggest shareholders. He came close, too, to becoming the last gentleman capitalist as investors called for his blood. They are angry, rightly so. They had already seen their shares collapse over the past few months, and were now being asked to dilute their holdings.Two years ago the shares were 500p; on Friday they were 72p. Not a good week.
But the most breathtaking admission from Kent came when he and his board of five (highly qualified) non-executive directors said they had not realised how bad the situation had become. He said, and I quote: "The bank is slow at producing financial information. The board did not see the April results until the end of May. By then, the trends were showing trading was not what we thought it was." He also admitted "management failure".
This took the biscuit. We have all known for months that the lending markets have been appalling. B&B, along with other troubled banks, has been looking – for weeks – at how to restore capital reserves and improve balance sheets. Even at the beginning of April it was known that B&B would have to raise more money, despite company denials. Clearly conditions worsened at the end of the month as mortgage arrears built up and net interest margins fell. But surely this is when Kent, and his board, should have demanded weekly, if not daily, financial reports? It beggars belief that he didn't.
By all accounts Kent is a man of detail. People who worked with him at Close Brothers say he knew just what was happening in all bits of the bank, even the market-making, right down to weekly trading positions. Odd that he didn't have a better idea of what was happening at B&B.
Jeremy Warner's Outlook: Once there were building societies. Then they became banks, and it all went wrong
Remember demutualisation windfalls? This was the closest thing to a free lunch ever invented. All you had to do was spend half a day of your time wandering up and down the high street opening an account at every building society you could see, and then sit back and wait for the share certificates to start dropping through the door.
Many of these so-called carpet baggers made tens of thousands out of the wheeze, which you could read about in any old personal finance column. Even longstanding depositors and mortgage holders seemed happy enough with the outcome. It was like money for old rope.
Today, the demutualisation dream lies in tatters. All of the building societies that did it have either gone or are shadows of their former selves. Even the mighty HBOS, the remnants of the Halifax and Leeds Permanent building societies, trades at less than half the price the shares were floated at more than 10 years ago. Alliance & Leicester has ended up as similarly damaged goods. Northern Rock is a complete write-off, Bradford & Bingley is virtually the same, and Abbey National, which led the charge to demutualisation, had to be taken over by Santander of Spain after management hubris brought the company to its knees. A perfectly viable industry which performed a vital public service in a reasonably well-managed, responsible fashion, has been completely destroyed. As ever, it was greed that did it....
....But it wasn't just about the money. Conversion was justified on other grounds, too. One was that building societies had too much capital, and that, in the interests of capital efficiency, it needed to be distributed. Not many shareholders at HBOS and Bradford & Bingley would recognise this characteristic now they are being asked to give it all back again in jumbo, distress rights issues.
But if you didn't like the capital surplus argument, there was always the one which had it that, by remaining mutually owned, the building societies were depriving themselves of access to the capital markets and all the opportunities for balance-sheet expansion that their rivals among the joint stock banks could pursue. Given what's happened in the last year, you might reasonably think that these were opportunities that would much better have been avoided.
Barclays lines up sovereign wealth funds for cash boost
Executives at Barclays, Britain's third-largest bank, are in advanced talks with overseas government-backed funds to secure a capital injection of more than £3bn.
The lender has stepped up talks with investors from China, Abu Dhabi and elsewhere in the Middle East and Asia as it looks to follow its peers by recapitalising its balance sheet.
Advisers to Barclays said this weekend that it wants to tie up the new capital within the next few weeks. The bank's strong preference is to raise capital from sovereign wealth funds rather than through a rights issue.
Real-Estate Woes of Banks Mount
Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums.
Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses.
"As long as the housing market is on a downward path, as long as those prices continue to fall, I think there's a risk that the losses could continue to mount on a variety of loans," Federal Reserve Vice Chairman Donald Kohn told the Senate Banking Committee Thursday.
At the same hearing, Federal Deposit Insurance Corp. Chairman Sheila Bair said banks that aren't diversified, or those with high exposures to residential construction and development, are of particular concern. "That's where we are really seeing the delinquencies spike," she said.
The surprisingly gloomy outlook is at odds with the sentiment of investors, who appear to have moved on from worrying about the health of the financial system to obsessing about gasoline prices and consumer spending.
Pressure Points in the Bank Bust
Many of the regional and other private banks scattered across the United States are in deep trouble. The Federal Deposit Insurance Corp (FDIC) has declared 76 banks as official 'Troubled' in a rise from the 50 declared with similar status at the end of year 2006. Joining the breakdown of the big banking stock index BKX breakdown in progress is the breakdown of the regional bank stock index RKH. It has fallen below the pennant pause pattern. The word CONTAGION comes to mind, the nightmare for USFed officials. The worst lies directly ahead for banks and stated losses. All propaganda will be unmasked very soon. Panic might set in within a few months time.
The big banks have begun to set up private resolution business segments, entrusted with the duty to liquidate credit related assets. This trend appears to be an attempt to circumvent regulators, to avoid proper accounting, and to prevent a cascading decline of valuations in disclosed bond markets. JPMorgan hired Blackrock to manage the $30 billion raid on Bear Stearns. Merrill Lynch has also set up a private resolution business segment, according to an internal memo. They seek to reduce their $1000 billion book of assets. They had $6.6 billion in asset backed CDO bonds at the end of March. UBS has created a new distressed asset fund under Blackrock management, again another private resolution business segment. UBS conducted an ugly circular deal, where they sold basically to themselves $22 billion worth of impaired bonds for 68 cents on the dollar value.
Special Purpose Entities, Structured Investment Vehicles, and now Variable Interest Entities (VIE) constitute the shell game for insolvent giant banks avoiding honest balance sheet reporting. CreditSights estimates that impaired mortgage related assets of up to $784 billion remain in VIEs are scattered across major Wall Street and money center banks. The potential additional losses related to VIEs could reach $88 billion, they estimate. Goldman Sachs recently admitted they are holding $11.1 billion in VIEs. Citigroup has a whopping $320 billion in VIEs that are off-balance sheet still.
Standard & Poor's just downgraded MBIA and Ambac, the major bond insurers. Last month Fitch downgraded them. This could provide the ultimate push for the banks to move damaged assets on their balance sheets. An avalanche of bank writeoffs looms. The insurers are dead! Municipal bonds are another matter altogether. Delays by banks on credit asset portfolio writedowns, create risks maybe greater in the Untied States today than they were in Japan in the 1990s. The next process with involve heavy stock dilution much like shampooing: lather, rinse, repeat, then write down, raise capital, repeat.
Lehman Brothers stock has massive option puts, especially at strikes that would only pay off if LEH completely imploded, with some even that expire in June, an identical situation to Bear Stearns just three months ago. Lehman Brothers is poised to be killed. The Credit Default Swap for Lehman Brothers corporate bonds has jumped from 130 at end April to 240 at end May and to 275 in early June. In 1Q2008, Lehman recently admitted a mere $200 million in losses from the oversized $6.5 billion portfolio of subprime securities on its balance sheet. Consider that a quarter of their total securities bear junk status. Lehman executive comments made public do not match reality. The time has come to punish, err, to impose proper value.
Lehman, the lying lemon lemming anecdotal timeline?
Let's see here. The company is the largest MBS underwriter and the smallest bulge bracket bank on the street (the bank that had the #1 spot was just taken under). The company has hit the capital markets twice and the Fed window once to access capital to (Ahem!) "prove to the market that it has liquidity" and for "testing purposes only". They then take this money that they got from the suckers, oops, investors and buy their own stock with it. Is that what those suck.. I mean investors had in mind for that money?
The company alleges short sellers conspired to drive their stock down, so they went on the PR warpath to fight these (us) bad guys. Instead of opening up their books to prove them they (I) am wrong, they try to sick the government on the short sellers. Merrill Lynch issues a buy on Lehman today, after downgrading them a couple of days ago. Lehman stock shoots up after being beat up for a few days, probably incited by David Einhorns choreographed, publicized short selling campaign.
Regarding Lehman, a common sense approach asks a lot of questions
To begin with, you have no business buying stock if you need to hit the capital markets - for any reason. The SEC was willing to look into shortsellers conspiring to drive Lehman's stock price down - well I insist they look into Lehman for conspiring to drive stock prices up! They stated that they only bought small amounts, but since they failed to mention what those amounts were, it is called into question.
Lehman states that it isn't facing a liquidity crisis (ala Bear Stearn's same "Short me, please speech 3 months ago), yet it is going back to the liquidity well for the 4th time in as many months. I hear alcoholics really don't believe they have a drinking problem, either.
Whether they have a liquidity problem or not, are backstopped by the Fed or not, one thing is for sure - They definitely have solvency problem, and that is something that can only be solved by strong earnings growth (not happening here) and strong market valuations (uh, uh). High leverage, depreciating assets bought at the top of a bubble, and the burning need to delever in a rapidly falling market will kill the best of us.
Rating agencies’ blow to monolines
Ambac and MBIA, the two biggest bond insurers, breached an important barrier this week. Soon, none of the main ratings agencies will rate them triple A.
Fitch Ratings, a smaller ratings agency, had already removed their top-notch status months ago. But the biggest agencies still had them at a level which indicated the lowest possible risk of default. Now, Standard & Poor’s has downgraded them to double A status, and Moody’s Investors Service is likely to follow.
Without a triple A credit rating, there is no prospect of these bond insurers doing new business again. The entire bond insurance model rests on a triple A credit rating; it is the triple A guarantee that municipal borrowers and structured finance markets have been paying for.
“The ability of MBIA and Ambac to continue as viable ongoing companies is highly in doubt,” said Rob Haines, analyst at Creditsights. “How can a triple A be justified for a company that cannot sell its product, is facing mounting losses, and has no access to the capital markets? The franchise value of both companies has been seriously damaged.”
Although more than $1,000bn of bonds with guarantees from Ambac and MBIA will now also be downgraded, investors and borrowers have, where possible, already adjusted prices and positions to reflect a rating of Ambac and MBIA below triple A.
Indeed, the use of guarantees in the US municipal market has dropped dramatically. Those borrowers that do want guarantees are instead getting them from bond insurers that avoided losses related to risky mortgage-backed securities – such as AGO and FSA – or are turning to some of the new entrants in the market, such as Warren Buffett’s Berkshire Hathaway.
The premiums that can be charged for guarantees have trebled, according to market participants, as guarantees that are used are seen as more valuable.
China lifts bank reserve requirement by 100 bps
China's central bank on Saturday raised the amount that lenders must hold in reserve by a full percentage point, an indication of official alarm over the huge amount of cash coursing into the economy.
It was China's fifth increase of the ratio this year but the first time since December that the central bank opted for more than a half percentage point rise.
The reserve requirement ratio for big banks will stand at a record 17.5 percent after the increase is implemented in two steps, going up by half a percentage point on June 15 and again on June 25, the People's Bank of China said on its website.
In familiar language, it said the move was intended "to strengthen liquidity management".
On the occasion of previous increases, however, the central bank had said its objective was also to curb money and credit growth. This time it only mentioned liquidity management.
China's concerns about surging liquidity have sharpened in recent months as the country's stockpile of foreign exchange reserves, already the largest in the world, soared to $1.757 trillion. Reserves increased a record $74.5 billion in April alone, source earlier told Reuters.
Officials suspect that a large portion of the inflows has been speculative capital, frustrating their efforts to manage the money supply.
With strict quotas on lending by commercial banks, the cash flooding into China has been piling up in the interbank market, Stephen Green, Standard Chartered economist in Shanghai, said.
"You have to sterilise that, so you raise reserve requirements," he said.
Increases in the reserve requirement ratio have been the central bank's main tool to mop up, or sterilise, the monetary impact of huge inflows of dollars that it buys in return for yuan to hold down the currency's exchange rate.
"Raising reserve requirements is the only way you can cheaply and efficiently remove liquidity," Green said.
Russia blames U.S. for global financial crisis
Russian President Dmitry Medvedev blamed "aggressive" United States policies on Saturday for the global financial crisis and said Moscow's growing economic muscle could be part of the solution.
"Failure by the biggest financial firms in the world to adequately take risk into account, coupled with the aggressive financial policies of the biggest economy in the world, have led not only to corporate losses," Medvedev told Russia's main annual event for international investors in St Petersburg.
"Most people on the planet have become poorer."
The Kremlin leader said investment by cash-rich Russian companies abroad, promotion of Moscow as a major financial centre and use of the ruble as a reserve currency were part of the answer.
These could help solve problems created by what he said was a gap between the United States' leading global economic role and "its true capabilities".
The Kremlin leader said economic nationalism had played a big part in triggering the current crisis, which he compared to the Great Depression of the 1930s.
Smile through the crisis
FT.com rounds up the best (and the worst) offerings from every corner of the world’s strained banking system to keep you laughing (and groaning) under the darkening financial skies....
....Jonathan L, from Tel-Aviv, recalls an old classic from the 1980s crash: What’s the difference between a stockbroker and a pigeon? A pigeon can still leave a deposit on a Porsche.