Bradford & Bingley
What is it?
Bradford & Bingley (B&B) was formed from the happy union of two building societies in 1964. It's been based in the Yorkshire town of Bingley for over 100 years, and became a bank in 2000 after the former Bradford & Bingley building society floated on the stock exchange.
When it was a building society, B&B was a nice safe place to put your money, and a nice safe place to borrow money from. Like all building societies, it relied on savers to fund its mortgage business. For each 1 deposited, it would lend out 1 and make a profit on charging more to their borrowers than they offered to their savers.
However, after becoming a bank, B&B ditched the softly, softly approach and turned to securitization as a way of raising more money to turn into more mortgages. According to Standard & Poor's (a ratings agency), only 40% of B&B's funding came from retail deposits in June 2007.
The wonders of securitization enabled B&B to become one of the UK's biggest mortgage lenders, particularly in the buy-to-let sector, where in 2008 it accounted for 20% of the market. It was also a leading light in the market for self-certified mortgages (AKA 'liar loans'): about 85% of its loan book was self-certified or buy-to-let loans, and its average loan-to-value ratio was higher than market average.
What's it got to do with the financial crisis?
On 29 September 2008, B&B went the way of Northern Rock, AIG, Fannie Mae and Freddie Mac, and Dexia and Fortis in Holland: it was nationalised by the government.
The most immediate reason for the British government's decision to step in was the collapse in the company's share price. When B&B floated on the London Stock Exchange in 2000, its shares were worth 2.47 each. In the week ending 27 September 2008, they sunk to just 20p.
However, the collapse in Bradford & Bingley's share price was symptomatic of a deeper malaise: struggling mortgage customers and a failing business model.
Across Britain, one in every 150 mortgage holders was three months or more behind on their payments in September 2008. At B&B, one in every 43 customers was struggling with their mortgage.
At the same time, when investors' appetite for buying mortgage-related assets disappeared, eyebrows were inevitably raised over Bradford & Bingley's funding model.
Recognising there were issues, B&B set about trying to raise cash, and failed. In May 2008, it said it wanted to raise 300m ($586m) through a rights issue, after earlier denying it intended any such thing. It was still trying to raise money in September, but repeated downgrades of its debt by ratings agencies made the process increasingly difficult to achieve.
With the share price plummeting and retail customers worrying about the security of their bank deposits, the British government had little choice but to step in. It didn't take responsibility for the whole of B&B - only for its 42bn ($76bn) mortgage book. B&B's 20bn of deposits and 200 or so branches were sold to Spanish bank Santander for about 600m.
Last updated on 1 October 2008.
