Many shareholders expressed concerns to us about the nationalisation of Bradford & Bingley which was done extremely rapidly and with no consultation or political debate. We therefore set up a “shareholder action group” with the objective of pursuing some redress).
Some shareholders feel particularly disgruntled because they subscribed to the rights issue only a few weeks before nationalisation, which was promoted to them as putting the company on a sound financial footing for many months.
This note is intended to explain what has happened and why – at least so far as we know. It also attempts to give a brief summary of possible claims that shareholders may have and how they might be pursued, but without trying to give you specific legal advice.
The key questions which shareholders need answers to are:
- The exact reason for the nationalisation of the company and the necessity to confiscate the property of the ordinary shareholders (as the owners of the business).
- Whether the rights issues should have been permitted to proceed and whether shareholders were wrongly induced to subscribe to it, when it seems that this fund raising was insufficient to stabilize the company so that only a few weeks later the Government found it necessary to intervene.
- Whether the comments concerning the strength of the company, only a few days before nationalisation took place, from the directors and from the investors relations department were misleading.
- The question of what compensation, if any, shareholders will get from the Government and on what basis that will be determined.
These four questions are covered in detail below. Note that all shareholders should note that you effectively no longer own shares in the company, and the temporary suspension of the company’s shares is effectively permanent. Those shares are not going to be returned to you in the future and the company is in reality being wound-up.
Why Was the Company Nationalised?
The announcement by the UK Treasury on the 29th September 2008 stated “The FSA determined on Saturday morning that the firm no longer met its threshold conditions for operating as a deposit taker under the Financial Services and Markets Act 2000 and FSA rules”, but no more details were given. See the full announcement which can be obtained from: http://www.hm-treasury.gov.uk/press_97_08.htm . In reality this is misleading because if any such "determination" had been made then the company's banking license would have been immediately withdrawn, but that did not happen.
The “Transfer Order” also states “It appears to the Treasury to be desirable to make this Order for the following purpose: maintaining the stability of the UK financial system in circumstances where the Treasury consider that there would be a serious threat to its stability if the Order were not made.”
So what exactly were the nature of these threats to the financial system and specifically the breaches of compliance with deposit taking regulations? Was the company insolvent or about to run out of cash? Shareholders will certainly not have expected either to apply bearing in mind the large amount of cash raised by the rights issue. Although the share price had collapsed in the last few days (it closed at 20p on the Friday before nationalisation when it had been as high as £3 in the past year), which clearly indicated some lack of confidence that the company could continue, share price volatility does not by itself affect the operations of a company.
But the Financial Times reported that tens of millions of pounds had been withdrawn by depositors via their internet site on Friday and Saturday. Queuing problems were also reported in some branches on the Saturday. One of our shareholder contacts reports having spoken to Katherine Conway of Investor Relations, and she apparently said that the company approached the Government on Friday for funding but that it was refused.
Clearly the company had been seen as vulnerable to the credit crunch. Like Northern Rock and HBOS, Bradford & Bingley was dependent on the money markets (lending from other banks and institutions) to finance its mortgage bank to a much greater extent than other banks. If money markets closed for any significant time, then it would be unable to roll-over previous loans as they became due. With money markets totally frozen, B&B’s credit rating had been reduced and this was hampering the prospect of fund raising even more. One can see the impact on the company because on the 25th September 2008 it announced it was making redundant branch based mortgage advisors and intermediary sales staff which suggests it was reducing new mortgage lending very substantially.
So it looks like the company was suffering a minor cash outflow with possibly bigger problems looming despite the rights issue fund raising, and the Government refused to provide any temporary liquidity. It then moved rapidly. According to press reports, on the Saturday they initially tried to find a buyer for the whole business but nobody wanted to take on the B&B mortgage book which was seen as risky with lots of “buy-to-let” and “self-certificated” mortgages. With no offers on the table, on Sunday a decision was made to arrange a disposal of the deposit taking business to Santander (Abbey) with a view to an orderly wind-up of the mortgage loan book over the next few years.
In essence it seems the Government might have wanted to avoid accusations of “dithering” as happened with Northern Rock (an unreasonable complaint in reality), and the necessity to provide Bank of England funding to keep it afloat. Of course they have had to provide £18bn in loans to cover the transfer of deposits to Santander and taken the whole liability for the mortgage book on their hands, but they apparently saw this as preferential to having a repeat of the Northern Rock saga.
Cleverly they managed to invoke the Financial Services Compensation Scheme to ensure that some of the costs fell onto other banks and building societies, much to their chagrin.
The Rights Issue
The rights issue in July 2008 raised £400 million. It was proposed because “The Directors believe strengthening the Group’s capital base is the correct course of action to take during a time of continued financial market dislocation” and that “the Group will be better able to develop the business to exploit the opportunities available in its markets in the medium term” – to quote from the prospectus. There are of course lots of “health warnings” in this document, but those kind of comments hardly suggest that the company was rapidly running out of cash or was close to no longer being a “going concern” so they could be seen as misleading in themselves, even though presumably they had the support of the FSA in launching this rights issue.
Those shareholders who subscribed for the rights issue certainly seem to think they were sold a pup. Unfortunately many of these investors took the words of the directors at face value without possibly studying the position more closely.
One of the key issues here is the quality of the assets underpinning the balance sheet. It may well be that the company, its directors and the FSA had more confidence in those assets than other people, particularly the Government.
Were these and other Comments Misleading?
The rights issue was clearly intended to fund the company into 2009 - witness the comments from Investor Relations Manager Neil Vanham to another investor in July 2008: “With regard to your comments on ‘speculation that the company may be wound up’, this is simply sensationalist press comment. B&B continues to be well funded into 2009 and has a fully underwritten rights issue in place that has the full support of our major shareholders.” As it turned out, many shareholders chose not to take up their rights and the underwriters were left with most of the shares.
On the Thursday before nationalisation, Chief Executive Richard Pym even said the bank was “strongly capitalised”. But being solvent does not help if you run out of cash due to a run of depositors for the exit. As Peter Montagnon of the Association of British Insurers said, the Bank of England should have been “more proactive in providing emergency liquidity funding for solvent institutions” – this was of course the same problem which brought down Northern Rock where the Bank of England hesitated and the eventual support was leaked in a melodramatic way causing the stampede of depositors. Mr Montagnon also said as reported in the Times newspaper, that “This is a bank with one of the highest capital ratios, if not the highest. It is a matter of serious concern that it has moved to terminal care within a matter of days”, which is a nice concise description of the sequence of events.
Will Shareholders Be Compensated by the Government?
The Government has published a “Compensation Order” which will determine how shareholders will be compensated. An "Independent Valuer" has been appointed but there is still a lot of uncertainty as to what value might be attached to the company and to the shares at the nationalisation date.
In the case of Northern Rock, one of the Government’s key arguments for not paying compensation was because the company clearly could not continue without support from the Government and the Bank of England. They might attempt to use similar arguments in this case.
One issue that might be looked at here was whether nationalisation of Bradford & Bingley was a proportional act. Was it necessary to take such extreme measures or were there less drastic measures available that would have preserved the financial stability of the UK economy while preserving the company and the rights of shareholders? It would not be difficult to argue that there were.
Why for instance did the Bank of England not provide funding using the “Lender of Last Resort” facilities which are usually available to solvent institutions? Or bearing in mind the Governor’s known concern about the “moral hazard” of encouraging questionable lending and business practices, did he decide that this was one company that should be treated as an example to others and effectively destroyed (because make no mistake, this is what is happening). It’s worth pointing out that the Bank of England has subsequently supported other UK banks with over £300bn of funding on the excuse of needing to inject liquidity into the system so why could not some of this have been made available to Bradford & Bingley? Perhaps the Government did indeed determine that the quality of the assets at B&B made it not worth saving.
Other Questions
The “shareholder’s equity”, i.e. the surplus of assets over liabilities at the date of nationalisation, according to the last set of accounts was about £1.5bn – that is equivalent to about 100p per share. That should be what remains after the “run off” of the company. Is this a realistic figure though or did the Government judge that the assets were not fairly valued in the accounts? We may not know until time has passed to see how many mortgages go into default. But the implied value assumes that the wind-up process is handled properly and there is no rush to dispose of assets at less than fair value.
Obviously any “fire sale” type process tends not to be in the interest of the shareholders (or the “residual owners of the assets” as they might be called in this case). And one immediate issue is whether the sale of the branch network to Santander was done at a good price. By rushing through this process in a matter of days, if not hours, it seems unlikely that the Government maximised the price.
What We Are Currently Doing
We have been seeking disclosure from the relevant parties, including the Treasury, the FSA and others, of information relevant to the valuation process. This will include details of why the FSA intervened on the morning of Saturday 27th September 2008 and the sale process conducted on behalf of the Treasury which ultimately lead to the deposit-taking business of Bradford & Bingley being transferred to Banco Santander. This may require the Action Group to seek legal representation as the various entities involved may continue to resist providing relevant information.
Our key objective is to obtain a fair and reasonable valuation, and hence compensation for shareholders, out of the independent valuation process. The Government has appointed an independent valuer to determine the compensation but it will be many months before any result is issued. The valuation process is by no means a foregone conclusion and there is likely to be significant argument about the basis of valuation and the information on which it is based. There may also be disputes about the availability of that information including the financial position of the company, and likely future trends, at the date of nationalisation. These may well require legal challenges. In addition we will need to take expert professional advice on the valuation to put our case properly, which might involve very substantial costs.
Note that the separate matter of the B&B rights issue is being handled by solicitor Leon Kaye and we will not be pursuing that ourselves because there is no point in duplicating effort. However that action will only potentially benefit those who subscribed for the rights issue and only in respect of the money subscribed, not in respect of the other shares you held.
It is important to raise awareness of these issues among politicians and get some answers from the Government. We suggest you write to your Member of Parliament using a letter like this.
David Blundell
Chairman, Bradford & Bingley Shareholders Action Group
Email: uksa@uksa.org.uk
Revised 27/7/2009
