Britannia Radio

Taxpayer puts up £18bn to fund Santander buy

By Nick Clark
Tuesday, 30 September 2008

Alistair Darling insisted that taxpayers would not be on the hook
after taking on £50bn of assets from the stricken bank Bradford &
Bingley, which was nationalised yesterday.

The Government was forced to step in and nationalise B&B after it went
into default on Saturday, the second bank in a year to fall into
public hands after the collapse of Northern Rock.

The Treasury announced in the morning that it had nationalised B&B's
£41bn mortgage business, but had sold off the branch network and
customer deposits to the Spanish group Santander. This came after the
Government was unable to find an outright buyer for the firm. The
Government is providing £18bn, mostly through the Financial Services
Compensation Scheme, to Santander to cover B&B's deposits.

The Chancellor said: "One of the things I was concerned to resolve
over the weekend was not just making sure that savers could be
reassured, but also making sure we could look after the taxpayer
interest, and the taxpayer interest is being looked after. The
Government and the taxpayers stand behind it, but as the assets are
sold, that reduces the liability, and if there's any shortfall the
first port of call will be to the rest of the financial services
industry."

B&B branches remained open for business yesterday despite the transfer
of ownership, and the call centres and internet banking operations
were still in operation. The group's board released a brief statement
to reassure its 2.7 million account holders, saying "customers can be
confident that their money is secure in a well-funded bank".

Santander has got its hands on assets from its third UK financial
institution after buying Abbey National in 2004, and Alliance &
Leicester earlier this year. It has paid £612m for B&B's 197 branches,
141 agency outlets and £20bn of retail deposits, which will be
transferred to Abbey. Almost half the B&B staff will move with them.
This brings the Spanish group's total number of branches across the UK
to 1,286, and it has about 10 per cent of the market.

Abbey's chief António Horta-Osório said: "This is good news for
Bradford & Bingley's savings customers. They can be certain that their
hard-earned savings are with a bank they can trust."

Mr Darling said the authorities "could have let it just collapse, but
that would have seriously undermined other parts of the banking
industry and I wasn't prepared to see that happen".

He added that the Government was nationalising the mortgage book,
personal loan book, treasury assets and its wholesale liabilities,
with the shares transferred to the Treasury. The transfer order was
made under the Banking (Special Provisions) Act of 2008. The company
was then suspended from trading on the London Stock Exchange, pending
its delisting.

Sandy Chen, an analyst with Panmure Gordon, said the move showed the
Government had changed its strategy for bank bailouts. Rather than
running troubled institutions, it intends to break them up, "implying
that existing shareholders are wiped out – otherwise, shareholders
would be favoured over taxpayers".

A Treasury spokesman said it was "premature" to consider what
compensation shareholders will receive, although all the share options
and other entitlements to shares issued by the company "have been
extinguished" . The Government said the existing B&B management team,
led by former Alliance & Leicester boss Richard Pym, will continue to
head the group in the short term. The Government said it would issue
an update on long-term management in due course. The Financial
Services Authority (FSA), the Bank of England and the Government have
been working behind the scenes to prevent the bank's collapse for some
time. Fears grew on Friday that it was heading for the wall, with the
shares dropping 22 per cent at one stage. The closing price of 20p
marked a 93.13 per cent drop from a year before. On Saturday morning,
the FSA declared it was in default.

The Government said: "Following recent turbulence in global financial
markets, Bradford & Bingley has found itself under increasing pressure
as investors and lenders lost confidence in its ability to carry on as
an independent institution. " The authorities had sought a range of
private sector solutions, before the plan to nationalise and sell off
assets to Santander.

The Treasury called in the investment banking group Morgan Stanley to
oversee the rescue, with its star banker Simon Robey fronting the
talks. Goldman Sachs, adviser to Northern Rock before it was
nationalised, was called in by B&B.

The Financial Services Compensation Scheme (FSCS) was triggered after
the FSA declared B&B in default. The body, with the backing of the
Government, is to pay out for £14bn worth of deposits covered by the
scheme to Abbey. The Treasury has announced a further £4bn to be
transferred to Abbey, for the retail payments not covered by the FSCS.
In return, the FSCS and the Treasury have acquired rights to the
proceeds in the winding down of B&B's remaining assets in public
ownership.

The Treasury and the FSCS plan to recover payments as the rest of B&B
is wound down. The Government is to guarantee certain wholesale
borrowings and deposits with the group for six months. The FSCS, which
is funded by banks and building societies, tapped a short-term loan
facility from the Bank of England, which will then be replaced by a
loan from the Government. The banks and building societies will be
liable for any losses if B&B's assets fail to cover the loan and will
also be expected to meet interest payments on the loan, with the first
installment, of about £450m, due next September.

B&B was one of five UK banks to tap shareholders to raise extra funds
this year. Its rights issue raised £455.2m in June.

A spokesman for Legal & General said the firm was "disappointed that a
well-capitalised bank, which in more normal circumstances might have
been expected to trade through its current difficulties, has been
nationalised" .

David Cumming, head of UK equities at Standard Life Investments, said:
"As long-term shareholders, we stood by the company and supported its
recent fund raising. This regrettably did not lead to the desired
outcome."

Insight declined to comment, while M&G was unavailable.