Bradford & Bingley: heading for a bailout?

"Poor old Bradford & Bingley," said Nils Pratley in The Guardian. Confidence in the specialist mortgage lender is fading fast. The shares have hit a record low as the bank has been downgraded to just one notch above junk status by rating agency Fitch, whose counterpart Moody's did the same late last week; and it appears that the Financial Services Authority is now trying to find it a white knight. On the plus side, it has managed to negotiate a deal with US GMAC, which originates "the most fetid loans" on its book, said George Hay on Breakingviews. B&B had agreed to buy another £1.75bn of mortgages by the end of next year, but will now only buy up to £750m by the end of the first quarter.

Still, this is unlikely to "make the difference", as Dresdner Kleinwort said. The key problem is that 85% of its mortgage book comprises risky buy-to-let and self-certified mortgages. Total arrears hit 3.1% in the first half; as Moody's pointed out, that's higher than any other rated peer, and the outlook for the housing market and economy in general is "increasingly negative".

The credit downgrades threaten to make it even more difficult for B&B to borrow in the wholesale markets; note that just 43% of its funding stems from retail deposits. If the bank loses the confidence of its wholsale funders or depositors, due to further turmoil in the stockmarkets it "would be in real trouble", said Jane Croft in the FT. This summer savers, unsettled by the uncertainty over its botched rights issue, withdrew £800m.

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Who would want it?

B&B seems unlikely to survive on its own, but the question, said Croft, is who would want to buy it. No big bank is keen. Another possibility is that the high street banks who own B&B could just carve up its assets. As a last resort, the Government can nationalise it. Given the huge sums that America is now "throwing at the market", a British bailout of B&B would be "small beer", said Hay.

BB: 25p; 12m change 92%