‘You can’t go wrong with bricks and mortar.’
This may go down in history as the most dangerously mistaken cliché ever uttered.
Over the weekend, another British high street bank has been nationalised. US politicians have been debating non-stop over an emergency bail-out that effectively part-nationalises the entire banking system. And a European bank, Fortis, is also being taken over by the state with the help of no fewer than three countries’ governments.
Amid all the wailing about the capitalist system, all the blame-throwing between investment banks and government ministers, we should remember that all this boils down to one stupid but widely-held belief.
That property prices could only go up…
Taxpayers are stuck with Bradford & Bingley’s toxic portfolio
Property prices only go up. Sounds daft now, but a lot of people must have believed it. It seems that the board of Bradford & Bingley certainly did. Otherwise, how do you account for the bank’s whacky business model?
It has a £41bn mortgage portfolio stacked high with buy-to-let and self-cert loans (also known as ‘liar’s’ loans, because you don’t need to provide proof of salary) alongside £11bn of other assets. Or should I say, ‘had’ – after all, you and I and rest of Britain’s taxpayers own it now.
And what a portfolio to be lumbered with. Of the £41bn, Credit Suisse analyst Jonathan Pierce reckons that 40% of the loans will be in negative equity if house prices fall by 30% from peak-to-trough. We’re practically halfway there.
And at this stage, the quality of the book is already looking extremely ropey. Arrears, at 2.87% in June, are double the industry average, as Philip Aldrick points out in The Telegraph. Worse still, it’s going to be a lot tougher to offload these borrowers than it was to encourage Northern Rock mortgagees to go elsewhere.
The trouble, as Aldrick says, is that there aren’t really any buy-to-let lenders left. “The market has almost entirely shut down, with dozens of lenders withdrawing as the financial crisis struck.” So it looks like the taxpayer will ultimately be stuck with this toxic portfolio, which won’t be pleasant, as more and more landlords go to the wall and more loans go bad.
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What about the rest of the bank?
Well, it seems that Santander (which owns Abbey and recently bought Alliance & Leicester) has bought Bradford & Bingley’s £20bn deposit book and 197-strong branch network for £612m.
Apparently shareholders in Bradford & Bingley are kicking up a fuss over this asset ‘fire sale’, says The Telegraph. Sorry, but anyone still holding onto Bradford & Bingley shares, when it was quite clearly the most hapless bank in the UK, has no right to complain. Haven’t they been following the news? Small shareholders I can understand – most of them got the shares for free in the first place and probably only looked them out from the back of the drawer when they realised they were being wiped out – but institutions should have known better. As Alex Potter of Collins Stewart put it to Bloomberg, “in a nationalisation, shareholders get wiped out. That’s just the risk investors take.”
In any case, the shares have already fallen 93% in the past year, from 300p to 23p a share on Friday night. Losing the other 7% is hardly a big loss after that thumping hit.
Of course, Britain is far from the only country to be suffering the pain as our mistaken faith in property comes back to bite us. The rampant fear in the credit markets has seen Belgium’s Fortis – the country’s biggest private-sector employer – bailed out by not one, but three governments. Belgium, Luxembourg and Holland are clubbing together to stick €11.2bn into the financial services group.
The group came a cropper partly due to its role in the purchase of ABN Amro, alongside Royal Bank of Scotland and Santander last year. It’ll now sell off its stake in ABN Amro, though no buyers have been mentioned yet.
As for the US, Wachovia, the sixth-biggest US bank by assets, is up for sale, so it seems it will be the next victim of the crisis. And the biggest bail-out of all, Hank Paulson’s $700bn rescue plan for the nation’s banks, seems to be finally sealed – we’ll have more on this on the website later.
What all this government intervention means for the markets
So will all this state intervention make markets less queasy? It’s hard to say. One big problem is that hedge funds are being forced to liquidate left, right and centre, and return money to investors this week. Not a single strategy produced a positive return in September, even though plenty have still outperformed the market. All that selling can’t be good for markets.
But in any case, in the longer run, none of this is going to be a miracle cure. The fundamental cause of the problem – over-inflated property values – is still rectifying itself. That’s going to take a long time. Even as banks are saved from going bust, the availability of credit will still be far lower than in the ‘good old days’ of the boom times.
By the time prices are bottoming out, the idea that ‘you can’t go wrong with bricks and mortar’ will be as despised as the concept of renting was at the height of the boom. By then, it might just be time to buy – but you’ve got a while to save up a decent deposit before that happens.
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