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Government buys Bradford & Bingley

29/09/2008

Bradford & Bingley's (B&B) mortgages are to be nationalised while the bank's savings business will be taken over by Abbey-owner Santander after the bank was deemed to be a failure.

The firms 2.7 million savers are being told their £20 billion of cash is safe and B&B's branches, call centres and internet operations will be open for business as usual to provide continuity of service to customers.

A Treasury statement reads: "For savers and borrowers of Bradford & Bingley it will be business as usual."

Under the deal, B&B was deemed a failure so depositors' funds are covered the Financial Services Compensation Scheme (FSCS).

By using the FSCS, the banking sector will be forced to pay for any losses, but the government is lending £20 billion to cover this. If - by the time B&B is wound and sold off completely - there is a shortfall on this £20 billion, banks will be forced to cover the difference.

Upshot of the deal is there is little or no risk for the taxpayer.

Last week B&B announced it was stepping away from the UK mortgage market, but this was deemed enough to solve its liquidity problems.

Over the weekend the Treasury held an auction for the lender - with no firm ready to take on the whole business, so the taxpayer takes on the mortgage assets and the risk attached to them.

Under the plans, the government is likely to work to run down the B&B £40 billion mortgage book – meaning customers will be told after the end of fixed-rate deals the only offer will be a higher standard variable rate (SVR) or to remortgage elsewhere.

A similar strategy is being maintained by Northern Rock.

The upshot for the taxpayer is the state will be left holding the mortgages of customers that other lenders do not want - such as riskier buy-to-let and self-cert mortgages. But any losses would be covered by the rest ofthe banking sector.

Bradford & Bingley on Friday maintained it was in a strong position, with chief executive Richard Pym saying that the bank remained well-capitalised and could deal with its troubles.

However, the capitalisation position of B&B was nto the problem, but its liquidity standing.

In the current second wave of the credit crunch, banks are unwilling to lend to each other amid fears of further losses.

B&B's own mortgage was heavily focussed on buy-to-let mortgages - seen by some as a greater risk in the current housing downturn.

The biggest loser from the deal will be shareholders - with many taking a stake when the firm demutualised from being a building society.

The firm's share price closed on Friday at 20p, compared with 325.50p a year ago. It is uncertain how much - if any - money shareholders will receive.

B&B was the last demutualised former building society on the market - with others now bought by larger banks or nationalised in the case of Northern Rock.