B&B shareholders revolt
Angry Bradford & Bingley shareholders are demanding an investigation into the bank’s nationalisation amid concerns that they will receive no compensation.
The bank has around one million shareholders, of whom 930,000 are private investors. On Friday 26 September, Bradford & Bingley closed at 20p per share on the London Stock Exchange but following the weekend’s decision to nationalise the bank, by Monday each share was effectively worth nothing.
The UK Shareholders Association (UKSA), which represents the interests of such investors, has declared its opposition to the nationalisation and will ask the City watchdog, the Financial Services Authority (FSA), to conduct an investigation.
Its concerns stem largely from the bank’s recent rights issue, which many shareholders took up believing that the long-term future of the firm was secure. Back in July, 93% of investors voted in favour of Bradford & Bingley's £400 million cash call, yet less than three months later they have been left with nothing.
Roger Lawson, communications director at the UKSA, is concerned that the information given to shareholders to encourage them to buy more shares was misleading. He also questions how the financial position of the bank deteriorated so quickly following the rights issue.
Lawson says: “Shareholders should expect very little, if anything, in compensation. This ‘fire sale’ of the company's assets is clearly disadvantageous to shareholders and is allegedly justified based on a breach of the FSA rules for deposit takers, but no details of those breaches have been provided.”
During a recent session in the House of Commons, chancellor Alistair Darling was asked what would happen to “loyal” Bradford & Bingley shareholders as a result of the nationalisation.
Darling refused to be drawn, stating it was “impossible” to say what – if anything – will happen to shareholders down the line.
“We will do what’s right,” he added. However, the chances of compensation do look slim.
Darling pointed out that Bradford & Bingley’s mortgage assets will take years to be realised, and it is not yet known how much money they will even bring in.
With the Treasury and the Financial Services Compensation Scheme borrowing money from the Bank of England in order to transfer Bradford & Bingley’s saving business to Santander, it will certainly be some time before anyone sees any money made of the nationalisation of the building society turned bank.
A way a company can raise capital by creating new shares and invite existing shareholders in the company to buy these additional shares in proportion to their existing holding to avoid a dilution of value, which means keeping a proportionate ownership in the expanded company, so that (for example) a 10% stake before the rights issue remains a 10% stake after it. As an added incentive, the new shares are usually offered below the market price of the existing shares, which are normally a tradeable security (a type of short-dated warrant) and this allows shareholders who do not wish to purchase new shares to sell the rights to someone who does.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.