Bradford & Bingley shows UK economy's 'serious problems'

The British economy faces "serious problems" at present, according to the Liberal Democrats.

The party's shadow chancellor Vince Cable states the plight of Bradford & Bingley starkly illustrates the growing concern for the financial sector and its potential impact on the wider economy.

"This is further worrying evidence of the serious problems the UK economy now faces," said Mr Cable. "The wider impact this has had on banks' share prices shows just how shaky confidence in the UK financial sector is."

Yesterday Bradford & Bingley announced it had slipped into the red during the first four months of 2008.

The company lost £8 million over the period, compared to a profit of £108 million of the same period of 2008.

As a consequence, the lender - the eighth biggest in the UK, and a specialist in the buy-to-let sector - was forced to seek investment from American company Texas Pacific Group (TPG), which took a 23 per cent stake in the organisation.

"It is no surprise that Bradford & Bingley has cited high default rates in its buy-to-let mortgages as one of the key reasons for its financial difficulties," said Mr Cable. "Buy-to-let mortgages are some of the worst examples of the irresponsible and unsustainable loans that have been offered by banks over recent years. They have already created thousands of empty homes, particularly in northern England, which investors can't afford and where there aren't enough tenants to fill them."

However, other commentators have attacked Bradford & Bingley's management, calling the company "shambolic".

Speaking to the BBC's Today programme, Mr Alex Potter, a banking analyst at Collins Stewart, explained: "Issuing a profits warning during a rights period is obviously very, very unusual.

"The fact that they updated the City only a month ago on the prospects of the business kind of begs the question do they even know what is going on within their own bank at the moment?

"Clearly a renegotiation of the rights issue was going to have to happen but, frankly, this looks pretty shambolic all round," he added.

Bradford & Bingley were forced to call for £300 million of investment from shareholders during May, but this has now be scaled back following the involvement of TGP.

However, Bradford & Bingley is not the next Northern Rock, claim analysts.

Graham Spooner, investment adviser at The Share Centre, said: “Although it does reflect the dire state of the buy-to-let market we do not think Bradford & Bingley is another Northern Rock situation.

"Bradford & Bingley has without doubt, been among those worst hit by the credit crunch, having traditionally taken a higher proportion of its funding from wholesale money markets as opposed to individual savers. As a result its share price has already fallen sharply this year.”

He went on to advise investors mulling over the bank's rights issue to wait to the last moment to judge whether it is a good deal or not.


Chris O'Toole