Sean O'Grady: Private Investor
B&B pulls it back from the brink – phew...
Saturday 28 June 2008
Oh, look! Bradford & Bingley is the only one of my recent banking punts to be in the money. At 80p or so I'm up a fifth on the nadir I bought at a few weeks ago, when they seemed all but done for. All the banks had their ups and downs last week, but Alliance & Leicester and Barclays are still underwater, despite some relatively good news from Barclays on their recapitalisation. True, it isn't a proper rights issue which would be fairer all round to shareholders, but it is close enough to one to be acceptable to smaller investors.
Contrast that, though, with the Bradford & Bingley plan. A few weeks ago I think I spoke for many people when I said that shareholders in the bank should accept the 24 per cent stake about to be taken by Texas Pacific Group. This American private equity investor seemed to be the only thing standing between B&B and oblivion.
Well, I've changed my mind about that. Now, with the interest Resolution recently took in the bank, their overtures sadly knocked back by B&B, I wonder whether shareholders in B&B should be all that desperate after all. In fact, I am tending to the view offered by those wise folk at the Association of British Insurers. The ABI says that B&B breached "sound governance" principles because its plan to raise cash favours TPG. As I say, I did think that was a price worth paying when the bank seemed to be on the verge of collapse, but calmer heads should now prevail. After the risible failure of the first rights issue this punk version seemed to make sense in the fevered atmosphere of the time. But times change.
This sort of thing is cropping up quite a lot with the banks at the moment – the rights of existing shareholders, or pre-emption rights. These basic rights of property, enshrined in company law and long convention are being jeopardised because the banks, or rather the banks' managements, are panicking all over the place.
It is the clearest divergence of the well observed separation of the interests of the owners and the managers of a company. The managers don't lose anything if they sell great chunks of a firm for next to nothing – and indeed have everything to gain if it helps preserve their jobs and the directors' usually lavish emoluments. However, the people who actually own the institutions – the shareholders – effectively pay a heavy price indeed for such cynical attempts to save the skins of useless boards and executive "teams".
So I am rather glad the ABI sees things my way and has sensibly decided to speak out on the issue.
The B&B plan, as the ABI states, breaches the right of investors to buy new shares in proportion to their existing holdings and gives TPG "preferential treatment" protecting the size of its stake. Peter Montagnon, the group's director of investment affairs, said that the ABI will "urge the regulatory authorities to take additional care in encouraging bank boards not to put themselves in such a position in future. Bradford & Bingley failed to ensure a timely flow of management information that could have prevented the need for this unsatisfactory arrangement." The breaches of governance principles are, he says, "unacceptable".
Indeed they are. So I urge all those small shareholders in this former building society to vote against the plans on July 7. It might, just might, prove a turning point in corporate affairs, and need not damage the bank's ability to recapitalise.
As I wrote last week, it is up to bodies such as the London Stock Exchange, the UK Shareholders Association, the British Bankers Association and the Financial Services Authority to tell our great banking groups that they are not allowed to shaft existing shareholders, no matter how dire their situation.
If it really is that dire, then new legislation will soon mean that the bank of England will be able to ease them into a special regime where they can be hospitalised and, in some sense, perhaps even saved.
By the way, I see the builders are down yet again this week, a very unhappy sight, and I'm glad I avoided them. Credit Suisse put out a note that spread depression everywhere, but in truth we can all see what's happening to the housing market. On the construction side it's much worse for builders than in the 1990 to 1992 slump. Who can save them?
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