Jeremy Warner's Outlook: Texas Pacific proves a man of straw as magnificent four ride to the rescue

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The Independent Online

Believe it or not, there are some positives to be drawn from the debacle that is Bradford & Bingley. One is that despite the lily-livered behaviour of Texas Pacific Group, an alternative recapitalisation on almost exactly the same terms has been quickly put in place in a manner which may prevent a repeat showing of the collapse in confidence that did for Northern Rock.

What's more, in orchestrating this rescue, the Financial Services Authority has shown a degree of professionalism and decisiveness that belies its image as a failed regulator.

Given the speed with which this latest crisis developed, it was impressive stuff, and gives some comfort that having so spectacularly dropped the ball over Northern Rock, a chastened FSA is fully on the case. Incendiary devices still threaten to go off all over the place in the capital markets, yet here's evidence that the FSA is defusing at least some of them.

Then finally, the big investment institutions have ended up getting what they wanted. For them, Texas Pacific's involvement was anathema. The American participation, negotiated without consultation over a weekend, flew in the face of pre-emption rights and involved a high degree of dilution for existing shareholders. With TPG's retreat, the City old guard gets to step up to the plate instead. A blow has been struck for shareholder rights. In future, even failing banks will think twice before ignoring the wishes, or indeed potential support, of their leading shareholders.

In other respects, however, nobody emerges with credit from a shambles that could easily have resulted in a far less benign outcome. Texas Pacific was meant to offer certainty that come what may, Bradford & Bingley would get the money it needed to survive. While others were wavering, Texas Pacific had managed effortlessly to slap the money on the table. All other alternatives were said to lack the confidence-inspiring certainty that Texas Pacific brought to the party.

Yet in the end, these self-styled champions of the new capitalism proved to be men of straw. At the first whiff of grapeshot, the private equiteers were off. It would have been almost comical but for its potentially devastating consequences. The certainty that Texas Pacific promised proved to be no more than hot air. Fortunately, the staid old institutions, much mocked during the boom for their old-fashioned ways and standards, were made of rather sterner stuff.

Has Texas Pacific fully thought through the consequences of its actions? This I doubt. No one is going to trust the US-based private equity house after this. When push comes to shove, the company cannot be relied on to be good for the money. Potential counterparties will laugh behind their hands at the partnership that promises so much but somehow or other cannot quite deliver.

If it were possible, the FSA would drum them out of town for the trouble they have caused. For the sake of just £180m, a comparatively small investment by Texas Pacific's standards, the private equity group has completely trashed its reputation.

Equally bizarre was the behaviour of the credit rating agency Moody's in accelerating the announcement of a downgrade which it knew would jeopardise Bradford & Bingley's refinancing and thereby put the beleaguered mortgage bank's entire future in doubt.

Moody's actions can only be reasonably explained by the drubbing credit rating agencies have received for mispricing mortgage-backed securities and other unsafe forms of debt. Ever since, they have been under intense pressure to up their game, and produce some more on-the-ball and astute assessments of credit risk.

Both clients and regulators accuse them of having lost the plot. As the political backlash builds, they are desperately trying to demonstrate that they still have a reason to be.

Yet the FSA is hardly going to thank them for their new-found vigilance on Bradford & Bingley. Like the previous underwriting agreement, the Texas Pacific capital injection was made conditional on the credit rating.If Moody's downgraded by more than one notch, then Texas Pacific would have an opt-out. Almost immediately the deal was struck, Moody's downgraded by a single notch. Inexplicably, it then accelerated a further review of the credit rating, and put the company on warning of another downgrade.

At that point, the company, its advisers and the FSA moved quickly to find a plan B. When the second downgrade was published, Texas Pacific was given two hours to decide whether it wished to proceed or not.

Eventually, the private equiteers came back with an offer of a lesser amount of new capital, but by then it was too late. Hector Sants, chief executive of the FSA, had decided that anything less than full commitment from Texas Pacific would bring the all-British, backstop solution into play. After being told there was an alternative on the table, Texas Pacific took the view that it was free to walk.

The Americans claim not to have been surprised by the downgrade, but they were taken aback by both its timing and the alarmist tone of the language used. As one Texas Pacific partner put it to me: "Once that downgrade was out, we had a fiduciary duty to our investors to revisit all the assumptions we had made in taking the Bradford & Bingley stake." For Texas Pacific, the deal no longer stacked up. Yet if Moody's had delayed publication, even by a few days, it would have gone through.

Small wonder that regulators are in some respects even more angry with Moody's than they are with TPG. Having helped to cause the credit crisis in the first place by assigning top-notch investment grade to toxic debt, the rating agencies are now recklessly enhancing the ensuing mess with belated downgrades. It is almost as if Moody's was deliberately trying to sabotage the B&B refinancing, and thereby seal the company's fate. But then that would be to attribute too much ingenuity to these discredited automatons.

All that said, you don't need to read very far into the Moody's review to realise why Texas Pacific got cold feet. The Americans only committed to the investment in the first place as a favour to Bradford & Bingley's advisers, Goldman Sachs, who after the original rights issue fell apart were desperately casting around for alternatives. The money was then pledged after only the most limited due diligence. In so doing, Texas Pacific made a bad mistake.

If Texas Pacific no longer thinks B&B a good investment prospect, how come the magnificent four of M&G, Legal & General, Standard Life and Insight (the fund management arm of HBOS) think differently? Part of the explanation is that for these four, there is an existing investment in Bradford & Bingley to protect. For Texas Pacific, it would have been a new, incremental investment.

Even so, you have to wonder whether they are not throwing good money after bad. The Moody's review talks of a "substantial deterioration in the bank's asset quality ... as well as the expectation that this will weaken further during the rest of the year".

The continued obligation to acquire mortgages from GMAC up to a value of £350m a quarter until the end of 2009 is a further cause for concern, as these mortgages are said to be showing a greater rate of deterioration than the original book. Moody's is also worried by the growing number of good-quality mortgages pledged to secured creditors, weakening the quality of uncollaterialised assets.

In addition, the liquidity and funding position of the bank is said to remain under pressure. I could go on, as indeed Moody's does. As a Bradford & Bingley investor coming new to this, you would want to slit your throat. Notwithstanding the new capital, Bradford & Bingley looks in pretty bad shape.

After the latest upset, Rod Kent, the chairman, is dogmeat. Once he's seen through the refinancing, he'll be gone. Hindsight is a wonderful thing, but whether it is his fault or not, there have been key mistakes for which he must now take the blame. As a matter of urgency, the four musketeers must find an accomplished banker to salvage an organisation which is plainly still in very difficult waters. In this environment, that in itself is going to be quite a challenge.