Margareta Pagano: The English gentlemen failed at B&B. But can the Texans succeed?

It beggars belief that management didn't realise how bad things were
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The Independent Online

Most Sunday mornings, Rod Kent, chairman of Bradford & Bingley, can be found selling his home-made yoghurt at the farmers' market in Winchester, near his home. Kent, tall and debonair, looks every inch the gentleman farmer too. But this Sunday he won't be at his stall; he'll be trying to catch up on the sleep he has lost after what he describes as "10 days of hell".

It's been 10 days in which Kent had to issue profit warnings, reconstruct a rights issue and invite the Texans in to become the biggest shareholders. He came close, too, to becoming the last gentleman capitalist as investors called for his blood. They are angry, rightly so. They had already seen their shares collapse over the past few months, and were now being asked to dilute their holdingsTtwo years ago the shares were 500p; on Friday they were 72p. Not a good week.

But the most breathtaking admission from Kent came when he and his board of five (highly qualified) non-executive directors said they had not realised how bad the situation had become. He said, and I quote: "The bank is slow at producing financial information. The board did not see the April results until the end of May. By then, the trends were showing trading was not what we thought it was." He also admitted "management failure".

This took the biscuit. We have all known for months that the lending markets have been appalling. B&B, along with other troubled banks, has been looking – for weeks – at how to restore capital reserves and improve balance sheets. Even at the beginning of April it was known that B&B would have to raise more money, despite company denials. Clearly conditions worsened at the end of the month as mortgage arrears built up and net interest margins fell. But surely this is when Kent, and his board, should have demanded weekly, if not daily, financial reports? It beggars belief that he didn't.

By all accounts Kent is a man of detail. People who worked with him at Close Brothers say he knew just what was happening in all bits of the bank, even the market-making, right down to weekly trading positions. Odd that he didn't have a better idea of what was happening at B&B.

What is refreshing now, though, is that Kent is taking the blame on the chin. He admits there were real failures – not in systems but in the way B&B was slow at getting numbers. It was only at the bank holiday weekend, when those numbers arrived by courier, that the emergency rescue was put in place. They moved like lightning, with advisers Goldman Sachs getting back in touch with Texas Pacific Group, which had approached B&B a few months ago. Kent had to choose: a deal to prevent a potential run on the bank or underwriters left with a huge chunk of stock on their books. He says there was no choice – the underwriters were told of the change of circumstance. They didn't have much choice either: if conditions do materially worsen, they are well within their rights to demand a repricing, as happened in the infamous BP share sale in 1987.

What is interesting is how Northern Rock has sharpened everyone up. Within hours of Kent discovering the black hole, teams from the Financial Services Authority, Treasury and Bank of England moved in to prevent a possible run. The FSA played a big role, persuading the mortgage lender to write down assets – a move affecting its value and share price. Where next? The Texans seem rather bright, far longer-term in their approach than many private equity houses. Philippe Costeletos, head of TPG Europe, has been in the game for 17 years and has had his eye on B&B for several months. TPG has made some big investments in the financial sector; $7bn in Washington Mutual, for example. The evidence suggests it's in for the long term – and Costeletos has a five-year plan for B&B. Two TPG directors will join the board, sooner rather than later.

Investors still want to know more from Kent. He will need every ounce of his gentlemanly charm to redeem himself and persuade them he did the right thing. They should give him a chance and stay in the game to see if the Texans can deliver.

Trouble-shooters for the markets and horse-trading with the Treasury

The City nose is back, big time. That's the best way of viewing the Treasury's latest plan to create a new panel of financial market experts to sit alongside the Bank of England and advise it on any potential trouble in the markets.

What the Treasury hopes is that this new panel, to be made up of the City's finest with investment banking and markets experience, will prevent more disasters akin to the Northern Rock fiasco. What it does not want to do, however, is to take away any of the financial and banking supervision currently held by the Financial Services Authority.

Treasury sources say Chancellor Alistair Darling will provide more details of the new panel by the end of June. This is when No 11 will bring out a consultation paper on ways of improving financial stability. It will include the number of people on the panel, their term and how it will report to the Bank. According to a No 11 source, it will work rather like the Monetary Policy Committee.

Of course this City panel will be tougher to run than the MPC – its remit is more dynamic, more classic central banking, which works by nose as well as numbers. But the only way to see how it works is to start the stress-testing

As part of the deal, apparently, Bank of England Governor Mervyn King gets his candidate, Charlie Bean, to take over as deputy Governor when Rachel Lomax retires at the end of June.

King has been backing Bean because of his monetary background – crucial in the new fight to control inflation. But this will disappoint another internal director, Paul Tucker, who is more of an all-rounder. Tucker may have to wait. He has a big following in the City, including the support of shadow Chancellor George Osborne, who is pushing him for the deputy job.

But Tucker may be able to jump straight to the top job when King retires in four years' time. Then it will be the Conservatives who are most likely to be in the position of choosing.

Bennetts come in from the cold with quirky Kookai

It's comeback time for Kookai, the quirky fashion chain which nearly went bust two years ago. Rescued by the Bennett brothers, Maurice and Michael, who founded the Oasis fashion chain, Kookai is braving the chill on the high street with lots of new openings. Its latest additions are a new website, a new line of clothing for 4- to 9-year-old girls and, the latest must have for any brand – shoes. But managing director Guy Critchlow is confident that new designs will beat the gloom. The Bennett brothers, whose father had Europe's biggest camera shop chain before selling to Dixon's, have been behind fashion brands from Coast to Warehouse. They work with Maurice Helfgott, former Marks & Spencer director, who knows a thing or two about retailing.

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