July 4, 2008 | posted by Michael Baxter in Banking |

There is one thing you can be sure of.  When you need your bank the most, that’s when it starts getting difficult.  When you don’t really need to borrow money, then it will try and force all kinds of schemes down your throat.    But when times get tight, and you need a bit more help, that’s when the bank starts asking you to pay back your overdraft.

The key seems to be this.  You need to create a scenario where your bank needs you more than you need it.

It is not that the banks are necessarily wrong.   They like to lend money to people who don’t need it, because they are precisely the type of people who are most likely to be able to repay the debt.

So in truth, you can’t blame the banks.   But whether you can blame them or not, the fact is this approach has the effect of exaggerating booms and crashes.

And yesterday, we saw banks and the finance business at its most extreme.

On one hand, the Bank of Bungle, also known as Bradford and Bingley, has been saved by a consortium of banks and other shareholders who dare not see it fail.

On the other hand, the latest credit conditions survey from the Bank of England shows that banks are cutting back on their lending to individuals and business.

It is difficult to imagine a sorrier tale of woe.  Bradford and Bingley, where do you begin?   Time was when this was the building society of the men with bowler hats: respectable and safe.   Then it became the bank that specialised in buy-to-let, or to put it another way, the bank that specialised in funding bubbles.   Then it was the bank whose boss said it wouldn’t need to raise more money.     Then it changed its mind and announced an underwritten rights issue.  Then, just days later it announced that write-downs were bigger than it had previously expected.  Then it was the bank of the falling share price.  In fact, its shares fell so low that they went below the rights-issue price.  So it became the bank of a new plan to raise even more money.  It reeled out a big US private equity investor – TPG, then let the two banks which had agreed to underwrite the rights issue off the hook, and reduced the amount it was requiring from shareholders, but at a lower share price.

Then, like Superman rushing from the nearest telephone box, red cloak flying in the wind, the finance world’s answer to Clark Kent, Clive Cowdery, offered more money for a higher share price, and a plan to use B&B as a stepping stone to building a new financial empire, buying up other companies on the cheap.  It was a bold, but brilliant, plan.     Mr Cowdery recognised that it is times like these when opportunity awaits. It was win win.  Win for him, win for B&B.

And Bradford and Bingley became that bank that said no.  One in the hand is worth two in the bush, it reasoned; the TPG funding was a done deal.   

But then credit rating agency, Moody’s, came along and spoilt it all by saying something stupid like Your credit rating is down.  Well, actually, the credit ratings relegation is not official yet, it is just one of those really badly kept secrets.

So that’s a relief then, thought TPG to itself;  the change of the credit ratings means we can legally drop our interest. So that’s when the private equity group, who by the way are the very same people who were nicknamed Barbarians at the Gate, pulled out.

This has left a lot of eggs on faces.   TGP has not won over any friends. B&B has given yet more reason why some think it should change its name to Bradford and Bungle.  But at least it’s the bank that isn’t Northern Rock.

But thanks to Northern Rock, or rather an FSA that is terrified of seeing another Northern Rock, major shareholders of the bank have clubbed together to provide the bank with the necessaries.

So Legal & General, M&G, Standard Life and HBOS are, at the urgings of the FSA, to step into the breach left by TPG.

But that’s strange, these are the same companies who were backing Cowdery’s bid.  These are the same companies who were sent away with a flea in their ear.

Still, this is one of those occasions where failure is not on the cards.     We can’t be having another Northern Rock, now can we?

So if you are a bank, and you need help, well, to err is to be human, and you are saved.  It seems quite possible that, if you are a property company, and your main assets are the very same assets that underpin the banking system – that’s land and property, then maybe you are safe too.   

But if you are Mr or Mrs Ordinary, or your company is called Ordinary Trading Company, and you are in the business of producing something, as opposed to the business of shuffling money, it is a different story.

According to the Bank of England’s latest Credit Conditions Survey, “In the three months to mid-June, lenders reported that they had further reduced the availability of credit to households and corporates. Lenders expected some additional reductions in credit availability over the next three months.”

Defaults are expected to rise too.   But you see, when times are good, if you have got a slight liquidity problem, you can always borrow some more money. 

This option has been removed. 

“Lenders implemented the reduction in secured credit availability partly by tightening credit scoring criteria, and by decreasing maximum loan to value (LTV) ratios,” said the Bank of England report.  The report continued:  “Lenders reported that their expectations for the housing market, the changing economic outlook and changes in their appetite for risk had contributed to the decline in credit availability. It was also reported that some of the reduction in credit availability was linked to continued tightness in wholesale funding conditions. Lenders expected these factors to contribute to the tightening in credit availability over the next three months.”

Boom and bust is like this.  It is an age old pattern.  When Gordon Brown promised to end boom and bust, the key surely rested with putting into place a system to stop the availability of credit from exaggerating economic conditions.   If he had managed that, then he would indeed be remembered as a great chancellor.  If he and Mr Darling can somehow stop the rot, then they will deserve praise.

If Gordon can pull off that trick, it is not Cowdery who is Superman, it is Mr Brown.   It seems more likely, however, that he is just like the rest of us.