Forget the rally, think B&B

If anyone out there has been carried away on the euphoria of today's rally and the Paulson bailout, here is a story to bring straight back to earth. Moody's downgraded Bradford & Bingley's credit rating to just one notch above junk status.

Meanwhile, the cost of protecting B&B’s debt against default, as measured by credit default swaps, continued to skyrocket. This week, it cost 558 basis points to insure against a B&B default.

Bradford and Bingley is the king of buy-to-let lenders. About 85 per cent of its mortgage book is made up of buy-to-let and self-certified mortgages. Unfortunately, its buy-to-let borrowers are running into repayments problems. Total arrears including rose from 2.1 per cent to 3.1 per cent in the first half of 2008.

Moody’s summed up the problem perfectly when it pointed out that this level of arrears was “significantly higher than that of any other rated peer in the UK; given the early stage in this cyclical downturn we expect the number of loans in arrears to continue increasing”.

So despite the 9 percent FTSE rally, the banking crisis is still here. The B&B is still a bank in desperate trouble.