U-turns on rights issues, never-ending writedowns – there’s been plenty of badly handled mishaps to choose from.

But even by the low standards of the banking sector, Bradford & Bingley (LON:BB) has been particularly hapless. In fact, its latest bombshell managed to wipe £2.8bn off the value of the UK’s six biggest banks, even though B&B itself only started the day with a market cap of barely half a million.

So how did such a small bank cause such a big reaction?

The reasons behind Bradford & Bingley’s shocking share price slump

Bradford & Bingley has had a dreadful few months. In the middle of April, rumours arose that the bank was on the verge of launching a rights issue. At the time, B&B denied it strongly. However, within a few days, Royal Bank of Scotland had announced its plans for a rights issue, which was closely followed by HBoS.

With the floodgates open, B&B apparently changed its mind in mid-May, saying it would be raising £300m from shareholders, with new shares placed at 82p a pop, way below the share price at the time.

At the time there was no suggestion of a profit warning, but with the housing market deteriorating, and management under a cloud because of the U-turn, investors were clearly worried. B&B’s share price slumped as investors fretted over the state of the bank’s finances, until on Friday, B&B was trading at just 88.5p a share.

Then, on Sunday, chief executive Steve Crawshaw, whose position was probably already untenable, resigned due to health problems. Then yesterday, the bank finally issued the much-expected profits warning.

And what a warning it was. The group plunged into an £8m loss in the four months to April, compared to a £108m profit for the same period in 2007. Profit margins have dived as funding costs grew, while bad debts have rocketed – more on that in a moment. The group also wrote down a further £89m in sub-prime related assets.

The good news – what little there was – was that US private equity group TPG has picked up a 23% stake in the bank for £179m. But even so, the rights issue had to be entirely revised. Under the original deal, if the share price had fallen below 82p, there would have been no incentive for anyone to buy into the stock and the underwriters (UBS and Citi, the investment banks who undersigned the deal) would likely have been left on the hook for the whole £300m.

Obviously, this wasn’t something either UBS or Citi would have appreciated. Reports in the papers suggest that they might even have found reason to pull out if necessary. So the deal has been changed. Shareholders will now be offered 19 shares for every 25 owned, at the price of 55p a share. Rather than raising £300m, B&B aims to raise £258m.

But why did the other bank shares fall?

The chaos and the grim news on profits sent B&B’s shares diving 24% to 67p, and it’s certainly a messy situation. But why did other banks take such fright? For example, HBoS sank 10%, while Alliance & Leicester fell 5.2%.

Well, the main worries for other banks were in B&B’s trading update. The group – which is Britain’s biggest buy-to-let mortgage lender – saw bad debts on its buy-to-let mortgages jump by a staggering 50% between the start of the year and the end of April. More than 3,000 of B&B’s buy-to-let customers are now at least three months behind in their mortgage payments, from less than 2,000 at the start of 2008. Buy-to-let accounts for nearly 60% of the bank’s mortgage book.

Things will only get worse, said the bank. “The tougher economic environment will continue to push arrears beyond the current level.” As Sandy Chen at Panmure Gordon put it: “This is not the bottom. The UK housing market – not just buy-to-let – is turning south.”

And although the bank has been raising its mortgage costs, it’s not seeing the benefit feed through to its profits, because it can’t write enough of the new mortgages. As Derek Chambers of Standard & Poor’s tells The Telegraph: “I think the hope had been at Bradford & Bingley, probably at HBoS as well, that as they re-priced new mortgages they’d be able to pass on these costs.” But in fact, they are “stuck with more mortgages at low rates which are probably low margin or even negative margin, and they’re not able to free up capital to lend at the new higher rates.”

The trouble is, this is just the beginning of the housing market upheaval. The Bank of England reported yesterday that in April mortgage approvals hit their lowest level since the Bank started recording the data in 1993. Capital Economics reckons the data suggest we could be looking at “house price falls that are well into double digits by the end of the year”.

So all of the banks can expect their bad debts to rise from here on in, for quite some time. Any shareholders in B&B, RBS, or HBoS pondering whether to buy into their rights issues needs to forget their current shareholding and ask themselves: “Given the choice of all the stocks in the stock market, would I put my money in a bank right now?”

And for anyone with anything less than the strongest risk appetite, then in the current economic climate, the answer has to be no.

Source: Why the Buy-to-Let Carnage is Just Beginning

Now, we may not be dealing with a bunch of Einsteins at the head of these oil majors, but they’re not dopes either. They understand what’s going on. So, why is it that when ExxonMobil, Royal Dutch Shell, BP, and ConocoPhillips all reported in the last two weeks, each and every one of them said the same thing.

Profits are up on price increases. And volume is flat. Let me repeat that. VOLUME IS FLAT. What the heck is going on?

Take these companies with market cap’s of several hundred billion dollars … the latest drilling technologies … thousands of acres … billions of barrels of proven reserves … tens of billions more of unproven reserves – add it all up and they can’t produce more oil this quarter than they did last quarter or the quarter before?

Have these companies gone OPEC on us?

I mean, we know that OPEC keeps production just low enough to keep prices high. But they only provide about 40% of the world’s oil.

What’s the excuse for these private oil majors? Have they also found it in their interests to keep a lid on production? (This wouldn’t be the first time we’ve seen a manufactured shortage to hike prices.)

I almost wish there were an unholy conspiracy between OPEC and the other oil producers. If there were such a thing, it might mean with a little arm-twisting, we could get non-OPEC producers to push up production.

But, alas, there is no conspiracy.

There is something else … something much more ominous…If we were talking about food, I’d say there’s a worldwide famine brewing. But it’s oil, which isn’t quite as brutal as a famine. People have to eat. But do they have to drive?

No. But a worldwide shortage of oil is knocking on the door. Right now, supplies are tight. But they are more or less in balance … with admittedly no excess capacity to spare. It’s not going to last. Global oil demand is about to leave oil supply in the dust.

Shell’s production fell six percent year-on-year. BP’s fell two percent. ExxonMobil’s fell 10 percent. According to Credit Suisse, overall production will fall two percent this year from last. I believe that underestimates the slide.

And while OPEC – being OPEC – has no quarrel with the soaring price of oil, the fact is, even OPEC countries (except for Saudi Arabia) can’t produce more than what they are now.

Saudi Arabia is producing 12.5 million bpd (barrels per day). It has plans to increase that amount to 15 million. Or should I say “had” plans. The Saudi government has put those expansion plans on hold. It doesn’t want to take the risk of expanding into the teeth of a global recession.

OPEC as a whole plans to increase oil production by five million bpd. That won’t be enough. Global demand should increase by 11.5 million bpd by 2030.

Russia came to our rescue in 1999 when it finally opened up its fields to Western participation. Russian production rose by four million bpd from 1996 to last year. During the same period, Saudi Arabia’s production increased by 600,000 bpd.

Can any of the non-OPEC countries come to our rescue once again? Russia won’t. It’s too busy renationalizing its oil and gas industry.

Mexico? Nope. Their Cantarell field is getting long in the tooth.

England? Norway? No, their North Sea production is winding down.

Venezuela? Don’t make me laugh. Mr. Hugo Chavez is more intent on using his petro-profits as a tool of foreign policy, not plowing them back into oil production to help lower oil prices for the U.S. and its friends.

And the oil majors can’t help us because they can’t help themselves. Every time they think they’re getting access to a big field bursting with oil, something happens. Expropriation … terrorist acts … renationalization…

So much for sensible analysis. The property markets were in frenzy in 2006 and 2007.  Large developers were listing their stocks via IPO’s and they were all lapped up. Well-paid analysts were talking about the embedded Net Asset Value in the stocks of these property developers and the land bank they all owned.

The SEZ policy is the equivalent of the industrial license raj that ruled – and ruined -India’s economy till 1991. Land was acquired at maybe Rs. 10 per square foot. A few approvals later, the land was re-zoned and re-born as a pretty garden villa real estate project selling at Rs. 4,000 per square foot. The magic of the Indian rope trick. The magic of an opaque approval process. Land barons were born. They made it to the mega rich league of the market cap charts.

Investing in India: real estate is overpriced?

Sam Zell, the legendary real estate developer and investor from USA, gave a talk at a conference in Bombay in December 2006. Not more than 5 feet 6 inches in height, he stood above the frenzy of the crowd. Sam Zell had just sold his company, Equity Office, to the private equity firm, Blackstone, for some USD 35 billion in November 2006. Why are you selling Sam? – all the commentators seemed to be asking him – the US economy has a long way to run.

I can picture Mr. Zell smiling in silence as he collected his cash. He sold out at a level that – in hindsight – was the peak of the US property market cycle. “There is no shortage of land in India”, declared Sam Zell, “there is only a shortage of zoned land”. Read that statement carefully. Read it again. And think of the SEZ policies and the land grab.

Sure, India has a demand for some 20 million homes and some 5 million office units and some 200,000 hotel rooms. And schools and colleges to educate the one hundred million young children. And hospitals to take care of the 100 million elderly people in the country as they age in a changing society where the children don’t live with them anymore.

And we need many more cricket stadiums to watch overpaid cricketers sell you some TV sets, washing machines, and mobile phones. A back of the envelope estimate indicates that India needs to build some 3 billion square feet of property in the next 5 years to partially meet some of this demand. How much is that?

Well, visualise Nariman Point. And now imagine that we have to build a string of Nariman Points from Bombay to Bangalore.

There is enough land to construct all of that. The shortage is in the zoned land. This is a man-made shortage. A shortage created by policy. Just as India had to suffer for 20 years with a regime that forced us to buy the Premier Padmini and the Ambassador – and we had to wait 3 years to get the cars delivered. At the end of the wait, we got a useless product for a lot of money. And Premier and Ambassador were profitable companies – whether their profits were declared in cash or cheque.

Just like the sheltered real estate developers. Land is in abundant supply. There is some special mechanism to convert this useless land to useful, zoned land. My colleagues in our real estate arm tell me that there are 62 approvals required to get useless, un-zoned land converted into an end product that we can live on.

Artificial barriers have created an artificial price of the end product. And this leads to a strange end market at today’s prices. The very rich can buy any property anywhere in the world – or any city in India. The rich can afford to buy one nice home in any one city. The middle class cannot really afford to buy in many cities. The poor have no hope of buying anything.

Investing in India: a long term opportunity, short term dangers.

The volume potential in India is huge – tens of millions of square feet can be bought every year by genuine buyers. But not at these inflated prices. Not at prices propped up with an industrial license raj mentality. A policy that favours the few well connected developers. Unlike a car ownership, home ownership is critical. People don’t riot because they cannot buy a car. People will get pretty upset if they cannot afford a home.

The current level of property prices is not sustainable because not many people can afford to buy homes.A simple test: can you afford to buy the home you are currently living in at today’s real estate prices? At what price level can you afford to “re-buy” the home you are living in? And do the same mental test for the people you know. Now where do you think the “real” level of property prices should be?

The real estate developers have land banks though these – in an open environment – are “unbankable” into cash and profits at these current levels of real estate prices. But there is a large demand for real estate out there – at different price points. But which developer – or business person – wants to work hard and build a volume business?

Why build 100 million square feet of homes and sell them for a profit of Rs. 200 per square foot when a “zoning process” allow you to build 10 million square feet and make a profit of Rs. 2,000 per square foot? It is far easier to do what was done in the days of the license raj – limit the supply. Create these islands of favouritism called SEZs or earmark little islands of zoned land from friendly sources. And when you are on an island, it is easier to milk paradise.

And if there is a back lash from the voters, the folks on the island may still get away. But the investors in their listed stocks may not.