LONDON Bradford & Bingley was nationalised on Monday, making the buy-to-let mortgage lender the second UK bank to be taken into public ownership this year as a deepening financial crisis claims victims around the world.
After intense weekend talks failed to find an outright buyer for Britain's ninth-biggest mortgage lender, the Treasury said it would take over B&B's 50 billion pound mortgage portfolio and sell its deposits and branches to Spanish bank Santander.
"The stability of the system comes first," Prime Minister Gordon Brown told BBC Television. "We will work night and day to make sure that Britain can come through this downturn which started in America and it is now affecting the whole system."
The FTSE 100 index of leading shares was 4.7 percent lower at 3:55 p.m. British time on Monday, touching a three-year low, and is now down 13 percent this month on deepening worries about the banking sector. The pound fell more than 2 percent against the dollar.
The Conservatives branded the move as another example of Brown's economic mismanagement, while the Labour government accused them of having no policies in place to tackle the market turmoil hitting the world.
"To pretend that somehow there was some other solution, unnamed, unspecified -- it seems to me to be clutching at straws. You needed to take decisive action. That's what we've done," said Chancellor Alistair Darling.
The banking crisis has so far overshadowed the Conservatives' annual conference in Birmingham, central England, and recent opinion polls show Brown's jibe last week that it was no time for a novice to be in charge may be starting to stick.
After months of polls showing Labour on course for a humiliating defeat at the next election, due by mid-2010, four polls in the last week have shown a bounce for Brown, who was finance minister for a decade, as the market crisis worsened.
A Sunday Telegraph poll even put Brown and Darling ahead when people were asked who they trusted to run the economy after this month's government-brokered rescue of the country's biggest mortgage lender HBOS and laws curbing stock market speculation.
The Conservatives, however, remain well ahead overall despite their poll lead of some 20 points having halved. Many voters appear fed up with Labour who have been in power for 11 years as the economy faces its first recession since 1992.
Speaking at his party's conference, Shadow Chancellor George Osborne warned bankers that they would have to pay their share of any financial bailouts under a future Conservative government.
"I will not tax the earnings of the family earning 20,000 pounds to carry on paying the bonuses of the banker earning 2 million pounds," Osborne said.
GOVERNMENT SHIFTS RISK
B&B, with its heavy exposure to the slumping housing market, is one of the latest victims of a global banking crisis that has felled some of the world' largest financial institutions in the last few weeks.
Benelux financial group Fortis also underwent a part-nationalisation on Sunday. In the United States, the administration is putting together a $700 billion (389 billion pound) bailout package to buy up banks' toxic assets to prevent more failures.
Some analysts said B&B might be the last British bank to succumb to the credit crisis, as it was the only remaining small lender with heavy reliance on increasingly expensive wholesale borrowing for its funding.
"All UK banks with less than 65 percent of loans funded by deposits have now been nationalised or sold," said Alex Potter, banks analyst at Collins Stewart.
However, Financial Services Authority Chairman Adair Turner warned it was still too early to say the danger had passed.
"I think one has to realise, as is clear from the events of the weekend with Fortis...we are not necessarily right at the end of this process," Turner said in an interview with BBC Radio.
Santander will combine B&B's deposit and branch network with Abbey National, the lender it bought in 2004.
Santander, which in July also agreed to buy mortgage bank Alliance & Leicester, now has a high street presence to rival the country's four biggest banks, Panmure Gordon analyst Sandy Chen said.
"We'd expect the presence of five major competitors will keep competition, especially for customer deposits, lively," Chen wrote in a note.
The sale and nationalisation of B&B also threatens to inflict heavy losses on shareholders.
David Cumming, head of UK equities at Standard Life Investments, said the move was "disappointing."
"As a long-term shareholder, we stood by the company and supported its recent fund raising. This regrettably did not lead to the desired outcome," he said.
While the public takeover puts even more risky assets on to the government's books only seven months after the nationalisation of Northern Rock bank, Darling said the risk would be borne by the banking industry through a compensation scheme.
He also assured depositors their money was safe and B&B was open for business as normal.
Not everyone agreed.
"I just thought I don't want to have my money there and I am just going to put it where I can be sure that it is safe," said Denise Christou, who closed her B&B account.
(Additional reporting by Steve Slater, Matt Falloon, Kate Kelland, Raji Menon and Georgina Cooper; Writing by Sumeet Desai; Editing by Sue Thomas and Erica Billingham)