Three weeks ago Rod Kent felt able to breathe a cautious sigh of relief. The chairman of Bradford & Bingley had secured the signatures of UBS and Citigroup on the underwriting of a £300million rights issue.

His denial a month earlier, ruling out just such a capital-raising, was embarrassing, of course, but at least now he had placed the bank on a firmer footing. Whatever happened, B&B would get its money, beef up its balance sheet and keep increasingly nervous banking supervisors at bay. The reputation of Mr Kent, who led the investment bank Close Brothers for 25 years, was still just about intact.

The relief was not to last, however. The board - and the underwriters UBS and Citigroup - had made the terrible mistake of basing their decisions on six-week-old management accounts, going only to the end of March. Only last week did they see the April numbers. The figures made grim reading, with the numbers of borrowers three months or more in arrears soaring to 8,333, and £1.1 billion of loans under threat. The net interest margin was narrowing, too, and there was the little matter of a £15 million mortgage fraud. To cap it all, Steve Crawshaw, the chief executive of six years, was stricken by a serious heart problem.

Meanwhile, the B&B share price had been falling day after day.

When the original rights issue was announced, the planned 82p issue price was at a sizeable 48 per cent discount to the prevailing 158p share price. That seemed like plenty of headroom, but by the end of last week - amid renewed gloom about the credit crunch and market worries about a huge overhang of unwanted bank shares - the margin had narrowed to only 6p. B&B recognised that once it put out the necessary profit warning, its shares would fall below the issue price.

It was then that the board took its controversial decision. Rather than let the underwriters and sub-underwriters take the strain, Mr Kent and his fellow directors decided to let them off the hook. In effect, instead of claiming on the insurance policy, they decided to draw up a new capital-raising plan. This would enable them to raise more money and bring in a heavyweight new backer - TPG, the private equity group. TPG had first approached B&B a few weeks earlier and been turned away, but suddenly its interest was hugely attractive. Last Wednesday Goldman Sachs, B&B's adviser, arranged for four days of due diligence.

Versions differ about why the old rights issue was scrapped. Mr Kent says that there was no underwriter revolt and that the new terms were set to give a better chance that small investors not taking up their rights would receive a small cash sum for their nil-paid rights. “Clearly, if the rights issue was under water, they would get nothing,” Mr Kent told The Times yesterday. “We thought it was better to reset the terms. It was a judgment call.” This explanation makes little commercial sense, however. Shareholders would get some cash, it is true, but they would be worse off overall because their shareholdings would be additionally diluted.

Another source close to the deal said that B&B had been faced with an altogether scarier prospect. Citigroup and UBS had made plain that if they were lumbered with unwanted B&B shares, they would dump them, sending the price plunging and possibly triggering a panic. They might be B&B's brokers, but they could not afford to show any excessive loyalty to their client.

Moreover, according to another source, despite the underwriters being committed to honouring their promises, there were some clauses in the underwriting agreements that might have enabled them to wriggle free in extreme circumstances. Although underwriting gives issuers protection against a general slide in share markets, the insurers can invoke material adverse change clauses in some cases. It may be that B&B did not want to risk such an outcome.

They pressed the button on the new restructuring, risking the wrath of shareholders over another aspect of the deal - pre-emption rights, the fundamental tenet that existing shareholders should have first refusal on any new equity issue. TPG has negotiated the right to appoint two B&B directors, a special protection preventing its holding being diluted and has also been promised a £1.8million fee if B&B is taken over by somebody else.

Meanwhile, Mr Kent has to improve management systems at B&B if shareholders are to have much faith in its numbers. As one executive from a rival bank said: “You would have expected them to know April's figures by mid-May. Their business isn't very big or complicated.”

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