The Co-op bank should have learned some lessons from the past about mutuals

2nd September 2013

It is doubtful whether many of today’s titans of finance have read LP Hartley’s 1953 novel The Go-Between although some may have seen the prize winning 1970 film adaptation. But they should do – if only for the book’s opening line writes financial journalist Tony Levene.

This is the famous quote “The past is a foreign country: they do things differently there.” Of course, this is not true. We can none of us escape our past, we cannot evade history – even more so now that every jot on every website is retained for posterity.

It would have been particularly apt if the then bosses of the Co-operative Bank had looked at history when they took over Britannia Building Society in 2009. Then they might have expended more time on due diligence. Had they done so, and looked at the past of the Britannia and of many building societies, they might have avoided their current hubristic problems.

Now, largely as a result of that takeover, the Co-op Bank has a £1.5bn regulatory shortfall in its balance sheet, according to the Prudential Regulation Authority. It has just announced a £709m loss for the first half of 2013.

Ultimately financed by the Co-op grocery on the high street and the Co-op funeral parlour chain, – whose £140m was more than wiped out by the banking debacle, it has no shareholders to fall back upon. Instead, bond holders will have to bear the brunt with a haircut of a third of their cash. The profitable insurance arm has already been sold off to raise cash. It flew too close to the sun.

Unlike most corporate bond holders, however, the Co-op has a large proportion of small investors as well as the usual funds. These pensioners and savers would have chosen Co-op Bank bonds for ethical reasons as well as for the promised return. The Co-op Bank had a heavy ethical attraction even if some of it was blatant nonsense – the advert that it would not give accounts to Masters of Fox Hounds during the hunting ban controversy was ridiculous as no hunting folk were likely to want an account.

It had a second attraction. Based on the Britannia deal, bondholders felt they were buying into a bigger, more stable organisation that could take on the big banks. That myth was further buttressed by the long and ultimately pointless negotiations to buy the 632 branches that Lloyds Banking Group is obliged to sell. This would have turned it from 80 or so outlets before 2009 to over 1,000.

Had there ever been such a ten-fold expansion in so short a time in banking history – let alone a successful one? Given the chaos in UK banking, did the Co-op have superhuman skills? Why did the ultimate Co-op board – all non-executives elected from the local Co-ops – not question it? And why did the regulator – the Financial Services Authority – wave it all through?

The history of the Britannia – formerly the Leek, Westbourne and Eastern Counties and before that a whole host of other long forgotten societies – is one of over-reaching beyond its skills set. It was not alone. The Dunfermline, shut down one weekend by the Bank of England and rescued the next working day by the Nationwide, also worked way beyond its level of competence. Norwich & Peterborough had to be rescued following its disastrous recommendation of Keydata bonds based on Americans dying early. Had it read newspapers it would have seen warnings.

Re-reading a 1984 book “Building Societies and the Myth of Mutuality” by academic Paul Barnes shows poor managers, sharp accounting practices, dodgy loans and a degree of corruption leading into outright theft. It could all be then swept under the carpet – the societies were smaller, often just a few branches, and could easily be absorbed. The Woolwich (later demutualised and then taken over by Barclays), for instance, easily took on the New Cross which was shut down by regulators following rubbish loans to developers including lending on a brothel in Paddington.

The instant rescue became more difficult as societies became bigger although it is questionable whether the managements improved – after all, those at the top in 2009 would have started around 30 years earlier during the period of Barnes’ study.

So property developers saw them as easy targets in the first decade of this century. The societies themselves believed their media image – that they were both cuddly mutuals and competent loan-makers. In their rush to expand, they forgot what they were first about – financing home buyers and offering a home to small savers. When that was true, all management really needed to know was the mantra “3-6-3”. That meant giving 3% to depositors, charging borrowers 6% and getting to the golf club by 3pm.

But those innocent days are long gone. They took on fringe commercial properties – the best deals went to the major banks and they were not good at diligence either.

Does the Co-op Bank have any excuses? Where are the boardroom apologies? Who has paid back their bonuses or excessive salary?

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