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From Herald 26/2/14
‘That’ll learn ye’, as my grandfather used to say. Not so long ago in these columns, I sang the praises of the Co-op Bank for staying mutual and avoiding the financial crises that had afflicted other banks through greed, stupidity and dodgy property deals. The ethical bank has now suffered a financial crisis through, er, greed, stupidity and dodgy property deals. It is set to post £2bn losses according to the BBC’s Robert Peston, one of the largest annual losses banking history. The Co-op will have to undergo another asset fire-sale. It is hard to see how the co-operative philosophy can survive. And its chief executive, Euen Sutherland, handed in his resignation after it was discovered he was paying himself £3m
Most of my family in Glasgow were buried by the Co-op, which not only dealt in relatively cheap food with dividends, but handled the financial affairs of generations of working class families. Now the Co-op appears to be in the business of burying itself. It has already sold the Coop insurance arm, CIS, and now it is selling farms and pharmacy – anything its distressed management can lay their hands on. Up to 5,000 jobs will go.
Among them, the colourful former chairman of the Co-op Bank, the Rev Paul Flowers, which will be no great loss since he didn’t seem to have much of a grasp what his bank actually did. He told MPs at a select committee hearing that the bank’s assets were £3bn when the true figure is £47bn. This mental confusion was perhaps explained by Mr Flowers’ fondness for mind altering substances. In November he was caught in a newspaper scam allegedly buying cocaine and boasting about orgies and heroic consumption of class A drugs. This essentially Victorian institution, borne out of the self-help friendly societies and the temperance movement, had turned into an ethical version of the Wolf of Wall Street – a mutual Sodom and Gomorrah.
Now, like many people during the financial crash, I started banking with the Co op because it is owned run by its members, rather an bonus-driven City crooks in braces. The 20 strong Co-op board is elected by its membership. In a mutual, there are no shareholders and therefore no risk of earnings being diverted into corporate pockets. I also bank with the Nationwide, Britain’s other big mutual, and seems to be going strong – touch wood.
So, what happened at your Co-op? Well, the trouble began when it started thinking of itself as a big player and paying its chief executives big player money. Many Co-op members were astonished last year when they learned that its former CEO, Peter Marks, reportedly paid himself £1.6m in 2012 in salary and bonuses. He departed in 2013, shortly before the manure interfaced with the air-conditioning, and is now enjoying a comfortable retirement interrupted by occasional torrid appearances before parliamentary committees of inquiry. MPs accused him last year of having “selective amnesia” about the financial affairs of the bank he used to run. Perhaps this is because one of Mr Marks’s hobbies is playing in Rolling Stones tribute band called Last Orders.
The Co-op board started believing the old lie that you get what you pay for. But people who are attracted by big salaries tend to be the kind of people who want to make them even bigger, and the fastest way to do that is to go for acquisitions – to grow the business by whatever means come to hand. The idea was to turn the little mutual Co-op into a big, hairy mega bank that was Too Big To Fail, first by buying the collapsed Britannia Building Society in 2009, and then bidding for 600 high street branches of HBOS Lloyds.
If you are too big to fail the government has to support you with public money if you go bust. This is what happened after Britain’s biggest banks descended into collective insolvency in 2008. The taxpayers of Britain stepped in with £1.2trillion to rescue them from the consequences of their own folly. Unfortunately Co-op bank failed to join the too-big-to-fail club in time. Just as they were on the point of sealing the deal with Lloyds in 2012, auditors noticed that there was a £1.5bn pound hole in the Co-op Bank’s balance sheets.
Saddled with a pile of bad debt inherited from the commercial property portfolio of the Britannia Building Society, the 150 year old Co-op met its Nemesis last December in the form of the “vulture fund” capitalist raider, Mark Brodsky. His New York hedge fund, Aurelius (known as “the Terminator” because it “just keeps coming”) and other US hedge funds, bought a chunk of the Co-op bonds at bargain basement prices when no one else would touch them. The hedgies then refused to take a “haircut” – ie accept a reduction in the value of their stake – when the Co-op was restructured, which meant they effectively took the bank over, and now own 70% it. Instead, 30,000 small investors in Co-op bonds took the hit. They didn’t have the right lawyers, apparently.
And so this moral mutual, with its fair trade policies and its ethical investment philosophy, fell into the hands of some of the most hard headed money men on Wall Street. Mind you at least they aren’t off their skulls on crystal meth like chairman Flowers. The Co-op’s new chief executive, Euan Sutherland, bending to the inevitable, described the hedgie takeover “the best outcome overall”. Which brought to mind Christine Keeler’s rhetorical answer.
The Co op’s 3 million membership are not so sanguine. There is a strong activist base which has encouraged sustainable farming, fair trade, ethical investment policies. Since 1992, the Co-op has turned down £1.2bn in business on the grounds that it is environmentally unsound, connected to arms manufacturing or animal testing. The Co-op’s moral majority fear that the new owners are using this crisis to transform the organisation into a conventional capitalist company, with a focus on pure profit.
Charities like War on Want, ActionAid and the Jubilee Debt campaign have had to reconsider wether banking with the New Co-op is compatible with their own ethical investment policies. The Labour Party too is looking a little sick. It has benefited from annual donations of around £800,000, which will now be slashed if not scrapped altogether. HM Treasury could be losers too. Unlike most big companies, the Co op believes in paying its taxes. Last year, the Co-op paid £2.7milion on its £1bn turnover which is more more than Amazon paid on its £4bn UK turnover. Such fiscal altruism may not survive, and nor may the Co-op’s democratic structure, with moves to collapse the 20 strong board and have a “professional” appointees instead of elected members.
The activists are not giving up, however and have launched a campaign to Save our Bank. The Co-op is planning to ballot its members in the Spring on whether or not to retain the ethical business model. Save our Bank say Co-op is the leading ethical brand in the UK and that the hedge fund investment will be damaged if customers/members desert the organisation in disgust. It’s an ethical offer they can’t refuse. So, who knows: the hedge funds may be the final saviours of the soul of the Co-op.