Communist Party of Australia

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Issue #1617      November 6, 2013

Co-operative Bank snapped up by vultures

May 9, 2013 will stay long in the memory for many co-operators. It was the day of reckoning for Britain’s Co-operative Bank. It was the day the great unravelling began, the day credit ratings agency Moody’s downgraded the bank’s debt rating to “junk” status.

It said that the bank was vulnerable to potential losses and warned that it may need “external support” if it could not strengthen its balance sheet. In a massive piece of understatement the bank said it was “disappointed” by Moody’s decision.

The news preceded the resignation of chief executive Barry Tootell and the collapse of a bid to buy 631 branches from Lloyds Banking Group. This unravelling has now ended with the enemy inside the gates.

US hedge funds, sometimes described as “vulture funds,” Silver Point Capital and Aurelius Capital Management now have significant stakes in the bank – presumably intending to do to us what they usually do with the distressed assets of developing economies.

Now Moody’s, ever helpful in these matters, says that the Co-operative Bank will be forced to “take the axe” to costs. It is worth pointing out that the issues the bank faces are not dissimilar to those faced by the rest of the banking sector. Some banks have had to be nationalised, all have had to be recapitalised. So the environment for banking has certainly worsened dramatically.

But this crisis has been caused by bankers themselves – by their ridiculous growth strategies and reckless lending, risk-taking and selling of products that they themselves did not understand in a mad greed-driven feeding frenzy.

The Co-operative Bank had prided itself that it was different, that the mutual sector – or at least what was left of it – had weathered the storm better than the joint stock banks. It encouraged people who had an ounce of ethics to “switch their money.”

Now we find, according to no less than the ex-CEO of the Co-operative Group and the current chairman, that there is a crisis of governance at the group.

We need to unpack these comments because governance has several elements to it.

Is there something inherent in large-scale co-operatives that makes them difficult to govern? Was there a healthy culture at the group – i.e. was there an open and respectful relationship between those who represented the interests of the members and the professional management?

And what were the qualities of the key personnel, the senior executives of the group and the bank and the lay chair of the bank and the Co-op Group?

To answer these questions a review is being carried out by Sir Christopher Kelly, chairman of the King’s Fund and former chairman of the committee for standards in public life.

His job is to examine the trail of poor decisions that led us to this situation, “to look at the management structure and culture in which those decisions were taken; lines of accountability which governed those decisions; and the processes which led to them” and “to identify lessons which can be learnt to strengthen the Co-operative Bank and the wider Co-operative Group and the co-operative business model generally.”

Clearly we should wait until the results of that report which will be available at the group AGM next May.

There are nonetheless a few things that are now obvious.

First that we should have no confidence in the advice from group chairman Len Wardle or ex-CEO Peter Marks about what to do next. We should have stopped listening to them a long time ago. And it is inconceivable to me that Wardle could contemplate retaining his chairmanship until May – he should have already gone.

Second a co-operative bank with a minority member’s stake may be “ethical” in intent, but it is evidently not, in my personal view, a co-operative.

And if it persists in using the name it should be asked to desist – just as the brand Co-operative Travel, which the group sold to Thomas Cook, has to disappear after a certain period.

That said, the current CEO of the group Euan Sutherland has handled the situation well despite the dreadful hand he has been dealt. Here’s hoping this amputation of the Co-op’s crippled banking arm stops the bleeding and protects the body of the Co-operative Group from any further liabilities.

It is sobering to remember that none of the demutualised building societies have survived the transition.

* Nick Matthews is vice-chairman of Co-operatives UK.

Morning Star

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