In May this year, the credit rating agency Moody’s issued a statement saying it had downgraded the debt of the Co‑operative Bank by a whopping six notches to ‘junk’ status. This followed news in February of a £1.5 billion hole in the Co-op’s balance sheet – a shortage almost as big as the bank’s total capital.
Of the £1.5 billion, £900 million stemmed from real estate loans; 12 major commercial property developments on the Co‑op’s books were found almost at once to be in danger of default. The Co-op also needs £600 million more in cash to meet new capital funding requirements, introduced by regulators in an effort to make banks safer.
More bad news followed at the Co-op’s half-year financial results in August, which revealed a further £496 million of write‑downs on loans the bank had hived off into an internal ‘bad bank’ to insulate the rest of the company. This took the overall impairment charges on its lending up to almost £1 billion over the past year and a half.
Unlike banks owned by external investors, the Co-op can’t raise capital from its owners. Solutions under discussion have been drastic, ranging from seeking a bailout, to selling parts of the Co-operative Group (the mutual of which the Co-op Bank is a subsidiary), to selling shares on the stock market, an anathema to the bank’s espoused values. In the end, the bank and regulators agreed on a ‘bail-in’: converting £1.3 billion in loans from outside investors to £1 billion in new capital, a step that will see investors lose 25 to 30 per cent. An additional £500 million will be raised by selling off some of the bank’s loan book and the Group’s insurance business.
These problems came as a surprise to many. The Co-op, which traces its roots to the 19th-century co-operative movement in the north of England, has long been celebrated as an ethical alternative to the major high street banks. For those banks, scandals of rate fixing, risky lending and mis-selling savings and insurance products have created a crisis of public trust. The Co‑op emerged relatively unscathed from the economic downturn and flourished on the back of Occupy and a Move Your Money (MYM) campaign that convinced some two million customers to close their high street accounts.
What went wrong? The Co-op itself, Bloomberg, BBC and others blame Britannia. The official story goes that this building society issued risky property loans before its merger with the Co-op in 2009, which only later became apparent. But that skims over the management decisions and politics behind the Co-op’s rapid expansion: a story in which David was keen to turn himself into a giant to beat the high street Goliaths.
The government’s role has also been left out. The 2008 crash made clear that many building societies had engaged in the same risky practises as major banks. To quell the crisis, the government pushed healthier institutions to absorb collapsing ones. It encouraged the ‘merger’ of Nationwide with the troubled Derbyshire and Cheshire building societies, while presiding over the union of the Co-op and Britannia.
Creating a ‘supermutual’ suited both Labour’s politics and David Cameron’s ‘big society’ election campaign. The Financial Times hailed the Co-op/Britannia merger as ‘the solution to the over-concentrated banking industry’.
For management, it was a once-in-a-lifetime growth opportunity, launching the Co-op into sudden competition with Lloyds, NatWest and Barclays. The merging parties appeared well-suited for each other. Britannia was member-owned, like the Co-op, and a substantial player in property, where the Co-op was keen to expand.
Plus, if the Co-op wanted to establish itself as a true competitor on the high street, it needed more than just 100-odd branches in the north of England. Absorbing Britannia meant sudden expansion to the south with the addition of 200 more branches.
Then, possibly fuelled by media attention and government support, Co-op execs appear to have been gripped by megalomania. Neville Richardson, chief exec from the Britannia side, had just taken control of the newly enlarged Co-op when he and colleagues attempted another merger, one that would have tripled the bank’s size for the second time.
Thus began the Co-op’s short-lived entanglement in ‘Project Verde’, a name given to the sale of 632 branches of Lloyds. A successful purchase would have left the Co-op with nearly 1,000 branches. But after details of the bank’s financial problems emerged, the impossibility of the roughly £700 million price tag became clear.
All this raises questions of how much the execs knew about Britannia’s bad loans when they merged, and how much they knew of their own financial problems when embarking on the Lloyds expansion. Why had they planned to press ahead with a risky and expensive reorganisation (around £250 million on a new IT system)?
It is striking that the Co-op’s losses on commercial real estate lending were booked shortly after Project Verde collapsed. It seems rather unlikely that Co-op execs – particularly Richardson, who had headed Britannia – would have failed to understand the risks involved in those real estate deals prior to the collapse of Project Verde. Nor is it likely that all large commercial loans turned bad all at once.
Instead, it seems entirely feasible that those bad loans had been kept off the records or downplayed for the time being so as not to jeopardise the Co-op bid for the Lloyds branches. Had the deal gone through, existing bad debts would have been less significant because the bank would have been well capitalised with a larger balance sheet. But the deal did not go through, and the bank had to come clean.
While we can’t be certain about execs’ involvement in hiding bad debts to secure Project Verde (which probably would have secured them bonuses, too), it is striking that several Co-op execs have jumped ship – ostensibly for personal reasons. And it is worth asking why regulators overseeing the Verde deal didn’t notice the problems lurking below the surface.
The independent review headed by Sir Christopher Kelly plans to investigate and present some answers at the Co-op’s AGM in May 2014, though by that time much damage will have been done. Thousands of small investors who bought bonds with the Co-op assuming they were a safe source of retirement income will face a loss. Private equity and hedge (or ‘vulture’) funds that have been circling the Co-operative Group’s assets for months may have the chance to buy, and no doubt disregard what the Co-op has historically stood for. A further danger is a spillover effect on other ethical or mutual banking alternatives, potentially affecting Charity Bank, Triodos Bank and Ecology Building Society, if customers give way to cynicism and declare all banks self-interested and greedy.
As it stands, events at the Co-op eerily resemble the high‑street banking behaviour that prompted so many people to move their money. Execs have acted in their own interests, pursuing over-zealous expansion that the government not only oversaw but promoted. RBS’s acquisition of ABN Amro and Lloyds’ merger with HBOS spring to mind.
Aspiring to be Goliath meant the Co-op had to play by Goliath’s rules. This compromised the interests of millions of members, who have a right to know what happened and to hold execs responsible.
The Co-op could not be reached for comment. Move Your Money declined to comment on the Co-op but said it was reviewing its scorecards. Daniel Tischer has written a PhD on the UK ethical banking sector. He is currently a researcher at the University of Manchester’s CRESC and the Wissenschaftszentrum Berlin, focusing on alternative and ethical banking systems
Andrew Dolan on how the left must match the anti-establishment rhetoric of the right, but with a different politics
In the first of a series of interviews with migrants' rights and racial justice activists from the US, Marienna Pope-Weidemann speaks to Peter Pedemonti, co-founder and director of the New Sanctuary Movement in Philadelphia
Yasmin Gunaratnam reflects on John Berger’s gut solidarity with the stranger
Charlie Clarke and Heather Mendick discuss how to work through the tensions within Momentum
In 1972 David Widgery wrote about the bitter intensity of love in capitalism
Emma Snaith speaks with directors Emer Mary Morris and Nina Scott about the power of theatre to encourage community resistance to estate demolitions.
Photos from The World Transformed festival in Liverpool, by David Walters
A short story by Kirsten Irving
Nadhira Halim and Andy Edwards report on the range of creative responses to the housing crisis that are providing secure, affordable housing across the UK
As man-made global warming gets closer to the tipping point, Andrew Simms finds reasons to be positive about averting catastrophic climate change
Greenwald speaks Trump, War on Terror, and citizen activism
Glenn Greenwald was interviewed by Amandla Thomas-Johnson over the phone from Brazil. Here is what he had to say on the War on Terror, Trump, and the 'special relationship'
Report from the second Citizen’s Assembly of Podemos
Sol Trumbo Vila says the mandate from the Podemos Assembly is to go forwards in unity and with humility
Protect our public lands
Last summer Indigenous people travelled thousands of miles around the USA to tell their stories and build a movement. Julie Maldonado reports
From the frontlines
Red Pepper’s new race editor, Ashish Ghadiali, introduces a new space for black and minority progressive voices
How can we make the left sexy?
Jenny Nelson reports on a session at The World Transformed
In pictures: designing for change
Sana Iqbal, the designer behind the identity of The World Transformed festival and the accompanying cover of Red Pepper, talks about the importance of good design
Angry about the #MuslimBan? Here are 5 things to do
As well as protesting against Trump we have a lot of work to get on with here in the UK. Here's a list started by Platform
Who owns our land?
Guy Shrubsole gives some tips for finding out
Don’t delay – ditch coal
Take action this month with the Coal Action Network. By Anne Harris
Utopia: Work less play more
A shorter working week would benefit everyone, writes Madeleine Ellis-Petersen
Mum’s Colombian mine protest comes to London
Anne Harris reports on one woman’s fight against a multinational coal giant
Bike courier Maggie Dewhurst takes on the gig economy… and wins
We spoke to Mags about why she’s ‘biting the hand that feeds her’
Utopia: Daring to dream
Imagining a better world is the first step towards creating one. Ruth Potts introduces our special utopian issue
A better Brexit
The left should not tail-end the establishment Bremoaners, argues Michael Calderbank
News from movements around the world
Compiled by James O’Nions
Podemos: In the Name of the People
'The emergence as a potential party of government is testament both to the richness of Spanish radical culture and the inventiveness of activists such as Errejón' - Jacob Mukherjee reviews Errejón and Mouffe's latest release
Survival Shake! – creative ways to resist the system
Social justice campaigner Sakina Sheikh describes a project to embolden young people through the arts
‘We don’t want to be an afterthought’: inside Momentum Kids
If Momentum is going to meet the challenge of being fully inclusive, a space must be provided for parents, mothers, carers, grandparents and children, write Jessie Hoskin and Natasha Josette
The Kurdish revolution – a report from Rojava
Peter Loo is supporting revolutionary social change in Northern Syria.
How to make your own media
Lorna Stephenson and Adam Cantwell-Corn on running a local media co-op
Book Review: The EU: an Obituary
Tim Holmes takes a look at John Gillingham's polemical history of the EU
Book Review: The End of Jewish Modernity
Author Daniel Lazar reviews Enzo Traverso's The End of Jewish Modernity
Lesbians and Gays Support the Migrants
Ida-Sofie Picard introduces Lesbians and Gays Support the Migrants – as told to Jenny Nelson
Book review: Angry White People: Coming Face to Face With the British Far-Right
Hilary Aked gets close up with the British far right in Hsiao-Hung Pai's latest release
University should not be a debt factory
Sheldon Ridley spoke to students taking part in their first national demonstration.
Book Review: The Day the Music Died – a Memoir
Sheila Rowbotham reviews the memoirs of BBC director and producer, Tony Garnett.
Power Games: A Political History
Malcolm Maclean reviews Jules Boykoff's Power Games: A Political History
Book Review: Sex, Needs and Queer Culture: from liberation to the post-gay
Aiming to re-evaluate the radicalism and efficacy of queer counterculture and rebellion - April Park takes us through David Alderson's new work.
A book review every day until Christmas at Red Pepper
Red Pepper will be publishing a new book review each day until Christmas
Book Review: Corbyn: The Strange Rebirth of Radical Politics
'In spite of the odds Corbyn is still standing' - Alex Doherty reviews Seymour's analysis of the rise of Corbyn