Get Red Pepper's email newsletter. Enter your email address to receive our latest articles, updates and news.
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
What if it's not us who are sick, asks Rod Tweedy, but a system at odds with who we are as social beings?
Survivors of the fire are still relying on thousands of community volunteers, writes Dan Renwick - but the failed council is plotting a comeback
The people could reach a democratic and non-violent solution if they were freed from US meddling, argues Boaventura de Sousa Santos
A decade after the start of the crash, economic power is in our hands – we must take it, writes Ann Pettifor
Nick Dowson looks at the new wave of co-ops and community groups where people are building their own truly affordable homes
Hsiao-Hung Pai meets people affected by the fire, and finds sadness and suffering mixed with a continuing wariness of the official investigations
Chris Williamson MP, winner of the election's tightest marginal, Derby North, and recently reappointed shadow minister for fire services, talks to Ashish Ghadiali about Jeremy Corbyn, the housing crisis and winning from the left
The Corbyn-supporting group is preparing for another election at any moment, writes Adam Peggs – and now has the potential to create powerful training initiatives, union links and party reform efforts
’We believe in you. We are with you. We will never forget.’ Grenfell solidarity sweeps East London in mass banner drops from housing estates
Fearless Cities: the new urban movements
A wave of new municipalist movements has been experimenting with how to take – and transform – power in cities large and small. Bertie Russell and Oscar Reyes report on the growing success of radical urban politics around the world
A musical fightback against school arts cuts
Elliot Clay on why his new musical turns the spotlight on the damage austerity has done to arts education, through the story of one school band's battle
Neoliberalism: the break-up tour
Sarah Woods and Andrew Simms ask why, given the trail of destruction it has left, we are still dancing to the neoliberal tune
Cat Smith MP: ‘Jeremy Corbyn has authenticity. You can’t fake that’
Cat Smith, shadow minister for voter engagement and youth affairs and one of the original parliamentary backers of Corbyn’s leadership, speaks to Ashish Ghadiali
To stop the BBC interviewing climate deniers, we need to make climate change less boring
To stop cranks like Lord Lawson getting airtime, we need to provoke more interesting debates around climate change than whether it's real or not, writes Leo Barasi
Tory Glastonbury? Money can’t buy you cultural relevance
Adam Peggs on why the left has more fun
Essay: After neoliberalism, what next?
There are economically-viable, socially-desirable alternatives to the failed neoliberal economic model, writes Jayati Ghosh
With the new nuclear ban treaty, it’s time to scrap Trident – and spend the money on our NHS
As a doctor, I want to see money spent on healthcare not warfare, writes David McCoy - Britain should join the growing international movement for disarmament
Inglorious Empire: What the British Did to India
Inglorious Empire: What the British Did to India, by Shashi Tharoor, reviewed by Ian Sinclair
A Death Retold in Truth and Rumour
A Death Retold in Truth and Rumour: Kenya, Britain and the Julie Ward Murder, by Grace A Musila, reviewed by Allen Oarbrook
‘We remembered that convictions can inspire and motivate people’: interview with Lisa Nandy MP
The general election changed the rules, but there are still tricky issues for Labour to face, Lisa Nandy tells Ashish Ghadiali
Everything you know about Ebola is wrong
Vicky Crowcroft reviews Ebola: How a People’s Science Helped End an Epidemic, by Paul Richards
Job vacancy: Red Pepper is looking for an online editor
Closing date for applications: 1 September.
Theresa May’s new porn law is ridiculous – but dangerous
The law is almost impossible to enforce, argues Lily Sheehan, but it could still set a bad precedent
Interview: Queer British Art
James O'Nions talks to author Alex Pilcher about the Tate’s Queer British Art exhibition and her book A Queer Little History of Art
Cable the enabler: new Lib Dem leader shows a party in crisis
Vince Cable's stale politics and collusion with the Conservatives belong in the dustbin of history, writes Adam Peggs
Anti-Corbyn groupthink and the media: how pundits called the election so wrong
Reporting based on the current consensus will always vastly underestimate the possibility of change, argues James Fox
Michael Cashman: Commander of the Blairite Empire
Lord Cashman, a candidate in Labour’s internal elections, claims to stand for Labour’s grassroots members. He is a phony, writes Cathy Cole
Contribute to Conter – the new cross-party platform linking Scottish socialists
Jonathan Rimmer, editor of Conter, says it’s time for a new non-sectarian space for Scottish anti-capitalists and invites you to take part
Editorial: Empire will eat itself
Ashish Ghadiali introduces the June/July issue of Red Pepper
Eddie Chambers: Black artists and the DIY aesthetic
Eddie Chambers, artist and art historian, speaks to Ashish Ghadiali about the cultural strategies that he, as founder of the Black Art Group, helped to define in the 1980s
Despite Erdogan, Turkey is still alive
With this year's referendum consolidating President Erdogan’s autocracy in Turkey, Nazim A argues that the way forward for democrats lies in a more radical approach
Red Pepper Race Section: open editorial meeting – 11 August in Leeds
The next open editorial meeting of the Red Pepper Race Section will take place between 3.30-5.30pm, Friday 11th August in Leeds.
Mogg-mentum? Thatcherite die-hard Jacob Rees-Mogg is no man of the people
Adam Peggs says Rees-Mogg is no joke – he is a living embodiment of Britain's repulsive ruling elite
Power to the renters: Turning the tide on our broken housing system
Heather Kennedy, from the Renters Power Project, argues it’s time to reject Thatcher’s dream of a 'property-owning democracy' and build renters' power instead
Your vote can help Corbyn supporters win these vital Labour Party positions
Left candidate Seema Chandwani speaks to Red Pepper ahead of ballot papers going out to all members for a crucial Labour committee
Join the Rolling Resistance to the frackers
Al Wilson invites you to take part in a month of anti-fracking action in Lancashire with Reclaim the Power
The Grenfell public inquiry must listen to the residents who have been ignored for so long
Councils handed housing over to obscure, unaccountable organisations, writes Anna Minton – now we must hear the voices they silenced
India: Modi’s ‘development model’ is built on violence and theft from the poorest
Development in India is at the expense of minorities and the poor, writes Gargi Battacharya
North Korea is just the start of potentially deadly tensions between the US and China
US-China relations have taken on a disturbing new dimension under Donald Trump, writes Dorothy Guerrero