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
The Democratic Republic of Congo (DRC) continues to witness devastating political violence, but the world refuses to act. Ishiaba Kasonga and Serge Egola Angbakodolo ask why?
When fire safety has become a privilege for the rich, it’s time to stop austerity and fund emergency mass works to raise standards immediately, writes Jane Shallice
The election result has irreversibly changed political discourse in the UK, writes James Fox
In commemoration of the 30th anniversary of Bernie Grant's election to parliament, Ayo Wallace explores the life and legacy of his radical representation of Tottenham's black communities.
Across Britain, hundreds of thousands of people have now taken part in mass rallies for Corbyn's Labour. Eli Regan soaks up the atmosphere in Warrington
The under-30s could be decisive in the general election. Frances Grahl meets young people hit by Tory austerity and looks at what's driving their support for Labour
“To them it’s just another number, someone else being sent back. But when you’ve got three children being left without their dad … it’s quite major,” writes Rebecca Omonira-Okeykanmi.
Hundreds of people surrounded the fences this weekend. Hera Lorandos spoke to women who have suffered inside.
Grassroots posters giving an alternative take on the general election
Laying out the case for Labour's leadership of a Progressive Alliance, Jeremy Gilbert argues that far from posing a threat to the Left, the Progressive Alliance offers a golden opportunity to end Tory rule and build a 21st century government committed to social justice
Brexit, Corbyn and beyond
Clarity of analysis can help the left avoid practical traps, argues Paul O'Connell
Paul Mason vs Progress: ‘Decide whether you want to be part of this party’ – full report
Broadcaster and Corbyn supporter Paul Mason tells the Blairites' annual conference some home truths
Contagion: how the crisis spread
Following on from his essay, How Empire Struck Back, Walden Bello speaks to TNI's Nick Buxton about how the financial crisis spread from the USA to Europe
How empire struck back
Walden Bello dissects the failure of Barack Obama's 'technocratic Keynesianism' and explains why this led to Donald Trump winning the US presidency
Empire en vogue
Nadine El-Enany examines the imperial pretensions of Britain's post-Brexit foreign affairs and trade strategy
Grenfell Tower residents evicted from hotel with just hours’ notice
An urgent call for support from the Radical Housing Network
Jeremy Corbyn is no longer the leader of the opposition – he has become the People’s Prime Minister
While Theresa May hides away, Corbyn stands with the people in our hours of need, writes Tom Walker
In the aftermath of this disaster, we must fight to restore respect and democracy for council tenants
Glyn Robbins says it's time to put residents, not private firms, back at the centre of decision-making over their housing
After Grenfell: ending the murderous war on our protections
Under cover of 'cutting red tape', the government has been slashing safety standards. It's time for it to stop, writes Christine Berry
Why the Grenfell Tower fire means everything must change
The fire was a man-made atrocity, says Faiza Shaheen – we must redesign our economic system so it can never happen again
Forcing MPs to take an oath of allegiance to the monarchy undermines democracy
As long as being an MP means pledging loyalty to an unelected head of state, our parliamentary system will remain undemocratic, writes Kate Flood
7 reasons why Labour can win the next election
From the rise of Grime for Corbyn to the reduced power of the tabloids, Will Murray looks at the reasons to be optimistic for Labour's chances next time
Red Pepper’s race section: open editorial meeting 25 June
On June 25th, the fourth of Red Pepper Race Section's Open Editorial Meetings will celebrate the launch of our new black writers' issue - Empire Will Eat Itself.
After two years of attacks on Corbyn supporters, where are the apologies?
In the aftermath of this spectacular election result, some issues in the Labour Party need addressing, argues Seema Chandwani
If Corbyn’s Labour wins, it will be Attlee v Churchill all over again
Jack Witek argues that a Labour victory is no longer unthinkable – and it would mean the biggest shake-up since 1945
On the life of Robin Murray, visionary economist
Hilary Wainwright pays tribute to the life and legacy of Robin Murray, one of the key figures of the New Left whose vision of a modern socialism lies at the heart of the Labour manifesto.
Letter from the US: Dear rest of the world, I’m just as confused as you are
Kate Harveston apologises for the rise of Trump, but promises to make it up to us somehow
The myth of ‘stability’ with Theresa May
Settit Beyene looks at the truth behind the prime minister's favourite soundbite
Civic strike paralyses Colombia’s principle pacific port
An alliance of community organisations are fighting ’to live with dignity’ in the face of military repression. Patrick Kane and Seb Ordoñez report.
Greece’s heavy load
While the UK left is divided over how to respond to Brexit, the people of Greece continue to groan under the burden of EU-backed austerity. Jane Shallice reports
On the narcissism of small differences
In an interview with the TNI's Nick Buxton, social scientist and activist Susan George reflects on the French Presidential Elections.
Why Corbyn’s ‘unpopularity’ is exaggerated: Polls show he’s more popular than most other parties’ leaders – and on the up
Headlines about Jeremy Corbyn’s poor approval ratings in polls don’t tell the whole story, writes Alex Nunns
Job vacancy: Red Pepper is looking for a political organiser
Closing date for applications: postponed, see below
The media wants to demoralise Corbyn’s supporters – don’t let them succeed
Michael Calderbank looks at the results of yesterday's local elections
In light of Dunkirk: What have we learned from the (lack of) response in Calais?
Amy Corcoran and Sam Walton ask who helps refugees when it matters – and who stands on the sidelines
Osborne’s first day at work – activists to pulp Evening Standards for renewable energy
This isn’t just a stunt. A new worker’s cooperative is set to employ people on a real living wage in a recycling scheme that is heavily trolling George Osborne. Jenny Nelson writes
Red Pepper’s race section: open editorial meeting 24 May
On May 24th, we’ll be holding the third of Red Pepper’s Race Section Open Editorial Meetings.
Our activism will be intersectional, or it will be bullshit…
Reflecting on a year in the environmental and anti-racist movements, Plane Stupid activist, Ali Tamlit, calls for a renewed focus on the dangers of power and privilege and the means to overcome them.
West Yorkshire calls for devolution of politics
When communities feel that power is exercised by a remote elite, anger and alienation will grow. But genuine regional democracy offers a positive alternative, argue the Same Skies Collective
How to resist the exploitation of digital gig workers
For the first time in history, we have a mass migration of labour without an actual migration of workers. Mark Graham and Alex Wood explore the consequences