2nd May 2014 by The Harried House Hunter
Just days after the Co-op Group unveiled a disastrous £2.5bn loss for 2013, shop fitters turned up at my local Britannia building society to redo the branch, tearing down anything that said “Britannia” and replacing it with “Co-op Bank”.
The Co-op Bank, of course, is not what it once was. It’s best described as the site of a £1.5bn (and counting) financial black hole. It’s no longer really mutually-owned, with a collection of hedge funds owning the majority of the bank.
Yet to most of the media the narrative for the bank’s downfall is simple. The bank was run by “crystal methodist” chairman Rev Paul Flowers who has been charged with drug offences. He knew nothing much about banking, he did not even have a clue about the balance sheet, and, of course, he had personal failings.
But none of this really explains what went on. This admittedly fascinating tabloid tale throws no light on the highly paid folk –bankers, advisers, lawyers, accountants, auditors – who really ran the bank.
It’s in their best interests for the story to remain concentrated on Flowers and the other amateurs identified on Co-op Boards for like most non-executives or trustees, they were rubber-stamps.
So based on my personal near four decades of knowledge of both the Co-op and the Britannia, and some very off the record discussions with Whitehall sources, here’s a new narrative, which makes far better sense.
The spotlight needs to be turned firmly on the last Labour government.
Wind back further than the Britannia take-over in January 2009 to the September 2007 collapse of Northern Rock. This was the first run on a UK bank in some 140 years and shook the government to the core – far more than ever admitted.
Footage of folk queuing in the streets of major UK cities for the return of their own money went around the world. It was television heaven – all the news stations could find a queue near their studios.
London, as a financial capital, risked becoming a laughing stock. Whatever the investment bankers and RBS boss Fred the Shred did – and at that time it was behind closed doors – this was literally out in the open. It was worse than third world. It could never be allowed to happen again. This was made a little easier to take because some of the banks would have been acquisitive in normal times.
So the government and Treasury organised rescue takeovers where it was made clear that for the acquiring bank, “no” was not really an answer. Selected banks would have to take the hit to ensure the overall health of the banking world.
It was Britain on a financial war footing. There would be casualties but it was for the general good. The mergers were to make sure there were no further corporate casualties. Some could be said to have worked. The Santander takeover of Alliance & Leicester and some of Bradford & Bingley seemed to. Santander had sufficient balance sheet muscle – and this took out a slice of competition. The main losers were staff in shut down branches.
But more than five years down the line, Lloyds shareholders are still picking up the costs for the similarly encouraged merger between the healthy Lloyds TSB and the totally sick HBoS.
Now for the Britannia, a strange organisation headquartered in a small Staffordshire town. This was formed in the mid eighties from several amalgamations – the Lion, the Leek and Westbourne, the Eastern Counties, and many others. They mixed mortgages on maisonettes with organising borrowing for homeowners who might well have been running brothels in Brighton. They were involved in some interesting valuations of gilt portfolios.
Was this colourful past all ancient history? No, it – and much more – took place when the final Britannia senior management was learning the trade. A Staffordshire hideaway ensured they had little contact with the rest of the banking world. And, in common with some other out of the way building societies, they were seen as an easy source of loans by the sort of commercial property developer you would not wish to attend your dinner party.
It was obvious that the mutual Britannia had more problems than was ever admitted in its never too closely scrutinised accounts. That should have been clear to the Co-op’s advisers.
The Co-op, which had until then been a minor player with no banking crisis involvement, was told by the government to take Britannia over in October 2008, a move that was surprisingly little commented at the time. The news managers talked “creation of a super-mutual”.
What was never said was that if customers knew how shaky Britannia was, then it was quite possible they too would have eventually found themselves queuing in the streets for their money just as Northern Rock account holders had done a year or so earlier.
The Co-op’s reward was not removal of competition but the chance to appear in hundreds more high streets (including my own). And if it did, the state would reward it with some 600 unwanted Lloyds branches. The move would have made perfect sense to the Government.
Thanks to the Co-op’s governance – particularly the fact there were no shareholders – there would be no complaints or fallout as there had been from the Lloyds’-TSB takeover of Halifax – Bank of Scotland.
The Treasury, as with all parts of government, works to the 24 hour news cycle, while politicians certainly don’t think much beyond the life of their own particular Government. The idea that its moves would cause problems years ahead is not in its mindset. It may have thought that getting big or at least bigger banks to swallow smaller ones would eventually benefit the merged entities with the usual justifications – economies of scale, wider distribution, maybe even increased pricing power. The various boards of whatever level of qualification in banking or none, may have believed them too.
What they failed to ‘price in’ – or they might have shown a little more reluctance – was the biggest, nastiest financial crisis since the war and one of the longest recessions in history.
It would be very difficult to prove without the minutes of the various meetings, the phone calls and the like. An inquiry might help but would it reach back for enough? Maybe we’ll know one day, but will it be soon enough to learn the lessons?
(Since the writing of this piece earlier this week, the Government reviewer into the Co-op debacle, Sir Christopher Kelly has identified the merger as responsible for much of the ‘black hole’ as the Guardian reported)