On Tuesday two US hedge funds took control of the Co-operative Bank and in effect ended its 170-year history as Britain’s largest mutual. Yesterday an aggressive hedge fund, deceptively entitled The Children’s Investment (TCI) Fund, acquired the largest stake behind the government in the Royal Mail. It is led by a man known for his anti-state streak in dismantling public provision which gained him and his fund the title of ‘locusts’ in Germany.
The obvious and immediate question to be asked is, whilst these are the normal machinations of unrestrained market capitalism, do these enforced takeovers serve the public interest or simply their own interests in extracting the largest possible short-term gains, irrespective of the consequences for the wider community? If the latter, as is obviously the case, then the non-bank financial sector of which hedge funds and private equity are prime examples, require radical reform.
The Co-operative Bank lost out to two New York corporate vultures, Aurelius Capital Management and Silver Point Capital, after it sought to buy 632 branches from Lloyds Banking Group when it gradually became clear that its merger with Britannia building society in August 2009 had failed because of commercial property and buy-to-let loans that had turned sour. In May this year Co-op Bank was devastatingly downgraded by Moodys rating agency as it was revealed that £1.7bn worth of commercial loans were impaired or heading for default.
The rescue plan envisaged that the Co-operative Group would retain a 75% controlling stake in the bank, but intense pressure from bondholders scuppered the plan. Finally the two New York hedge funds forced the Co-op down to as little as 30% of the equity, leaving themselves with 70%. Everyone loses from this deal – except the hedge funds which now fully control the options for the bank’s future. The government loses a big mutual challenger to the over-dominant Big Five banks, the Co-op is likely to lose its branded ethical focus, and hundreds of jobs among its 10,300 employees will very likely be lost.
The government (Vince Cable in this instance) has also lost out over Royal Mail, not only to the tune of £1.5bn in the original offer price, but also in the composition of the new owners. Earlier this month Cable was asserting that the government was in ‘a position to ensure’ that it got the pension fund and insurance company investors it wanted with a clear long-termist outlook.
It has ended up with TCI which now controls 12% of the free float (against the government’s residual 38%), a corporate predator already eyeing up the rest of the State’s portfolio. The trouble with a laid-back laissez-faire government and an uncontrolled deregulated stockmarket is that the public interest is squeezed out both by neglect and greed. We urgently need new rules for regulation of hedge funds to ensure they cannot run amok with the wider public interest which should always carry an override.
Excuse me but your opening statement is incorrect. The Co-operative Bank is not a mutual, it is & has been for many many years a PLC that had the Co-operative Group as it’s controlling entity. The Co-operative group & the bank have been misleading the public in this way for years & the ills befalling both organisations are largely brought on by their respective behaviour and justly deserved.
Ironically, state money via a part-nationalisation bailout would have been far more ‘ethical’ than what has happened at the co-op, and it makes you wonder why the idiots in charge didn’t go down that route rather than the disasterous loss to the hedge funds that has now happened. Oh, sorry, answered myself there really with talk of idiots in charge. To be honest I would trust a co-op executive as far as I could throw one and am now in the process of moving my accounts…
State intervention might well have been more ethical, but would this Tory LibDem Coalition have stepped in, or would they have allowed the Coop Bank to sink. I know the answer to that. Let The Market sort things out would be their dogma. Brown had the courage and forsight to step in and save Northern Rock and RBS; but this lot wouldn’t. The truth is that the only option was to let the Hedge Funders step in. The Group itself has had no control of the Bank. It was poorly managed and acquiring Britannia was the last straw as well as being too ambitious in being conned into going for the Llods TSB deal.
I thank God for those hedge funds. Without them the ethical bank was planning on screwing me and all the other small retail bondholders. Where else will you find the shareholders (the cooperative group) pushing their loss on to the bondholders – nowhere. With them, it looks like the small retail holders of the coop PIBS will come out with a much fairer resolution to this entirely avoidable self generated problem.
Vic Thomas is spot on – the co-op bank is a company owned by the co-op group – who managed it into massive insolvency and then tried to keep control of the equity by passing the buck from the shareholders – the co-op group – to bondholders like Stephen Tye and myself and pension funds. Very ethical of them! As to the role of the state, Mr Brown’s regulators gave a financial green light to the Brittania Building Society, whose dodgy loans portfolio was mainly the cause of the collapse, just before the co-op took it over – a takeover they also nodded through and which was publicly celebrated by Ed Balls at the time. The co-op’s management failed and Brown’s regulatory regime failed.