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Co-op Bank: a tragedy

29th October 2013

Co-op Bank: a tragedy

By Mick Brooks

The co-operative movement, together with the Labour Party and the trade unions, is the third wing of our labour movement. Co-op Bank customers learned with dismay in October 2013 that the Bank has just fallen into the hands of predatory hedge funds. 10,000 Co-op Bank workers tremble for their jobs. The Bank’s ethical policy, such a striking and pleasant contrast to the rapacious greed and social irresponsibility of the commercial banks’ lending, is likely to be torn up.

How did this happen? From its foundation in Rochdale in 1844, the co-operative movement has striven to show by example that we can do without capitalists - and do better without them. Their shops sold food that was wholesome and unadulterated. Even better, they were owned by their customers.

In practice the ‘owners’ of the co-operative movement had very little democratic control over the professional managers. Nowhere is this clearer than in the recent history of the Co-op Bank. Rather than providing an alternative to the feeding frenzy of the commercial banks that contributed to the financial crash, the Co-op Bank management joined in.

In a bid to expand, in 2009 the Co-op Bank took over the Britannia building society. Britannia was a ‘mutual’, ostensibly owned by those who saved with it with a view to buying a house. Bosses at the Co-op Bank soon found that Britannia’s management had in fact been sucked into crazy lending during the house price bubble. What they had acquired was a mass of rotten debts.
 
This hit the Co-op Bank’s finances hard. The bonds they issued to raise funds in the money markets sank to junk bond status. They were bought for a song by hedge funds Aurelius Capital Management and Silver Point Capital. Now they were at the hedge funds’ mercy.

During the house price bubble banks over-extended themselves, taking crazy risks to chase more profit. Banks were typically lending out £30 for every £1 backing they had in the vaults. Determined to close the stable door after the horses have bolted, the Bank of England is now insisting that banks tighten up on their capital requirements.

Partly because of the big hole in their pockets created by the acquisition of Britannia, the Co-op Bank was found to be £1.5bn short of the capital requirement needed. That is one problem with the co-operative movement. Their firms operate in a capitalist environment but they are not owned by capitalists and therefore find it more difficult to touch rich people for money.

Aurelius and Silver Point had become senior creditors of the Co-op Bank, first in the queue. Like Shylock, they insisted on their pound of flesh. They swapped their bonds for outright ownership of the firm. In taking 70% ownership they have dealt a body blow to the co-operative ideal. As Nils Pratley put it in the Guardian (21.10.13), “’Bank with the Co-op and help a couple of new York hedge funds trade out of their bad bet on distressed debt.’ As a slogan, this is probably not what the Rochdale pioneers had in mind.”

The Co-op Bank’s problem was that, living in the capitalist jungle, it caught all the diseases of capitalism. It is a measure of how far the Co-op Bank’s managers had drunk in the values of capitalism that they just rolled over and capitulated to the hedgies.

Aurelius and Silver Point are not just capitalist concerns. They are un-affectionately known as ‘vulture capitalists’. They are the lowest form of scum-sucking bottom feeders in the entire capitalist ocean. Aurelius is the company notorious for buying Argentinean bonds after the country went bankrupt in 2001. Whereas most creditors took their losses on the chin, Aurelius bought the bonds for next to nothing and then went on the warpath in the American courts demanding ‘their’ money ($1.33bn!) back in full. US imperialism with its global reach played hardball, persuading a Ghanaian court to seize an Argentinean frigate to enforce the judgement. Aurelius is blackmailing a country of 40 million people.

Can we expect these hedge funds to pursue an ethical policy now they have their hands round the Co-op Bank’s throat? Peter Marks, former chief executive of the Co-op Group, correctly called the takeover a “tragedy”. He spelled out the dilemma. “It’s not a co-op. Hedge funds are there to maximise profit – that’s what their sole purpose in life is. To be truly ethical they can’t do that.”

Rather than allowing the Co-op Bank to be swallowed up by the vultures, it should have been nationalised as part of a plan to create a dominant public sector banking service. With democratic control of bank management by the labour movement, this public sector banking system could run banking as a public service. Publicly owned and accountable banking alone can provide the investment we need to deliver jobs, growth and improved living standards rather than just gambling with our money.