Coppola Comment

Rather to my surprise, the Co-Op Bank has had a reprieve - well, perhaps more like a stay of execution. Even more surprisingly, this has come from what many would regard as a most unlikely source. The American hedge funds that rescued the bank back in 2014 are about to rescue it again, with a little help from their friends and relatives. "Vulture funds" are behaving most unlike vultures. Four months ago, the Co-Op Bank put itself up for sale. Unable to comply with the capital plan agreed with the Prudential Regulatory Authority, and apparently unable to persuade its hedge fund owners to cough up any more funds, it tried to find a "white knight" - ideally, a bank with deep pockets and an interest in UK high street banking. There appeared to be several potential buyers: the TSB, Virgin and CYBG, the owner of Yorkshire Bank and Clydesdale Bank, were all cited as possibilities. But in the end, no-one was willing to take it on. The deadline for the sale came and w

The Co-Op Bank has revealed its 2015 half-year results . And they are not pleasant reading. It has made a statutory loss before taxation of £204m, considerably worse than the £77m loss reported in the 2014 half-year accounts. And the Board advises that the bank will not return to profit for another couple of years. The background to this horrible report is the Bank of England's stress tests last autumn. I didn't bother to look at the results at the time, since it was always obvious that the Co-Op Bank was not going to pass the tests. They came too soon for it to have made serious improvements to its balance sheet after its near-collapse and traumatic recapitalisation in 2013. But I should have looked. The stress test failure was far worse than I had realised: The table shows that the adverse stress scenario, which modelled a severe property market crash, completely wiped out the Co-Op Bank's capital, leaving it insolvent. This is a major failure. Really, the Co-Op

Over at Pieria, I've posted the text and some of the images from the presentation I gave at the UK Society of Co-operatives conference on September 7th 2014 at the University of Essex. It's the full story of the decline and fall of the Co-Op Bank. Well, not just the Co-Op Bank.....we often forget that there were two banks involved in the Co-Op disaster. One of them was a mutual, but perhaps not the one that you might expect. The post can be found here .

The last few weeks for the Co-Op could perhaps be called “a tale of two reviews”. Firstly, there was Sir Christopher Kelly’s report into the disastrous takeover of Britannia Building Society by the Co-Op Bank. Secondly, there was Lord Myners’ review of governance in the Co-Op Group. Sir Christopher Kelly’s report tells a shocking story of deceit, corruption and utter incompetence in both the Co-Op and Britannia, both before and after the merger. The true state of Britannia’s balance sheet appears to have been deliberately concealed from those tasked with doing due diligence, and there were financial shenanigans designed to create the illusion of value when in reality value was being destroyed.  Britannia was by no means a sound business prior to the merger: it had extensive subprime mortgage exposure and a highly leveraged (and it now transpires, overvalued) commercial property book. But what I find more worrying is the evidence that AFTER the merger the enlarged Bank was not in

Nowadays, whenever there is a report of trouble at t'Co-Op, everyone assumes the problem is the bank (again). So it is perhaps not surprising that people are once again asking whether their money is safe, and people like the BBC's Paul Lewis (and me) are reminding them about the FSCS compensation scheme. Let me deal with this now. The FSCS compensation scheme insures 100% of all bank deposits up to a limit of £85,000 per person (not per account). That is more than enough to cover the vast majority of Co-Op Bank retail depositors. If anyone has more than that in Britannia, Smile and Co-Op Bank accounts combined, they know what to do. But the current mess isn't about the Co-Op Bank. That is in no worse shape than it was last week, or last month, or even last year. This is about the governance of the Co-Op Group - the sprawling conglomerate that encompasses supermarkets, farms, pharmacies, funeral parlours and health care as well as financial services. Managing such a divers

On 14th January, the Board of the Co-Op Group approved the Terms of Reference for an independent review of the governance of the Co-Op Group. The review is to be led by Lord Myners, who was appointed to the Board as an independent director in December with the remit to conduct such a review. This is now the fourth review of the Co-Op's problems, the others being the Kelly review of the circumstances of the Britannia takeover, the Treasury Select Committee's inquiry into the circumstances of the Verde deal collapse, and the Bank of England's forthcoming enforcement investigation  into the conduct of the Co-Op Bank. And the Chancellor of the Exchequer has announced that there is to be  yet another independent inquiry . I do wonder if this is overkill. There is only so much navel-gazing a company can stand. In the end, they have to get on with being a business and providing a service to their customers and, in this case, their members. Also on 14th January, the Co-Operati

My latest at Pieria considers who should run banks, in the light of the recent Co-Op Bank disaster: "The hapless Paul Flowers, former chairman of the Co-Op Bank, has been  arrested and charged with possession  of Class A drugs. The Flowers problem comes at the end of a simply horrible year for the Co-Op, in which it was forced to withdraw its bid to take on the TSB part of Lloyds TSB, its credit rating was downgraded to junk by Moody's and the PRA imposed capital requirements on it that it was unable to meet. It admitted in its half-year accounts that it was bust and proposed a recapitalisation plan that would have stiffed 15,000 grannies, only to see it trumped by two hedge funds who made the grannies a better offer - thereby presenting the world with the extraordinary spectacle of a group of vultures appearing considerably friendlier  than the supposedly cuddly teddy bear that is the Co-Operative Group.   "I don't intend to comment on Mr. Flowers's behaviour

My latest at Pieria: Every ecosystem needs its scavengers and its bottom feeders. They clear up the mess that others leave behind, extracting nutrients from decaying corpses and dung piles and leaving only sterile bones behind. We are revolted by them, but without them the world would be a much more unpleasant place. So it is with hedge funds. They are the financial system's equivalent of slime moulds and flatworms. They buy up distressed companies that no-one else will touch and extract whatever profit they can from them. In many cases they leave only empty shells behind, but they sometimes turn failing companies around with ruthless restructuring programmes, in much the same way that some kinds of maggot were used in field surgery to clean up suppurating wounds. In short, they may be revolting but they serve a useful purpose..... Read on here .

It seems the Co-Op Group's proposals for resolving the mess its bank has got itself into have been firmly rejected by the bondholders. More specifically, they have been blocked by an unholy alliance of two hedge funds - Aurelius Capital Management and Silver Point Capital. These two put in a counter-proposal, which it seems (after extensive talks) has been accepted by the Co-Op Board. Robert Peston announced on his blog that the Co-Op Group was about to lose control of its bank. But that's not what Euan Sutherland says . Proudly proclaiming that the Co-Op Group would retain a 30% stake in the Co-Op Bank, making it the largest shareholder, he claimed that the Co-Op Group would remain in control of the bank. I fear this is more Co-Op Group spin. I've complained before about the less than transparent way in which the Co-Op Group communicates with its stakeholders, which at times has amounted to outright deceit. The fact is that a 30% shareholding is in no way a controlli

In my post on the "ethical" Co-Op , I argued that the Co-Op Group management is treating subordinated debt holders in the Co-Op Bank shabbily. Various people questioned this on the grounds that as the Co-Op Bank is a public limited company, the Co-Op Group's investment in its bank is limited to its stake and it is not obliged to provide additional capital: it could simply "walk away" and allow the bank to fail. This comment challenged me to explain why this is not the case: The thing I still don't understand is why you think the Group can't walk away from the bank if it is a subsidiary Ltd company, as seems the case. Is there some legal entanglement beyond the usual corporate pyramidal structure? What is the mechanism through which you think the banks' liabilities can "move up" the limited liability barrier? This is not a question of ethics here, just basic corporate law.   Let's imagine the group withdraws the current offer and sto

My latest post at Pieria looks at the mess the Co-Op Bank has got itself into. The former CEO, Neville Richardson, says it's not his fault. But if it isn't his fault, whose fault is it? And just how bad is this mess, anyway? "The Co-Op Bank's former CEO, Neville Richardson, gave evidence to the Treasury Select Committee on the circumstances surrounding the failure of the Verde deal. In the course of that evidence, he made the following claims about the Co-Op Bank's finances: the Britannia building society, which the Co-Op took over in 2009 (and of which he was previously the CEO) was not the primary source of the toxic assets that have blown a large hole in the Co-Op Bank's capital; When he left the Co-Op Bank in mid-2011 it was profitable, well-managed and there were no signs of credit problems in its asset base. I admit I found this somewhat hard to swallow. But since he makes these claims on the basis of figures derived from the Co-Op Bank's r

The Co-Op Group is proud of its "ethical" values. From its website : our ethical values Openness  –  nobody’s perfect, and we won’t hide it when we’re not Honesty  –  we are honest about what we do and the way we do it Social responsibility  –  we encourage people to take responsibility for their own community, and work together to improve it Caring for others  –  we regularly fund charities and local community groups from the profits of our businesses.   But the Co-Op has a problem. It owns a dud bank . The Co-Op Bank acquired a load of toxic debt in its acquisition of the Britannia building society. The Co-Op Group deliberately concealed the true state of its bank's finances from customers and investors for over 2 years after that takeover. Even when it was forced to disclose in 2012, it attempted to distract attention by focusing on operating profit instead of total losses. It is hard to see this as consistent with the Co-Op Group's "ethical value