Co-operative Bank rescue by hedge funds deals blow to pioneers' dream

It was meant to be a genuine alternative to the big four, but now the Co-operative's banking arm looks just like its rivals

In an austere basement of a wool warehouse in Lancashire, 28 men huddled together. They had a goal: hard-working and aspirational, they wanted to find a way to help working people help themselves. They each put a week and half's wages – £1 – into a pot and formed a new group: the Rochdale Society of Equitable Pioneers. It was 1844.

Visitors to Rochdale are still reminded of the heritage of those pioneers, who used their £28 to set up a co-operative shop and invest the profits in community-owned housing. The houses still stand in the market town today and the railway bridge, in bold white letters, declares: "Rochdale – birthplace of co‑operation".

But last week, almost 170 years after the 28 pioneers started out on their mission, the future of the co-operative movement they founded was called into question. The Co-operative Group, now spanning grocers, funeral homes and pharmacies, was forced to relinquish control of its once-ambitious bank under pressure from two US hedge funds.

The race to fill the bank's £1.5bn capital shortfall – caused by bad loans and the poorly timed merger with Britannia building society in 2009 – forced the group to heed the demands of hedge funds who, along with other bondholders, will own 70% of the bank when it is listed on the stock market next year.

"Is that what the pioneers who formed the Co-op anticipated? That it would be in the hands of American hedge funds?" barked John Mann, the Labour MP, at the former boss of the Co-operative Group last week.

Former chief executive Peter Marks, who had spent 45 years at the Co-op, told Mann and the other members of the Treasury select committee: "It is a tragedy." More details about the terms that Silver Point and Aurelius have extracted from Co-op in gruelling late-night meetings were expected on Monday, but have now been delayed by another week.

Despite assurances that the bank's ethical stance – under which it has turned away £1.2bn of business since they were adopted in 1992 – will be enshrined in the listed bank, there are still doubts that the lender will be able to keep its values. "If it's not majority-owned by the Co-op any more, it's not credible to suggest that it's the same beast: it can't sacrifice profits for social goals any more," said Tony Greenham, head of business and finance at the New Economics Foundation. Marks was even blunter about the situation in his appearance before MPs: "It's not a co-op, is it."

In Rochdale, 55-year-old council worker and longtime Co-op customer Eric Holliday admitted to being "a little sad". He said: "It's a local tradition that we are losing."

It is not just a local tradition. Co-op boasts it has a presence in every postal code in the UK – largely as a result of its grocery stores, which expanded rapidly under Marks, who oversaw the takeover of Somerfield. Its farms can be found as far afield as Herefordshire, Norfolk and Perthshire, growing strawberries, peas and apples and making flour. It even brews its own cider.

Its ambitions spread to politics. It makes donations to the Co-operative Party – a sister party to Labour – which boasts 32 members of parliament, the highest-profile of which is shadow chancellor Ed Balls.

But Marks has raised questions about whether the group at which he spent his working life is trying to do too much. He stunned MPs when he said the interventions by the hedge funds could be "seen as a good thing". "In actual fact, it will force the Co-op to focus on fewer businesses and not stretch its capital in the way it has done," Marks said.

In some ways Co-op has all the accoutrements of big business: a swanky new £100m head office in central Manchester, glass-fronted and cylindrical, and big pay cheques for its bosses. Yet its management structure is stuck in the past. It has a board of 20 members – the height of democracy, according to the Co-op – but it does not allow a seat at the table for the chief executive.

Len Wardle, the university fellow who has chaired the Co-op Group since 2007, took the first steps last week to shaking up governance. He announced he would quit next year and that at this week's half-yearly board meeting he would try to convince his fellows to seek his successor from outside the movement.

Wardle is typical of the individuals who sit on the Co-op board. Andrew Tyrie, the Tory MP who chairs the Treasury select committee, describes it as an organisation "run by a plastering contractor, a farmer, a telecoms engineer, a computer technician, a nurse, a Methodist minister – who, incidentally, also chaired the bank – and two horticulturalists".

The former Methodist minister – Paul Flowers – will appear before Tyrie's committee next week alongside Barry Tootell, who quit in May when Moody's downgraded Co-op Bank to junk and began to lift the lid on its troubles.

It is all so different from a year ago, when the Co-op was picked to take control of 631 branches being sold by Lloyds Banking Group – a move that would have quadrupled its branch presence to 1,000 and made the enlarged bank a real competitor to the big four lenders.

Then, campaigners for mutuality were thrilled. Now they are being pragmatic and seeking solutions.

Greenham said: "[The Co-op bank] was a rather flawed model; you can't really judge mutuality on the basis of this one faulty example."

Chris Leslie, a Co-op MP who sees the organisation's travails as a "very sad saga", points to a private member's bill going through parliament that aims to find a way to help mutuals raise capital. Listed companies are able to achieve that simply by issuing shares. The bill is sponsored by Conservative peer Lord Naseby, who put his idea to Treasury minister Sajid Javid at a private meeting earlier this month. Naseby said: "What this does is allow a mutual to go to its members and appeal to them to take some equity out."

Grant and his friend Mark Dancer, a train conductor, had come from Machynlleth in mid-Wales especially to visit the recently renovated museum. Dancer once had a Saturday job stacking shelves in his local Co-op supermarket and remembers being taught the ethics and principles of co-operation as part of his induction: "We were taught why the Co-op is different," he said.

Now its 7 million members will be hoping that that difference, inspired by the pioneers, can survive the invasion of the hedge funds.

Article Source : http://www.guardian.co.uk
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