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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Royal Mail IPO: ministers to increase amount of public shares

Government is making plans to ensure 'smaller investors get their share', and do not lose out to banks and hedge funds

The government will bow to a mounting outcry and ensure the public do not lose out to banks, hedge funds and other financial speculators in the £3bn selloff of Royal Mail shares.

The Guardian understands that ministers are making plans to increase amount of Royal Mail shares available to the public at the expense of those set aside for banks, following overwhelming demand in the biggest privatisation since the sale of the railways in the 1990s.

Michael Fallon, the business minister in charge of the flotation, said he would do all he could to ensure "smaller investors get their fair share", ahead of Tuesday's midnight deadline to buy stock.

Fallon had promised that about 30% of the shares on offer would be reserved for the public but is now understood to be planning to increase this proportion available for small investors and cut back on the amount going to banks if public demand massively exceeds supply.

He said: "No decisions have been taken on allocation but I'm committed to making sure smaller investors get their fair share."

The government has been under pressure to ensure the public do not lose out to banks and hedge funds, which are hoping to make instant profits from the sale of the 500-year-old postal service.

Chuka Umunna, the shadow business secretary, said: "This is turning into a dream and a bonanza for City speculators and hedge funds, meanwhile the taxpayer … is getting massively shortchanged."

Financial institutions have ordered several times the number of shares available to them, amid reports that the government hugely undervalued the company, and the shares could soar by more than 30% on their first day's trading on Friday.

Stockbrokers have also reported unprecedented public demand for the shares, to be priced at between £3-3.30 each, with some staying open all weekend and until midnight Tuesday when applications close.

Alastair McCaig, market strategist at IG Index, said public demand for Royal Mail's shares has been "even stronger than we saw in Facebook".

IG said excitement over the flotation had sparked a frenzy in the pre-trading "grey market", with investors betting the shares will rise to £4 on Friday – 70p more than the maximum the government has allowed itself to sell them for.

If they do reach £4, the government will have lost out on an extra £400m it could have made if it priced the shares at £4, rather than £3.30.

Panmure Gordon analyst Gert Zonneveld – the only analyst to have published research on the shares – has said he is convinced the government undervalued Royal Mail by more than £1bn. Zonneveld said the shares should have been sold between £3.70 and £4.50, considerably higher than the government's initial range.

Vince Cable, the business secretary, on Monday hit back at Umunna for accusing the government of undervaluing the company and selling it on the cheap.

"It is irresponsible to imply that a share offering looks significantly undervalued," he wrote in a letter.. "I think you should consider the risk that you may be influencing the decisions of retail investors. Equity investment always involves risk, particularly when the company in question is new to the market. In the light of this it is dangerous to imply that there is an easy bargain to be made.

"Panmure Gordon is only one voice and their report notes both near term risks and opportunities. We are alert to value for money criticism and have learnt from the mistakes of previous governments' asset sales. QinetiQ is one key example under the last government."

In 2007, the National Audit Office criticised the float of defence company QinetiQ saying taxpayers lost out to the tune of tens of millions of pounds.

The government's valuation of Royal Mail is based on advice from investment banks Goldman Sachs and UBS after £21.7m in fees was paid to advisers. Applications for shares close at 11.59pm on Tuesday. The minimum public application is £750. If the public apply for more shares than those available they will "scaled back", meaning applicants will not be able to buy all the shares they have applied for. Big applications will be scaled back at a greater rate than small applications.

Up to 62% of the company will be listed on the stock market on Friday. A further 10% will be given to Royal Mail's 150,000 employees.

The final price the shares sell at will not be decided until the company floats on the stock market on Friday.

Trading places

One of the accusations levelled at the Thatcher and Major governments was that they sold off Britain's nationalised industries too cheaply. A look at how the shares fared on their first day of trading lends weight to this argument, although long-term returns give a clearer picture of a company's value.

British Telecom was the Thatcher government's first big privatisation. Its shares jumped 35% on the first day of trading in 1984, but when two later tranches were offered the price rose only 5% each time. British Gas followed in 1986, helped by its "Tell Sid" campaign. Its shares rose 10% on the first day. Powergen and National Power both soared by about 22% on their first trading days but when further batches of shares were sold later the price rose less than 5% in both cases.

In 1987, British Airways' shares leapt by two thirds on their first day of trading. But later that year BP's privatisation was launched at the time of Black Monday when shares plunged in New York and London on 19 October. Underwriters were left holding shares priced at 330p that were trading at 262p.

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

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