Category Archives: Banking

As controversy over Co-op Bank’s £1.5bn rescue deal rumbles on, Patrick Collinson poses eight questions customers want answered

1. What were the commercial loans that caused so much misery?

Co-op Bank has been laid low by 12 big loans which together account for £900m of the £1.7bn of ‘impaired’ loans on its books. But who were these loans to? Small investors who have lost half the money in their PIBS (permanent interest bearing shares) rightly want to know where their money has gone. Defunct shopping centres? Collapsed property developers? Co-op Bank has never revealed the recipients of its loans, although other ‘ethical’ banks such as Triodos make much of the transparency of their lending decisions.

2. Were the problems really just at Britannia, the building society the Co-op Bank took over in 2009?

Co-op Bank inherited what turned out to be a mountain of bad debts as a result of its merger with Britannia building society in 2009. Apart from the dodgy commercial loans, it is also suffering arrears on its £7.5bn-worth of “Optimum” mortgages that a subsidiary of Britannia known as Platform sold through intermediaries. But is it convenient for the management of Co-op Bank to distance itself from problems at the group by blaming the Britannia rather than themselves?

3. Who at Britannia was paid to oversee lending and risk controls?

The chief executive of Britannia was Neville Richardson, who went on to become chief executive of Co-op Bank. He quit the group in 2011, and a year later it was revealed that he was paid a total of £4.6m, including £1.4m as “compensation for loss of office” and a lump sum pension of £2.1m.

The non-executive chairman of Britannia in 2009, Rodney Baker-Bates (paid £101,000 a year), proclaimed in the society’s 2008 report and accounts: “We remain financially strong during these difficult times.” In the same report, Richardson said the Platform loans, even the ‘self-cert’ type, were “low risk” with the “right risk profile and right pricing”.

The group finance director at the time was David McCarthy, who was previously finance director of Bank of Ireland UK. He joined halfway through the year and was paid a basic salary of £128,000 for six-and-a-half months’ work. The accounts for Britannia were audited by PricewaterhouseCoopers.

Savers whose permanent interest bearing shares have now been all but wiped out must now be asking why these highly paid officers of the society were unable to see the impending impairment risks, especially as by the time of the merger, Northern Rock had already collapsed and the financial crisis was deepening.

4. The merger took place in 2009, with the financial crisis in full swing. Couldn’t the advisers spot the problems then?

The risks were virtually invisible among the back-slapping statements in the press release issued by City PR firm Brunswick at the time of the announcement in 2009. The merger would create a “super mutual” which would be “strongly capitalised and with scale and strength in product, distribution and service.”

Citigroup Global Markets were the investment bankers who advised Britannia, led by Chris Williams, an ex Goldman Sachs banker who previously worked on RBS’s takeover of NatWest. Co-op Bank’s advisers were JP Morgan Cazenove (JPMC), led by Tim Wise, who is now the company’s chairman. In 2008, JPMC paid bonuses of £85m to senior staff, but after it was fully acquired by JP Morgan in 2009 its bonus figures are subsumed under the group’s overall figures. The fees paid to advisers have not been disclosed, although Co-op Bank’s report and accounts include a figure of more than £50m for ‘strategic change initiative’ costs in 2009 and 2010.

5. Will the advisers who recommended the deal hand back the cash they earned?

Hmm. What do you think?

6. Why did the Co-op Bank waste millions pursuing the Verde deal to buy Lloyds bank branches when it had such problems in its own backyard?

A puzzling part of this whole story is why Co-op Bank was planning to quadruple in size with the takeover of a large chunk of Lloyds Bank at the same time as serious loan losses were mounting with the group. Again, the costs of the failed Verde bid have not yet been disclosed.

7. Will the board of Co-op Bank take pay cuts or hand back bonuses?

Bond holders have lost half their money, but there has been no indication yet that any senior staff at the Co-op will see their pay cut or bonuses clawed back. The bank chief executive, Barry Tootell, resigned after the savage Moody’s downgrade that revealed the bank’s problems. He was paid a total of £766,000 in 2011. New chief executive Euan Sutherland’s pay package has not yet been disclosed.

8. Can the Co-op Bank retain its status as an ethical bank if shareholders drive the company?

Shares in the Co-op Bank are to be listed on the stock market for the first time as part of the rescue deal to raise £1.5bn. It is a serious blow to the mutual sector which leaves Nationwide as the last major mutual on the high street. It also raises fears that the ethos of the Co-op may change for the worse. The Move Your Money campaign, which has been encouraging the public to switch from the major high street banks to the Co-op Bank, says it should become “not just another bank”.

We have put these questions to the Co-op Bank. Meanwhile customers seeking answers to these issues face a long wait, as the Co-operative group’s next annual general meeting is not until late April 2014.

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