How damaged is Co-op Bank by Flowers furore?

 
Co-operative Bank

It is some kind of chapter end, in the soap opera that is the story of Co-op Bank's near ruin and its stewardship by the Reverend Paul Flowers, that he has been arrested this morning in Merseyside, in connection with a "drugs supply investigation".

Now I hope this isn't an "Otherwise how was the play, Mrs Lincoln?" moment, but I have been interested in the impact on the bank of all the publicity relating to the conduct of Flowers, chairman of Co-op Bank until June, and the light shone on the incompetent management of the bank.

Also damaging to confidence in the bank has been the disclosure that there will be three forensic probes of it, in addition to the one being carried out by MPs.

Well, I am told that Co-op Bank has been losing in the intense war for current-account customers. Which is hardly a surprise, although I am assured the departures are not sufficient to reduce in any serious or damaging way the bank's holding of cash or liquidity.

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There is no point keeping your money in a bank that says it does good, if it's going to lurch from crisis to crisis”

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What this shows is that the Co-op brand has taken a bit of a battering (good grief, really?).

That said, what will be seen as good news is that rescue of Co-op Bank remains on course.

The hedge funds, led by Silver Point, Aurelius, Monarch, Caspian, Canyon and Beach Point, so vital to the rescue are - in the words of a source close to them - "locked up".

This person says: "The deal is the deal. There will be no renegotiation, no re-trade."

Which doesn't mean that the rescue is in the bag, that Co-op Bank will definitely avoid being taken over by the Bank of England in a process called resolution (which would protect depositors and the bank's essential operations).

It means the investment institutions that control £942m of so called lower-tier-2 bonds will vote yes.

But also required is the approval, in three separate votes, of holders of circa £350m of upper-tier-2 capital. For the deal to go through, two thirds of them have to vote, and three-quarters of voters must say yes.

That won't be easy to achieve, because these investors include 18,000 retail investors, and - experience shows - getting them to vote at all is a logistical challenge.

But one fillip to getting the votes out (as it were) of the Flowers debacle is, presumably, that few people in the UK right now can have failed to notice that the future of Co-op Bank is at a critical juncture.

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The hedge funds now laugh rather wryly about the moralistic way Co-op Group lectured them about the enormous value of the brand”

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And then there is the most astonishing effect of the Flowers furore, which is how the respective reputations and "brand value" of the Co-op and hedge funds have been moving in opposite directions.

The Co-op accepts that it now needs to do a lot of work to prove that co-operative values can again be made consistent with management competence. There is no point keeping your money in a bank that says it does good, if it's going to lurch from crisis to crisis.

And, if nothing else, hedge funds are regarded, in a commercial sense, as ruthlessly competent.

So arguably Co-op customers should thank their lucky stars that if the rescue goes through, Co-op Group's stake in the bank will fall to 30%, with hedge funds and conventional investors controlling 70%.

In the negotiations with the hedge funds, Co-op Group made a huge thing of imposing all sorts of restrictions on how Co-op Bank could behave in future if it wanted to continue to use the Co-op brand in its moniker and marketing.

The hedge funds agreed, although they now laugh rather wryly about the moralistic way Co-op Group lectured them about the enormous value of the Co-op brand. It is certainly not impossible that they might end up feeling that Co-op Group would prosper better under a new and different name.

Here is what they regard as Co-op Group's moment of hubris in the rescue talks.

It was at a delicate phase, and the Co-op side of the negotiating table turned to the hedge funds and said: "You have no idea the taint attached to our bank by association with you and your kind."

Hmmm. Right now Co-op Bank would presumably kill to have the commercial reputation of a hedge fund.

Laugh? I imagine many fans of mutuals and co-operatives are crying.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
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    Comment number 356.

    @355. All for All "How easily we forget the casualties"

    There is always that risk, and also the risk that we mythologise ourselves and others into victims. It is good if promises can be kept, but if they are sacrosanct then the notion of risk is called into question. What is reality if no one ever gets hurt? Let customers and members come first, and let members compensate as their ethics dictate.

  • rate this
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    Comment number 355.

    Grounder @353
    All subject to "risks"
    Many to "costs"
    The story of our lives
    And the shame and regret?

    How easily we forget the casualties, our own wounds and those inflicted or gone along with - in what transparent make-believe - 'for the best'? Would would advise BoE/public generosity more to Co-op bondholders than to Equitable pensioners? Part of a back-to-Brown stealing of Miliband's thunder?

  • rate this
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    Comment number 354.

    Alan (350), I happened to watch a former Co-op Bank Chief Executive being questioned by the Treasury Select Committee this week. I think you'll find they have been implicated in the mis-selling saga.

    You see, like it or not, they weren't holier than thou. It seems you might have taken their advertising slogans a little too literally. No more sanctimonious nonsense from the left, if you please.

  • rate this
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    Comment number 353.

    346. All for All "costs not seen"

    They are rather risks than costs... both for the members and the customers. The capability to "resolve", once tested in practice, better underwrites the risks of a failure in a bank big enough to matter. But this is not a trial to be undertaken at the expense of the bondholders any more than at the expense of Co-op members... Who, then, shall bear the costs?

  • rate this
    0

    Comment number 352.

    I find it incomprehensible how a chairman of a bank didn't have an idea as to the value of his bank's assets.
    How can you be a chairman of a bank without having some awareness of its balance sheet?
    You couldn't make it up.
    What this shows is that who you know rather than what you know is as widespread in Labour and Co-Operative party circles as in the Conservatives.
    Alan

 

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