Sir Christopher Kelly - why the Co-op nearly blew up

 
Co-op Bank sign

Another day, another rumble from the belly of the Co-op beast. Sir Christopher Kelly's report into the near-collapse of the Co-op Bank and the subsequent problems at the Co-op Group is not quite the final word on one of the most spectacular falls from grace since the financial crisis.

There are still reports from the Treasury Select Committee, the investigation by the Financial Conduct Authority and the inquiry by the Treasury itself to come.

But Sir Christopher's report is the most comprehensive attempt so far to draw together what happened to cause such a calamity.

It is due to be published next week, but a number of drafts are already in circulation and the arguments over who is right and who is wrong on why the Co-op nearly failed have already started behind the scenes.

Blame

Start Quote

Mr Richardson, who left the Co-op in the summer of 2011, argues that it was only after his departure that the business became over-stretched.”

End Quote

At the heart of the report, I have been told, is the takeover of the Britannia Building Society in 2008 and 2009. Sources have revealed that in a late stage draft of the report, Sir Christopher argues that both the Co-op Group and the Co-op Bank were "culpable" for the problems with the takeover.

Due diligence over Britannia's commercial real estate was "extremely cursory", according to drafts of the report. Ultimately, impairments linked to the takeover totalled £560m.

Sir Christopher says that the organisation took "its eye off the ball" - careful wording (mandarin-like, even) for a deal that caused a significant part of the Co-op Group's problems. He says that the lack of governance was at group as well as bank level.

The 150-page draft does go into the Somerfield takeover but I am told that it does not put as much weight on that deal as it does on Britannia. By the time of the Co-op's attempts to take over the Lloyds bank branches in 2012, the die had already been cast.

'Inaccuracies'

Sir Christopher's report is likely to split those who read it, particularly former members of the Britannia who feel that they have been unfairly blamed for all the ills at the bank and the group.

I understand that a number of them, including Neville Richardson, the former chief executive of the Britannia who subsequently had a senior role running the merged bank, will write to Sir Christopher claiming the report contains "factual inaccuracies".

Mr Richardson, who left the Co-op in the summer of 2011, argues that it was only after his departure that the business became over-stretched. He says he warned the organisation it was taking on too much.

The letter is likely to say that not enough weight has been put on the Co-op Bank's own impairments which could total more than £400m. The collapse of the deal to buy the Lloyds branches also left the bank with a bill of several hundred million pounds and a troublesome IT system costing £300m.

It is not clear how Sir Christopher will react to the letter. If he publishes the report so that it has a similar thrust to the draft, then it is likely that the Britannia camp will go public with their concerns.

 
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  • rate this
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    Comment number 4.

    The Board and voting members of the Co op group do not seem to grasp the peril facing the organisation. They didn't know 650 of its shops lay empty, and had to get lenders to relax the conditions of their borrowings otherwise the whole house of cards would have collapsed already. They must sell assets to avoid running out of cash in 2014 even if they do not subscribe to the bank rights issue.

  • rate this
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    Comment number 5.

    Kamal,

    Are you going to get your RSS feed working soon?

  • rate this
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    Comment number 6.

    No mention of JP Morgan, Citi Group or KPMG who advised Coop and Britannia on the 2009 merger. Despite the fact JP Morgan own shares in Moody's - who downgraded Coop Bank debt multiple notches to junk status, creating a sense of panic - despite the bank already being on 'negative watch'

  • rate this
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    Comment number 7.

    We don't know what the advice was. Perhaps the Board were as receptive to those advisors as they are to Kelly and Myners! They certainly didn't seem to heed strong concerns from certain of their own people.

  • rate this
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    Comment number 1.

    The Co-Op group were 'culpable'. Yet we still have arrangements that protect parent companies from the financial responsibility for those they bought. If a company takes over another the only limited liability available should become the top of the owning corporate tree.

 

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