The "ethical" Co-Op

The Co-Op Group is proud of its "ethical" values. From its website:

our ethical values

Openness  –  nobody’s perfect, and we won’t hide it when we’re not

Honesty  –  we are honest about what we do and the way we do it

Social responsibility  –  we encourage people to take responsibility for their own community, and work together to improve it

Caring for others  –  we regularly fund charities and local community groups from the profits of our businesses. 

But the Co-Op has a problem. It owns a dud bank. The Co-Op Bank acquired a load of toxic debt in its acquisition of the Britannia building society. The Co-Op Group deliberately concealed the true state of its bank's finances from customers and investors for over 2 years after that takeover. Even when it was forced to disclose in 2012, it attempted to distract attention by focusing on operating profit instead of total losses. It is hard to see this as consistent with the Co-Op Group's "ethical values" of "openness" and "honesty". But to my mind the current behaviour of the Co-Op Group is worse.

Yesterday, the Co-Op Group announced a loss of £559m in the first half of 2013 (versus a full-year profit of £18m in 2012). Although the performance of the supermarket arm was less than inspiring, the Group loss really had only one cause - the whopping pre-tax loss of £709m turned in by its banking subsidiary. The Co-Op Bank was forced to write off bad debts of £500m, accept costs (mainly IT-related) of £148m arising from the failure of the Verde deal earlier this year, and increase provisions for mis-selling of PPI, interest rate hedges and credit and identity fraud insurance.

The Co-Op Bank is seriously short of capital and, despite the writeoff, still has substantial bad debts. The Prudential Regulatory Authority (PRA) insists that the Co-Op Bank has to find £1.5bn of new equity capital, but the path to achieving this is fraught with difficulty. The Co-Op Group itself is only prepared to provide £1bn of new capital to its subsidiary: it wants the rest to come from a bail-in of subordinated debt holders, made up of institutional investors, hedge funds and about 15,000 ordinary people, many of them pensioners for whom these bonds form part of their pension savings. Coupon payments on subordinated debt have already been suspended, and it is anticipated that the principal haircut could be as much as 60%. Not surprisingly, the market value of these investments has collapsed.

Predictably, the subordinated debt holders are fighting back. And I think they have a case. Let me explain why.

The Co-Op Group, which is mutually owned (i.e. owned by its customers), is the 100% shareholder in the Co-Op Bank, which is a limited company.  Subordinated debt holders (Co-Op Bank preference shares and PIBS inherited from Britannia building society) are senior to equity shareholders. In insolvency (which is in effect the situation for the Co-Op Bank, since a regulatory capital shortfall means it does not have enough capital to continue trading), equity shareholdings are wiped before any type of debt holder, even a subordinated one, takes a hit. But it seems the Co-Op Group thinks normal insolvency rules shouldn't apply. It wants its liability limited and debt holders to share its pain so it doesn't have to take heavy losses.

Ripping off bond holders to protect the conglomerate's assets from forced sale is not in any way ethical behaviour. And nor is the rest of the Co-Op Group's strategy for ensuring that it doesn't have to bear full responsibility for rescuing its bank. It has tried to persuade the PRA to water down the capital requirements without success: the PRA is so far unmoved. But the Co-Op Group's management has other weapons.

From the Guardian today:
"Richard Pym, the bank chairman, said that without new capital the banking unit "will not be a going concern"."
Well, yes, we know that. If they can't raise enough capital the PRA will close the bank down. But it gets better. According to Philip Inman, 
"The Co-op group's new chief executive, Euan Sutherland, said there was no plan B." 
"The only alternative to meeting regulatory requirements to fill a £1.5bn shortfall in the bank's reserves would be a government takeover similar to the bailout of Northern Rock in 2008."
Sounds like a Plan B to me.  Actually it sounds like a gun to the Government's head. Or rather, a gun held to the heads of small subordinated debt holders in order to force the Government to act. Either the Government buys shares in the bank or the little people get hurt. My Ford namesake couldn't have put it better.   
Indeed, Inman expresses it similarly:
"Should the Co-op fail to secure a rescue of its banking division it will fall to the government to step in."
So it appears the Co-Op Group is using political pressure to attempt to coerce the Government into bailing out the Co-Op bank. It is absolutely essential that the Government resists, even if the price is little people getting hurt. Bailing out the Co-Op Bank would set an extremely dangerous precedent.
You see, the Government bailing out the subsidiary of a retailer is the same as bailing out the retailer itself. Suppose that the Co-Op Group's pharmacies subsidiary incurred such heavy losses that it threatened the solvency of the Co-Op Group itself. Would we expect the Government to buy shares in the pharmacies? I hope we would not. But if the subsidiary is a bank in trouble, apparently the Government should "step in" to protect the Group from insolvency. The Co-Op Group is not the only retailer with a banking subsidiary. Tesco, Sainsbury's, Marks & Spencer, Harrods - all have banking subsidiaries, wholly or partly owned. Should Government stand ready to bail out these, too? And doesn't this make retailers with banking subsidiaries "too big to fail"?
It is the Co-Op Group's sole responsibility to rescue its bank. Attempting to bail in subordinated debt holders is reprehensible and quite possibly illegal. Pressuring the PRA into watering down capital requirements - well, any bank can play that game: the PRA should not give in under any circumstances, and to its credit shows no signs of doing so at the moment. And using the plight of subordinated debt holders and the prospect of job losses as a political lever to get a Government bailout is frankly disgraceful. Especially as according to Philip Inman (op. cit) the Co-Op Group intends to pay bonuses to senior management.
Why, I want to know, does anyone think this outfit is in any way "ethical"? It is behaving no better than any other private sector retail bank and in some ways worse. Isn't it time we stopped believing the marketing "hype"?

Related links:
Under the radar - Coppola Comment
Is the Co-Op bank worth saving? - Harry Wilson, Telegraph
The Co-Op pays for past sins - Robert Peston, BBC
Job losses "inevitable", says Co-Op boss - Manchester Evening News


  1. Given the government’s desire to encourage any old sort of lending at any price, they probably will rescue the Co-op bank.

    We had a credit crunch caused by excessive and irresponsible lending, so the solution is to cut interest rates and do everything possible to encourage excessive and irresponsible lending. The logic there should be obvious to all.

    If readers of this blog hadn’t yet tumbled to the fact that the inhabitants of Westminster are barking mad, perhaps you’ve now got the point.

  2. Well, I know what Bagehot would say. You only rescue a Bank if it owns assets that will eventually regain their value. And if the Bank itself is writing off bad loans, that says that there isn't much value to regain.

    I think what the Government should really do is decide what the negative value of the Coop Bank is, and then offer to "sell" it to a stronger Bank that is willing to take on the risk, much as Ing. was sold Barings for one Pound.

    Then, as a compassionate issue, the Government should help to make whole any pensioners whose pensions would be impacted by debt haircuts. There isn't really any "cost" there since such pensioners would have to receive some sort of social support anyway.

    1. I'm afraid I disagree. It is not the Government that should decide whether to sell the Co-Op Bank to a stronger bank that is capable of taking it on. It is the Co-Op Group that must make that decision. The Government should not get involved.

      There is a second question here about whether the Government should make whole subordinated debt holders. I'm afraid I disagree on this too. I know it's sad, but these are risky investments - they have always paid interest well above the average rate, and that is a clear indicator of risk. I object to the Co-Op Group attempting to hit subordinated debt holders INSTEAD OF bearing the cost of recapitalising the Co-Op Bank themselves. But if the subordinated debt holders have to take a haircut as a consequence either of Co-Op Group insolvency or a forced sale of Co-Op Bank at a large discount to book value, that is the risk they took when they bought the bonds and they should receive no compensation. I know that seems harsh, but people must learn that high returns indicate high risk.

    2. The thing is what they seem to be proposing here is ad-hoc insolvency, so it requires government involvement in all cases: either to go through a full administration process, or to approve this deal as an ad-hoc quasi administration, where the Coop Group effectively is buying back a "Good" restructured Coop Bank. If they offer the bank for sale without the bond restructuring they'll have no buyer and we're back to square one.

      The ethical situation is similarly muddy. In so far as this deal is better for bondholders than regular administration, as seems likely, it is more ethical than the Group just writing off their holding in Coop Bank, a *limited* company, and moving on, which they are most likely entitled to do. Fleecing the non-banking businesses' stakeholders beyond their pro-rata equity share would certainly be no more ethical. They're nice enough to let their management throw one extra billion down what might turn out to be a black hole.

    3. No, the Co-Op Group is not "buying back" a "good" restructured Co-Op Bank. It is the sole owner of an insolvent entity. It is up to the Co-Op Group, not the Government, to decide what to do with it.

      It may well be that this deal is better for the bondholders. But that doesn't mean they should have to accept it. And I don't think your argument about the interests of non-banking businesses' stakeholders holds water. The Co-Op Group is responsible for ALL of the Co-Op bank, not a "pro-rata share" with the rest being the responsibility of bondholders.

      The decision the Co-Op Group has to make is whether to rescue its bank at its own cost (which may be unacceptable to its members), try to sell it, or wind it up. It may offer shares in the bank to bondholders and/or Government, but they may decline to buy. The Co-Op Group has no right to force bondholders to become shareholders, and no right to coerce the Government into becoming a shareholder either. The bottom line is, if no-one wants to buy the bank and the Co-Op doesn't want to rescue it, it must be wound up.

    4. I'm sorry I have so badly explained my points that they were not understood. Note I don't disagree with your bottom line. We only disagree on how (un)ethical it is.

      On the limited liability, it's a basic feature of limited liability corporate law that you can only lose your equity when things go wrong. If you buy shares of BT and they go broke, their creditors can't pursue you and take your house or savings just because you owned shares of BT. Coop Group as a shareholder of Coop Bank Limited are perfectly entitled to just abandon their insolvent subsidiary to administrators and you surely agree with that.

      The pro-rata point was simply to say that if say Coop Funerals members collectively own 10% of the group, and the group owns 100% of the equity of Coop Bank limited, they own via the group 10% of the equity of Coop Bank, which is fair they lose, but no more if they don't want (collectively with all other Group members) to invest more equity in this venture.

      The "buy back" point was a metaphor: the proposed process is not quite insolvency-plus-buy-back but is "as if" functionally. And as far as I understand it's sufficiently outside normal practice that the government needs to intervene (via regulatory agencies) in the sense that they need to make ad-hoc rules to allow this, suspending normal law so to speak. The Coop Group cannot unilaterally suspend the law of the land. That they're asking the government to do so is arguably a bit gross, and personally I think a formal administration process would be better. Where they gain back some ethics point is in making an offer rather than just abandoning the bank subsidiary.

      I don't think the "government intervening" necessarily means the "government becoming a shareholder" à la Lloyds/RBS. That means going through special administration (which is government action but not shareholding I would think). If there's no bank run, just clearing the bondholders (by 1B more than in the proposed plan...) will likely restore solvency and then the administrator can run it as a going concern until someone buys it with no taxpayer monies involved (other than a small increase in income support for some pensioners possibly taken below means tested thresholds by the operation).

      That said the bank is mostly funded by deposits so is very sensitive to a run (unless wholesale funds volunteer to replace depositors...). If there's a run, the government can choose to cut remaining depositors, and that will also be enough in most scenarios. Not that the Coop Group could do much either here: in case of a bank run a full liquidation of the entire group won't be enough. I think it's reasonable from them not to commit to corporate suicide and thus only propose a limited rescue.

      Where it gets tricky is that the process itself (accepting this deal or not, going through formal administration or not) may itself trigger a bank run at any point. I'm actually puzzled it hasn't slowly started, and also puzzled that you don't even mention it, when you were predicting runs in similar eurozone situations. And the problem with the depositor haircut option is that the current government is unlikely to have the courage to take this option if it was needed (despite the great pedagogical effect it would have), hence the Coop Group being in a relatively strong negotiating position for getting the "ad hoc" deal, which may not be that good for them anyway, if the whole thing sinks anyway a bit later. It's messy, but I'm not sure there's a scenario that's any more "ethical" and not just shifting the damage around with no increase in net ethics.

    5. I forgot the "above the insured limit" after "cut remaining depositors". I'm of course not advocating defaulting on that in any scenario.

    6. I don't think you can separate membership out in that way. The Co-Op bank is a separate entity because it is a limited company. But for those divisions that are simply management structures, not separate legal entities, members are members of the Co-Op Group, not of the particular division of which they are customers. Therefore they are responsible for 100% of Co-Op Bank, not 10% of it.

      I don't mention bank runs because I don't want to trigger them. I write far more generally and at a further distance regarding Europe, so I am less careful. But domestically, and about specific banks, I would rather allay people's fears. However, I have said in a previous post that I don't think the Co-Op deserves the loyalty that its customers are showing. I wouldn't blame them for moving their business elsewhere.
      High-value depositors lost money in the failure of Southsea Bank in 2011. This passed almost unnoticed at the time but actually set the precedent for UK depositors to be haircut in bank failures.

      The situation is extremely tricky, but I think you considerably overstate the Government's responsibility. Forcing losses on to bondholders to avoid Group insolvency is the Group's decision, not the Government's, and it will have to deal with the inevitable legal challenges. In my view forcing losses on to depositors is also the Group's decision, since depositors are simply unsecured creditors, and the same legal challenges would apply. There may be political reasons why the Government might wish to intervene, but there aren't any legal ones. The future of the Co-Op Bank rests entirely with its parent.

      Euan Sutherland's suggestion that a Northern-Rock style bailout is the only alternative would involve government buying the bank from the Co-Op Group. Admittedly government would pay almost nothing for it, and could asset-strip and sell it, but government would be left holding the bad assets as it did with other full nationalisations (Bradford & Bingley, Dunfermline, Northern Rock). Both the "good" Co-Op Bank and the Co-Op Group itself would gain, and taxpayers would lose. This to me is unacceptable. For government to bail out the Co-Op Bank in this manner would amount to bailing out the Co-Op Group itself. That would set a very dangerous precedent. What next - bail out Tesco?

      We really need to establish clear guidelines and responsibilities for handling failure of banks that are owned by non-banking conglomerates.

    7. The co-op group could walk away from the bank, a limited company. If the government sees fit to buy it for "almost nothing", how is that "bailing out the Co-Op Group itself"?

    8. It's not quite that simple. The Co-Op Group can't simply "walk away" from its bank. It could opt to wind it up: the FSCS would pay compensation to small depositors and everyone else would lose some or all of their money. But it would still have to dispose of the loans, and until it could do that those loans would have to remain on its books. Many of those loans are seriously impaired and wouldn't be easy to sell. After all, look how long it has taken RBS to sell off a seriously impaired loan book. And the Government still has the remains of Northern Rock and Bradford & Bingley on its own books.

      That's why I say that a Government purchase of the bank, even for a song, would be a bailout of the retailer. The Government would be buying the distressed assets and could be left holding them for a long time, while the retailer walked away with no damage to its balance sheet. It's a dreadful idea.

    9. OK I think I understand your view now. But I feel it's also unrealistic: I'm not a lawyer but I don't think there's a way to get out of insolvency -- you explained well in your subsequent post that the bank is bust -- through an orderly group-controlled wind down. While in concept cutting the depositors would not be that different to the thing they're trying to do with subordinated bondholders, I think the legal acrobatics required are so much more difficult that nobody is even going to try. Restructuring subordinated bonds is a routine thing (even if here within a trickier context than usual), restructuring bank depositors à la Bank of Cyprus would be a complete novelty in the UK. I don't think this can credible happen without a formal liquidation process and a court/regulator-appointed administrator taking over.

      Also a correction on what I said above: apparently the subordinated bondholders' stake is smaller than I thought (1 to 1.5B?), and assuming the senior bondholders are ranking same as depositors, as is (was?) customary, basically even a 100% write-off of the subordinated stake is likely to be insufficient to restore solvency even if nothing else goes wrong. The subordinated stake is more like 20x leveraged equity...

      Frankly at this stage it seems to me full insolvency seems unavoidable. I guess the government will not bail it out directly so that they can find an excuse to wipe out the senior bondholders while bailing out private depositors as they did for Icesave (it would be harder to do without going through formal liquidation).

      The remaining open variable is whether you liquidate the Bank only or the entire Coop Group. Won't make much difference for creditors given how small the trading group is relative to the bank (it may even make things worse, if you remove coop status it wouldn't be surprising to see the trading group end up in negative equity).

      I've looked a bit at their membership arrangement and they spin it as a glorified Tesco Club Card... not sure there's much genuine cooperative spirit left, and sadly maybe the whole thing doesn't deserve to survive.

    10. Actually this was the whole point of the post, and I'm sorry if it wasn't clear. The Co-Op bank is bust. If the Co-Op Group is not able to recapitalise its bank then it too is bust. The "ethical" thing for the Co-Op Group to do would be to accept that this is the case, and either raise the funds for recapitalisation or go into voluntary liquidation. I don't see anything "ethical" in their attempt to force government to bail them out by threatening subordinated debt holders, who - as you rightly point out - don't have enough of a stake to recapitalise the bank anyway.

    11. Without either the bond bail-in or walking away, I think the Group is indeed bust. Look at the balance sheet, the retail side is spare change compared to the financial side. It's not as if they had non-bank businesses worth billions...

      The thing I still don't understand is why you think the Group can't walk away from the bank if it is a subsidiary Ltd company, as seems the case. Is there some legal entanglement beyond the usual corporate pyramidal structure? What is the mechanism through which you think the banks' liabilities can "move up" the limited liability barrier? This is not a question of ethics here, just basic corporate law.

      Let's imagine the group withdraws the current offer and stops contributing any new group cash into the Bank, and the regulator pulls the plug (stop allowing the insolvent bank to operate below regulatory limits). What happens? The bank obviously goes into administration under the new bank resolution regime. I would expect the group to be able to continue operating their remaining businesses as (almost) usual. They may face some extra losses from any inter-group claims (e.g. that discussion on whether the IT loss onto the Bank or onto the Group's IT subsidiary) but as such that might not be enough to make the group insolvent.

      Is it that you think there's enough inter-group claims to take down the group, or something else? It may be worth a full post, I doubt I'm the only one mystified by the idea limited liability doesn't work as expected.

    12. I need to have a really good look at the balance sheets of both the Group and the bank itself.

      Banks can take quite a while to wind up, and the process is messy. Assets have to be sold, not liquidated (after all, these are people's business loans and mortgages). Under the new bank resolution regime, I'm really not at all sure who would own the residual assets, as the bondholders have nowhere near enough of a stake to take over ownership. Depositors? but that implies a bail-in, which the Government won't want. The political pressure to bail out the bank would be considerable.

      I actually don't think the Group has the slightest intention of walking away from its bank. What it wants is a bailout.

    13. Cig,

      I will write a post about this. I've done a bit more research (thanks to the commentator below who reminded me about the PRA's "qualifying parent" rules and power of direction). The PRA's powers overrride shareholders' limited liability in cases of regulatory insolvency in a subsidiary of a financial conglomerate. The PRA has powers to force the parent to recapitalise its subsidiary, even by selling non-financial assets if necessary. Shortfall of capital and/or liquidity is specifically listed as a situation where the PRA may direct a parent company:

      (see annex 2)

      Oh, and I checked - the Co-Op Group is listed as a financial conglomerate for the purposes of the EU's Financial Conglomerates Directive.

      The Co-Op Group can't simply walk away from its bank. It has to raise the additional £0.5m somehow.

  3. It is hard to feel sorry for the Co-op Bank or its gullible customers and bondholders who fell for its "ethical" policies. This is the organisation that has spent the better part of 20 years driving perfectly good British and Continental chemical companies out of business, and their employees out of jobs, by lobbying alongside Greenpeace and WWF for bans on beneficial chemical products (such as Dettol and other disinfectants and mosquito insecticides such as DDT) because of their perceived adverse impact on the environment.

  4. But we can't really compare co-op bank to a pharmacy can we because people's savings and investments - often their livelihoods - aren't tied up in pharmacies.
    Although presumably customers are protected to a degree by compensation schemes. Either way though, if govt doesn't bail out the bank it will bail out its customers. Rather do the former and have an opportunity to make the money back? As will surely happen with Lloyd's and in time (perhaps no time soon!) RBS.

    1. No, government does not need to bail out the Co-Op's customers. That duty would fall to the FSCS, which is funded by a levy on financial institutions (not just banks). The Co-Op is not a large bank, so it is quite possible that FSCS funding would be enough to meet insurance payouts. But if it isn't then the FSCS has authority to obtain top-up funds by additional levies on financial insitutions. Government does not have to pay anything.

  5. Do you know how much of the 'new' Co-Op bank that the bond holders are being offered? Ie what percentage would the Co-Op Group retain after the restructuring?

  6. All common sense, but unfortunately that doesn't stop George or any other politician from getting the chequebook out to ingratiate themselves with a key demographic.

  7. Absolutely right.

    And the Co-Op should also explain why their shop employees - and wider members - received a bonus this year while people in profitable parts of their financial services other than the bank (eg insurance) did not.

    It seems that the Co-Op has lost its way and once again we see what happens when there is poor transparency in financial products (ie a whole building society) and poor decisions are taken re software which turned out to be unfit for purpose.

    Various commentators were plugging Co-Op bonds until recently, in Money Week for example. It goes to show that when there is something too good to be true, there is generally a reason.

  8. It actually isnt clear whether the deal is a bad one or not. I've yet to see any detail on exactly how much of the bank the bond holders are going to get for their holdings (and the forced financial restructuring of their debt). However, I agree that before the bond holders get hit, the Coop should write off all of its equity in the bank and should receive no more than any new financial contribution. I also would like to know if there are cross guarantees within the Coop structure such that the contributions being made correctly reflect the pre-existing commitments that the Coop group has.

  9. "The bottom line is, if no-one wants to buy the bank and the Co-Op doesn't want to rescue it, it must be wound up"

    With respect Francis, the Co-op has no choice in the rescue once in resolution under the PRA. If the bondholders refuse the Co-op's offer and the Co-op does not provide the additional £0.5 billion from its own resources it will be placed in resolution and assets to the value of £0.5 billion will be sold to refinance the bank. Note that the new rules introduced in April to cover Banks owned by conglomerates (the qualifying parent undertaking) provide the PRA with the powers to bail in all the Co-op's assets if necessary. Under these rules the the PRA has first call upon these assets and the Co-op's syndicated lenders would lose any guarantees attached to the assets. As the Co-op has sufficient assets to meet the £0.5 billion the bondholders would not be bailed in and the bank could continue. The Government is determined not to use taxpayers' money to bail out banks and has ensured the PRA has all the powers it needs to deal with the Co-op situation which is why the new rules were introduced in April.
    This was also stated by Martin Wheatley, Head of the FCA,in front of the Treasury Select Committee.
    I agree entirely with your comments on the Co-op Directors. They have lied for 3 years about the Group's financial postion and made a false market in the Group/Banks bonds. Personally I would like to the Co-op Board and Euan Sutherland bailed in up to and including their last biscuit, whether that be rich tea or hob nob I care not at all.

    1. I had a look at the Group's accounts. As far as I can see the Group cannot provide the additional £0.5bn from its own resources. It doesn't have the asset base to raise that sort of money. If the bondholders refuse this offer the Group will have no choice but to walk away from its bank.

      With respect, I am saying the same as you. "If no-one will buy the bank and the Co-Op Group doesn't want to rescue it, it must be wound up" is effectively the same as "if the bond holders refuse the offer and the Group does not provide the additional £0.5bn, it will be placed in resolution". When an insolvent entity is placed in administration, what comes out of the other side of a programme of asset sales may be a going concern - but it isn't the same entity as the one that went into administration.

      To be fair to Euan Sutherland, he's only just arrived. The people you should be going for are Peter Marks and Neville Richardson.

    2. When you say the Co-op Group cannot raise the £0.5bn are you talking about loans backed by its asset base? Many of its assets are already pledged but in a sell off under PRA direction (which does not need to be in administration) there appear to be assets available e.g 70,000 acres of farm land (at £3,800 per acre = £266m)plus buildings and machinery, car garages, chemists, a security business, and the very profitable funeral business which already has 3 bidders + + +.
      Where can I find a version of these accounts?

    3. Co-Op Group interim report & accounts 2013 is here:

      The Co-Op's financial services business (bank and insurance) is 92% of its asset base. It is already divesting its insurance business. That's why I say the Co-Op Group does not have a large enough asset base to enable it to raise an additional £0.5m. If the PRA forces it to sell assets to raise the money - at fire sale prices, remember - I think we may find the Group itself in effect being broken up and wound up.

  10. But in the accounts aside from assets, the food business is producing about 300mn, the specialist businesses another 100mn. Assume a price earnings ratio of 10x, the Co-op's non financial business is worth £4bn. It could raise money by listing and selling itself off or by borrowing against future cashflows from the food business. But, I do not believe that this would be in the interests of the parent group unless there are substantial cross guarantees, which probably still wouldnt kick in until the bondholders get shafted.

  11. The Co-op's accounts are so full of inconsistencies they are not credible. There is even a transfer of losses from a sister business to the bank! I suspect this may prove illegal, we will see.
    Meanwhile the large institutions are now focusing on the Co-op accounts and a bondholder group is being established no doubt with forensic accountants to dig deeper into the Co-op's accounts past and present. This group is also examining a range of alternative solutions to fund any gap in the finances. This will undoubtedly mean that the Co-op Board must surrender some control of elements of its business to the bondholders.
    Sutherland will fight this hard as his brief from the Board is to refinance the Co-op Group while retaining total control of all businesses including the Bank. Hence the current proposal which leaves the Co-op Board in charge. Sutherland's future bonuses depend upon his success. He is like a trader who is vastly over exposed and whose only way back to solvency and big bonuses is to bet the bank on an all or nothing gamble. At this moment, given the evidence, I believe he will lose and a different solution will be put in place, one much more advantageous to the bondholders. Note the PRA will back any solution which does not need taxpayer's money and so it should.
    One large private bondholder group has already written a letter to the Co-op. The bondholder group also raised concerns about write-offs totalling £379 million that appeared on the lender’s first-half results last month.
    The group questioned the decision to write-off a further £149 million from the value of a new technology system, which the Co-op said no longer suited the bank’s requirements.
    The bondholders also queried why £230 million was written off that the bank could potentially claim back from the taxman.
    The group, which holds around £5 million in Co-op bonds, wants any value later regained from the writedowns to be returned to bondholders and not the Co-operative group.
    As they say in the press, "this one will run and run". It will be fascinating to observe the twists and turns in this matter.

    When you say "To be fair to Euan Sutherland, he's only just arrived. The people you should be going for are Peter Marks and Neville Richardson." You are correct in the long term they may be prosecuted for creating a false market in the bonds and and struck off as not fit and proper people in addition to a private prosecution for gross negligence and damages. However these two are yesterdays men and those currently in control (if that is not self contradictory) of the Co-op Group are "Teflon" Len Wardle, the Chairman of 7 years and Euan Sutherland the new boy on the block. These two have the power to change things and so are correctly the current focus of bondholder’s attention. Note that Teflon Len has been accused of lying about the state of the Groups finances in writing for each of the last 3 years and I gather that m'learned friends are studying that matter. Meanwhile the TSC obtained a statement from Martin Wheatley of the FCA confirming it would investigate this matter, so all told the pressure is coming on and about time.
    As I have said before.
    When incompetent, greedy, liars and fraudsters at the Co-op try to rob me I will pursue them and ensure that they are personally "bailed in" up to and including their last biscuit, whether that be rich tea or hob nob I care not at all. All that has changed today, is that I am now aided by some very large and wealthy institutions.

  12. If any member wishes to make a comment on the Co-operative Bank ,

    - the mess it's in, or
    - any other other Co-operative business or process or
    - the fact the Group Board Chair still sits on the Board and all subsidiary boards

    There are a number of Regional Half Year meetings taking place throughout the UK from the end of September until the end of October prior to the Group HYM in Manchester on the 2 Nov . There should be a Group Board representative at each of those meetings

    To find out where those meetings take place go to

    To find where the nearest regional meeting is to you log onto

  13. This is seriously mistaken; the Coop Group has ltd liability to the Coop Bank - they wouldn't have to stump up an extra £1.5bn if they let the bank fail. If they let the bank enter insolvency then the sub debt holders would likely be wiped out. The sub debt holders are therefore MUCH better off under the conditons of the bail-in (at least £1bn better off in fact, not to mention the value destrcution insolvency proceedings cause on bank - see Lehmans).

    I love this blog but this post is seriously misguided.

    1. I'm afraid it is nowhere near as simple as you seem to think. Since writing this post, I have looked in more detail at the question of limited liability and its application to the Co-Op:

      It is very clear that limited liability does not necessarily apply in the case of conglomerates that own banks: regulatory rules override limited liability. In the case of the Co-Op, the FSA was considering defining the Group as a "mixed financial conglomerate", which would mean the PRA could direct the Group to recapitalise its bank fully at its own expense. However, the FSA appears to have granted the Co-Op Group a three-year "stay of execution" regarding this, apparently to allow the Verde deal to go through:

      If this is true, then the conduct of the regulator must be called into question, and possibly the behaviour of Treasury officials and even Ministers too. The Co-Op situation is by no means a simple matter of applying limited liability rules. It is a complex and potentially inflammatory situation.

      Please don't say that I am "seriously mistaken" without doing your own homework first.


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