This Co Op Bank mess is fun, isn\’t it?

For instance, Lloyds lost £6.3bn in the same year as it was hit by £24bn of impairments as a result of its merger with HBOS. Yet at Co-op Bank the total annual impairment charge was just £112m, which the mutual said was down to “the cautious approach taken by both heritage businesses”.

A year later, impairments had fallen further to less than £100m and such was the Co-op’s confidence in its financial strength that in 2011 it launched a bid for the 632-branch Project Verde business being sold by Lloyds.

In December 2011, Lloyds confirmed the Co-op was its preferred bidder.

Yet, in its moment of triumph were laid the seeds of its disaster. As Lloyds staff and regulators began to pore over the Co-op Bank, they became troubled by what they found.

“It became clear very early on that they didn’t have the experience or the skills to manage an integration of this size. From what we could see, the Britannia integration had barely been begun and they appeared to have no concept of what it would take to fix the business,” said one senior banker.

Of particular concern was the apparent capital hole in the business. Lloyds had planned to sell the Project Verde unit with assets of about £60bn. But this had to be more than halved.

Essentially, small time bankers didn\’t understand banking.

That\’s a great boost for the idea of having lots of small mutual banks, innit?

18 thoughts on “This Co Op Bank mess is fun, isn\’t it?”

  1. So small mutual bank – so beloved of lefties – doesn’t know what it is doing. The answer: turn it into a nationalised bank – even more beloved of lefties, or even better, a regional bank controlled by local politicians just like they have in Spain.

    Because, you know, nationalisation worked so very well for pubs 50 years ago in an isolated market town that even the rest of Cumbria tries to ignore.

  2. I wonder if there is a major difference in the salaries at COOP versus its big competitors?

    * If yes, we now know what bankers are paid good wages for
    * If no then why the hell not.

  3. The CEO of Britannia, Neville Richardson – ex-PWC chartered accountant – took over as CEO of the Co-Op Bank after the merger. He left in 2011 with a £4.6m payoff for “loss of office” (translation “you’re fired, but we don’t want trouble”). The Co-Op didn’t “discover” the scale of the dodgy loans they’d inherited from Britannia until after he left. Consequently there was a massive hike in watchlist loans in the 2011 accounts (translation “we don’t like the look of these but we don’t understand them yet”) followed by £500k new impairments in the 2012 accounts (translation “my god they’re worse than we thought”). Funny, that.

    Not so much “small banks don’t understand banking” as “never let a chartered accountant run a bank”. Especially if he has something to hide, like a large portfolio of rubbish property loans. No-one can hide stuff quite as well as a Big 4 accountant.

    Oh, and the CFO left in February this year. Saw what was coming and got out, I reckon.

  4. “never let a chartered accountant run a bank”

    Never let the buggers run anything.

    I once helped sell a company with great brand and growing business. An accountant of the acquiring side, asked in all seriousness, why they were paying more than book value for the company.

    He couldn’t determine between market value and the balance sheet.

  5. Serf: Then he was a shit accountant.

    There’s a concept called ‘Goodwill’ that deals with precisely that situation. and which we are taught about on roughly day three of accounting school.

  6. So the Co-Op/Britannia while masquerading as nice safe mutuals were piling into high risk commercial and buy-to-let loans (similar to HBOS).

    I will struggle not to laugh at friends who keep banging on about how good mutuals are, if the Co-Op needs a taxpayer injection soon.
    They run the same risks and are more likely to be run by inexperienced management.

  7. Oxonymous,

    Well, there was goodwill in the Britannia merger. And a fair value adjustment of the acquired assets, too. Trouble is that because it seems the fair value adjustment was unrealistic at the time of the merger, as Tim’s link shows, goodwill is far more than it should be and will have to be brutally written down at some point. Putting it bluntly, they paid far too much for Britannia.

  8. >I wonder if there is a major difference in the salaries at COOP versus its big competitors?

    I knew someone very very very high up in the Co-op Bank around the time of the Brittania deal. I can confirm that he was paid peanuts compared to the big guys. I can also confirm that he had no great experience or understanding of banking.

  9. Frances: I’m with you on that one, they were sold a pup.

    I’m by no means a banking industry expert, but banks buying other banks for a fortune and realising they’re crap seems to happen quite a lot. Let’s ban bankers from running banks. Erm…

  10. @FC refers to banks having to hide a whole load of “rubbish property loans.” Says it all really .The problem is not the banks* but the property values that bubble and collapse. But I repeat myself.
    * Mind you I’d nationalise them for other reasons, like they create money and pretend they’ve taken it off depositors to loan to you.

  11. Daft question here: so long as a small mutual is clear about its purpose and doesn’t attempt ideas of grandeur, and also employs competent professionals rather than lofty idealists… what are the problems with small mutuals? The concept appeals to me (albeit, as a consumer) and I’m a bit surprised that it’s attracted scepticism (rather than just that aimed at The Co-op).

    Tim adds: In truth, absolutely nothing is wrong with a small mutual. However, the reason I’m pointing, laughing and dancing with glee is the following. Following the 2008 collapse we’ve had an awful lot of people insisting that the basic problem is that we’ve got large banks run for the benefit of shareholders. It’s the size plus the profit making that causes all the problems. We’ve been told endlessly (Ritchie, NEF, Compass, the usual suspects) that the solution is therefore a network of small, mutual, banks. Quite possibly with local politicos and union leaders on the boards.

    I’m therefore leaping with glee and pointing out that the mutuals seem to be just as likely to go bust as the shareholder owned. The small as the large. And the Spanish experience proves that you don’t want to let the politicians or union leaders near anything at all, especially the banking system.

  12. The Thought Gang

    @ James

    I think the answer, in theory, is that there’s nothing wrong with them.

    However, partly that does depend on what is meant by ‘small’. I’ve been looking at some accounts of credit unions and all the ones that I’ve seen so far are only viable because of grants (and yet their rates are worse than banks on both borrowing and lending).

    Running these organisations is expensive, particularly if you want to offer day-to-day banking services. Didn’t the host of smaller organisations buy and merge their way into the current ‘big 5’ because those old models weren’t viable?

  13. Oxonymous

    The problem to my mind is that bankers WEREN’T running either Co-Op or Britannia.

    The Britannia deal was part of Peter Marks’ acquisition strategy, as was the attempted Lloyds Verde deal. Marks started out as a shelf stacker and worked his way up to CEO of what is really a large shop. He knows sod all about banking. On the Britannia side, the CEO was Neville Richardson, who as I’ve already mentioned was a PWC chartered accountant before joining Britannia’s board and therefore also knew sod all about banking. And the Co-Op CEO at the time of the merger was Chris Anderson who had spent his entire working life in mutuals and therefore….yes, you get my drift. He lost his job in the merger.

    I can’t help thinking that if any of these key players actually knew anything about banking we wouldn’t be in this mess. And sadly I would say much the same about the other banks that failed, and some that didn’t (Barclays, for example). Genuine knowledge of banking was a rare commodity at board level in far too many banks.

    Let’s have some actual bankers running banks, PLEASE. Quite apart from anything else, it would make a refreshing change.

  14. So Much For Subtlety

    Oxonymous – “Let-s ban bankers from running banks. Erm…”

    Actually the problem has not been with bankers. It has been with former Building Societies wanting to be bankers. All the old banks have done fine – unless Brown forced them to merge with a smoking hole in the ground of course.

    So the rule ought to be, let us ban anyone from running a bank who does not come from a long line of bankers and understands things like tradition and family history. In the meantime, bank with Coutts. Not with anything owned by the Spanish.

  15. @SMFS Coutts is wholly owned by RBS. When is this going to penetrate your prejudiced skull? Prejudiced against anybody not WASP i.e. Catholic Spanish, Black ,Jewish etc and prejudiced in favour of the old Etonians and people who’ve been part of the Establishment for generations. Like they used to say “Safe as a Scottish banker” There’s a hoot.
    Take some notice what Frances Coppola is saying: banks of whatever type have ended up with prats in charge. Bob Diamond recently confessed to not having a clue how Libor was fixed ,so how could he have stopped the fiddling that got Barclays a monster fine? That’s what you want: really top men on the job, doing whatever it is they do without a clue but fucking the economy up good and proper.

  16. @ Oxonymous #5 – sounds like a good accountant to me. If he was working for the acquiring company, trying to drive the price down by questioning the existence and/or valuation of goodwill was exactly the right thing to do.

    If you’re buying, things are worth net asset value at most, probably rather less as you want a provision for risk, and forecasts are just guesses. If you’re selling, things are worth a multiple of possible future earnings regardless of asset value. So you both compromise, and both of you are happy 🙂

  17. So Much For Subtlety

    DBC Reed – “Coutts is wholly owned by RBS. When is this going to penetrate your prejudiced skull?”

    It is not who owns so much as who runs it. The Chairman of Coutts is the Earl of Home. Not some former accountant from a former Building Society. At the risk of sounding like a snob, that matters.

    “Prejudiced against anybody not WASP i.e. Catholic Spanish, Black ,Jewish etc and prejudiced in favour of the old Etonians and people who-ve been part of the Establishment for generations.”

    It is not a prejudice if it is an observable fact. Which in this case it is.

    “Take some notice what Frances Coppola is saying: banks of whatever type have ended up with prats in charge.”

    Although it is a lot more common among the former Building Societies. Bob Diamond, to take your example, is a good example of what I mean. No background in banking. An American. Not that there is anything particularly wrong with that. Of Irish Catholic origin. Not that there is much wrong with that by itself either. A former academic. A graduate of Colby College. I mean, even if none of this matters by itself, after a while it all begins to add up. Barclays could not do any better? As long as they kept the sprogs of the founders, they did alright. As long as they had a special system of promotion that brought the descendents of the founders to the top, they did fine. Then they got fooled by meritocracy and fairness. While Diamond might have been an excellent candidate on paper, he did not have what they needed – a long term vision and deep commitment to the bank as an institution. He was a fly-in fly-out CEO looking for a golden parachute and a retirement mansion in Florida.

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