It is excellent news that the privatisation of Lloyds Banking Group has finally begun. It follows the return to the private sector of Direct Line, which was spun out of the nationalised RBS, and the looming Royal Mail sell-off. Slowly but surely, some of the errors of the past are being undone, the equity markets are being reinvigorated and parts of the supply-side of the economy are being improved.It is easy to get overly depressed at the state of the UK, our government’s apparent obsession with taxing plastic bags and all the other nonsense. I certainly plead guilty. But every so often it’s worth remembering that it is not all bad: there are lots of debits, but on the credit side of the coalition’s metaphorical bank statement, corporation tax is falling, the top rate of income tax has been cut and now the nationalised banks are starting to be returned to the stock market.Lloyds’ gradual liberation from the dead hand of state ownership follows a little-noticed but important shift in regulatory policy by Mark Carney, relaxing the liquidity rules for banks and making additional kinds of assets eligible, a move which ought to allow for a return to cautious expansion. Combined with a much clearer relationship towards the financial services industry from the Bank, it is clear that the City has turned a corner. Global investors agree: there was vast demand for Lloyds shares last night, including from overseas. The UK and London are finally coming back to life, and not a moment too soon.- See more at: http://www.cityam.com/article/1379382612/barack-obama-should-make-donald-kohn-next-fed-chief?utm_source=website&utm_medium=TD_EditorsLetter_Homepage&utm_campaign=TD_EditorsLetter_Homepage#sthash.h955BW7K.dpuf
Everybody’s calling it a tragedy. Ex-Co-operative chief executive Peter Marks said that the demise of the UK’s Coop Bank has been a “tragedy” when grilled by the UK parliament’s Treasury Select Committee. The banking arm of Britain’s oldest cooperative movement and a mutualised bank (it is not a joint stock company quoted on the stock market), supposedly providing ethical banking, has fallen into the hands of its bond holders. They are a bunch of US hedge funds, Silver Point and Aurelius. The Coop Group’s stake in its own bank will fall to just 30%, while the hedge funds seize the bulk of the shares in return for bonds they hold.
The Coop Bank would have collapsed without this because its capital had been decimated by huge losses that it has had to face from non-performing commercial and retail mortgages it inherited from its merger with Britannia Building Society. The banking regulator said the Coop Bank must raise £1.5bn by end-2014 if it were to continue. It seems that the only way that this capital can be raised is by handing over equity to the hedge funds and by ‘haircutting’ the value of the bonds held by individual investors, the people who bought Copp Bank bonds because they believe in the cooperative movement. These retail investors will also lose the interest income from their bonds. And board members committed to the cooperative ideal will be removed and replaced by representatives of the hedge funds.
The merger of Britannia and the Coop in 2009 was meant to be an “ethical alternative to shareholder-owned banks”. After the merger,the Coop’s management even tried to buy over 600 branches of Lloyds Bank, the part state-owned bank that had been forced to sell them. That plan fell precisely because the regulator and Lloyds noticed that the Coop had nowhere near the capital or borrowing power to fund such a deal.
The demise of the Coop is yet another example of the reckless speculative nature of modern banking that eventually triggered the global financial collapse. Six years on from the start of that, the repercussions of aggrandising and criminal actions by top bank executives striving to boost returns and their pay packets, continue – now bringing down an important credit institution supposedly dedicated to the alternative of people’s or ethical banking.
But how could it happen that Britain’s cooperative movement could allow its bank, aiming to serve ordinary people, end up trying to become a major player in the heady speculative world of ‘risk banking’, despite the lessons of the global financial collapse? It does not talk well of the aims and ideology of the leaders of the modern Coop. Like the Coop, the Britannia liked to trumpet its ethical and environmental credentials to consumers unhappy with the big high street banks. However, its operating model was closer to the hugely failed and growth-obsessed HBOS bank, with its focus on highly aggressive commercial property lending and high loan-to-value buy-to-let mortgages. The Coop should have seen that because, in 2008, months before the announcement of its merger with the Coop, the Britannia was forced to write off bad debts of more than £40m in one of its specialist lending subsidiaries.
One analyst noted that the mutual’s exposure to the worst parts of the property market was “nothing short of alarming for what should be a staid building society”. On taking over the Britannia, the Coop spent heavily to develop a new IT system to manage the combined business. In 2009 nearly £80m was spent on the project, roughly half the amount the business made in profit that year. In total, the Coop spent close to £250m on building the new system! Then eventually the Coop had to admit that it had taken huge bad debts from Britannia and wrote off £469m. The Coop Bank was left looking for £1.5bn in capital and has now been devoured by the hedge fund vultures.
It is an irony that only recently the leader of the British Labour party, to which the Cooperative movement is affiliated, spoke at the Cooperative conference. Ed Miliband, started by saying: “It is a pleasure to be here at the Co-op. You have always understood that ethics of responsibility, co-operation and stewardship must be at the heart of what you do. That’s one of the reasons why the Co-Op bank has in the last week seen a 25 percent rise in applications for accounts. It was your values that I was talking about last September when I said to the Labour Party conference that Britain needed a different kind of economy. An economy based not on the short-term, fast buck, take what you can. But on long-termism, patient investment, and responsibility shared by all. Not an economy based on predatory behaviour. But productive behaviour. Not an economy that works just for a powerful, privileged few. But an economy that works for all working people.”
Unfortunately, it seems that the Coop Bank executives and their bosses in the Coop Group did not keep to ‘coop values’ but copped-out to the capitalist objective of the ‘short-term, fast buck’ and adopted ‘predatory behaviour’. Miliband went on to outline what was wrong with modern banking. He explained: “we can understand almost everything that has gone wrong with British banking over the last two decades. It is a story repeated across the country. Mis-selling of products to small business. Failure to lend. Fleecing of ordinary customers, such as in the payment protection scandal (The Coop Bank is being fined too for its part in the PPi scandal – MR). And all of us paying the price of what the banks did in the financial crisis in lost jobs and all the other consequences.”Miliband said the problem was that bankers had shifted from “what I would call the shift from stewardship banking to casino banking. Moving from a culture when banks cared about the local business and had an interest in its success To a culture too often driven by short-term gain, fancy financial products and the bank not caring about the success of the firm, just about the immediate return.”
As Miliband went on, such casino banking was “socially useless.” Even worse it was “economically damaging. And socially destructive.” “We need a banking system where bankers are not given an incentive to focus on the short-term return. But to build a long-term, trusted relationship with their customer. A banking system which the British people can have confidence in once again. That means we need a banking system which serves every region, every sector, every business, and every family in this country. We want banks to serve the country, not a country that serves its banks.”
Instead, as Miliband pronounced: “Over the course of the last twenty years, we have seen the ethic of our banks change because the institutions that make up our banking industry changed. We can all remember when there were many banks to choose from in this country. And different building societies in every major town. We saw them on our high streets and we understood what they did. They looked after our savings, offered us mortgages and supported local businesses. Since the 1980s, two hundred building societies have been lost. Now there are only five major banks in this country. And their business is often more focused on their investments in the global financial markets than it is on their local customers.”
He did not mention that this destruction of mutual credit entities and the rise of global banking took place on the watch of Labour governments under Blair and Brown, as well as Conservative governments. Miliband sat in a Labour Cabinet that supported deregulation and the end of mutualisation and praised the City of London during the great credit and financial binge of the ‘masters of the universe’ in the early 2000s. But okay, maybe Miliband has learnt the lessons of that period – unlike the Coop Bank executives who were listening to his speech. So what was the answer to this destructive disaster in banking, according to ‘Red Ed’ (as he is called in the right-wing British media)?
Well, apparently, we “can’t simply turn the clock back.” to mutualisation. Instead we must follow the strictures of UK’s Vickers Report into banking which argued for ‘Chinese walls’ between risk-taking investment banking in the City of London and ordinary loan and deposit retail banking in the ‘high street’. And the big banks should be broken up from five into….maybe seven! This will mean “better competition.”
Miliband pointed out the sorry failure of the capitalist-owned banks to provide loans to small businesses. “Take lending to manufacturers. Last March, out of all the business loans in the country, the amount that went to manufacturers was just 2.5 percent. Three quarters of all the loans to business went to finance and property firms. And this is after the crash. All around the country there are men and women who are not getting the credit they need to grow their businesses.”
So what was the answer? Set up a a British Investment Bank. Apparently this bank would provide loans for businesses to make investment. Miliband: “Our goal is clear. To build Stewardship banking again in this country. Separating retail and investment banking. More alternatives for the consumer on the high street. And a British Investment Bank to help our small businesses. A new culture which stops the bonus-as-usual, sell-what-you-can, short term system. To build banks that serve the people, not just themselves. Banks which are safe, so that the taxpayer never has to reach into their pocket to bail out one of the richest sectors of the economy ever again. And most of all, banks which reflect the values of the British people:Banks that can help us rebuild our country. And rebuild an economy that works for working people.”Stewardship applies ‘overseeing’ or ‘acting on behalf of others’.
Miliband wants bankers to be regulated so that they act on behalf of the people. But that won’t happen as long as they must make profits for their shareholders. The demise of the Coop Bank shows that even an ethical, mutual bank will succumb to casino banking while the drive for profit dominates. Cooperative institutions will only survive and blossom when capitalist production does not dominate overall.In this blog, I have explained in detail (see https://thenextrecession.wordpress.com/2010/09/15/banking-as-a-public-service/ and https://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/), as has the UK’s Fire Brigades Union in their pamphlet, that simply trying to regulate the existing banks’ behaviour,or trying to break them up into smaller pieces, or setting up one state bank in competition, would be totally inadequate and self-defeating.
Banking should be a public service for people and their businesses, just as education or the health service should be. But that can only be achieved through public ownership of the big five (in the UK) and democratic control of their management boards on the pay, conditions and objectives. Nothing else will do if banking is to operate in the interests of people and not in the interests of big capital. Of course, Ed Miliband and the Labour leadership do not want that (although such a programme was adopted, in words, by the British Trade Union Congress last year), because it would threaten the very power and control of capital, especially in the ‘rentier’ financial UK capitalist economy.
The answer to the Coop’s demise would be recapitalise the bank with funds from the state-owned RBS and Lloyds as part of a general publicly-owned banking system. Then the bank, under proper democratic management, could pursue the mutual and ethical objectives of cooperative movement and make a socially useful contribution. Instead the bank is being handed to American hedge fund vultures.