The Coop bank is in a mess. It’s a new sort of mess. A post-financial crisis sort of a mess. Back in 2008-09 when US and UK banks were on the brink of bankruptcy central banks and governments stepped in to bail them out. They were, so the thinking went, too big to fail.
Desperate to avoid having to step in again, and still saddled with crippling debts from the fallout from the financial crisis, we’re seeing something different going on. No longer will investors be saved by governments keen to ensure the protection of savers (not to mention the global financial system). Now investors are expected to live by the sword and die by the sword – having experienced the upside of returns on investment, they have to accept liabilities when things aren’t so rosy.
So, this week it was the bondholders who rejected the bank’s own rescue plans and put forward a plan of their own, effectively taking control of the bank in the process. It’s now hedge funds and institutional investors that are deciding what happens to coop bank and the implications are likely to be far reaching.
Bank regulators had ordered Coop to raise £bns in order to address capital shortfalls and if they didn’t they would be put into the financial equivalent of ‘special measures’. The bank’s mutual credentials were effectively diluted with a range of institutional investment.
And now, as the hedge funds start to flex their muscles, the Coop Group find themselves on the verge of relinquishing control of the bank. The consequences are immediately apparent; the bank will lose whatever ethical focus it had and it will not be business as usual. The resignation of the bank’s Chairman, Len Wardle, removes any possibility that the bank will continue to offer anything vaguely different to the other high street banks.
And this is what we can expect from the post-financial crisis approach. If it’s not our governments that bail out our over-exposed banks, it will be investors who take on the risks. But, unlike governments – who seemed unable or unwilling to extract much in the way of ‘added value’ from their investments, you can bet your bottom dollar that the hedge funds and bondholders won’t be so forgiving. Remember the fuss when it was discovered that Fred Goodwin had kept his massive pension payout despite overseeing the world’s biggest bank collapse? Do you think hedge fund managers would have allowed that to happen if they were doing the bailing out? Not me.
I suppose we can expect more of this sort of thing to happen as there are still lots of under-capitalised and over-exposed financial institutions out there. Coop’s position leaves us with one less choice in the ‘less terrible’ banking options and one less mutual out there and it’s not as if we were awash for choice in the first place.
Perhaps this is a one off, but my fear is that we are just starting to see the implications of an alternative approach to big bailouts by governments and I’m not sure we know what the unintended consequences are yet.