The Not So Cooperative Bank
This re-edited 2016 article covers the remarkable story of the Co-op bank, its demise, hedge funds take over, the purge of Palestine campaign accounts to the reinstatement of its ethical policy.
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or many years the UK Co-operative bank has been a bastion of decency for ethical investors and savers, knowing that their funds would not be invested in anti-social companies, such as those associated with tobacco, fossil fuels and arms. Not surprisingly then, a decision by the bank to close the accounts of pro-Palestine campaign Groups raised eyebrows.
Amongst those affected were high profile organisations such as the Palestine Solidarity Campaign (PSC) and Scottish equivalent the Scottish Palestine Solidarity Campaign (SPSC).
Cuba was also targeted by the bank:
THE Co-op Bank has closed the accounts of the Cuba Solidarity Campaign (CSC), with activists warning yesterday that many more left-wing groups are being targeted.
The CSC account closures emerged after the Morning Star revealed that the bank has shut 20 accounts held by British Palestine support groups, including the national Palestine Solidarity Campaign (PSC) and charities which fund educational and other projects in Palestine.
CSC director Rob Miller said the closures were “no coincidence,” given the bank’s takeover by US-based hedge funds two years ago. He told the Star: “It is exactly the same as they have done to PSC.
“It was done unilaterally. The national campaign has had all its accounts closed. We find it unethical and unacceptable.
There was clearly a political motivation here that would have been of grave concern to customers associated with the bank. This raised questions regarding the ethical integrity of the bank. Was this to be the thin edge of the wedge? What next — nuclear disarmament, or environmental groups? So what’s going on? The short answer is mismanagement and bad practice. Seems the bank wasn’t so good with money after all.
Fall From Grace
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n 1992 the Bank launched its ethical policy. With that it became a distinct entity in the financial markets.
During the economic collapse in 2008, it looked as though the bank had survived the financial maelstrom. But in 2013, trouble began to brew. In March 2013 the bank reported losses of £600m. In May, Moody’s downgraded its credit rating by six notches to junk (Ba3) resulting in the chief executive Barry Tootell’s resignation. In an effort to stave off the shortfall, the Bank had decided to sell off some of its assets. But:
Moody’s questioned whether the bank’s proposed disposals and scaling back of its businesses would be enough to bolster the bank’s closely-watched capital ratio, which at 8.8% is low relative to its peers. The ratings agency said the Co-operative was unlikely to be able to generate enough extra capital from profits and that there was “material uncertainty” over whether the disposal programme underway would be enough.
The root of the banks’ problems was the acquisition of the Britannia Building Society in 2009. Britannia had succumbed to the sub-prime mortgage crisis that had contributed to the financial crash. These problems had surfaced towards the end of 2007, about a year before the co-op showed interest in the Society. As This is Money notes:
Savers and borrowers with Britannia Building Society could see the value of their annual member reward — the mutual’s equivalent of a dividend — fall next year as a result of the credit crisis surrounding the mortgage industry.
Britannia, the second biggest mutual lender after Nationwide, is especially vulnerable to the credit crunch because its subsidiary, Platform, depends on capital markets for much of the money it lends.
This raises an important question. Why did the Co-op attempt a merger with a Building Society that had potentially toxic assets?
This article from co-operative news states the problem plainly:
…in 2010, Britannia joined with the Co-op Bank in an apparently friendly merger. Three years later, it was revealed that the Britannia’s balance sheet was riddled with toxic residential and commercial property loans. The consequences for the Co-op Bank were disastrous: writing down bad loans blew an enormous hole in its balance sheet, forcing the Co-op Group to obtain new capital from private sector investors.
Although the Co-op Group still narrowly retains the largest share, its ownership is severely diluted. There is no doubt that had the Britannia not merged with the Co-op, it would have failed in 2010.
Clearly there had been management issues at the Co-op. Revelations about former chair Paul Flowers’ involvement in drug related issues had prompted an investigation into what had been going on at the bank.
In April 2014, the Kelly Review — an independent investigation into the Bank — was published. Essentially due to what the Review describes as ‘A flawed culture’ and ‘A system of governance which led to serious failures of oversight,’ this effectively resulted in a ‘Failure by the Bank after the merger to plan and manage capital adequately,’ due to ‘Fundamental weaknesses in the governance and management of risk.’
It would appear that there were shortcomings in all areas within the bank right up to the very top. This was reflected in the fact that ‘The incoming Chief Executive, Neville Richardson, had not worked in a bank before’ and ‘The Chief Risk Officer was actually not a banker.’
A ‘Bale In’ Scheme
D
ifferent from the bailouts that took place after the financial crisis, the Co-op bank participated in a bail in scheme. This means that private equity firms took a share in the bank as part of the restructuring demanded by the Bank of England. As reported by the Guardian, this resulted in Co-operative Group reducing its holdings of the bank to 30%.
Not surprisingly, with the announcement that the bank would have majority control from US hedge fund companies, this led to speculation about the banks ethical standing:
Andre Spicer, professor of organisational behaviour at Cass Business School, doubted that the bank would maintain its ethical stance in the long term. “History suggests that once a mutual bank is privatised it drops the focus on doing good to focus on doing well for shareholders. Many ex-mutuals became some of the worst offenders in the lead-up to the financial crisis. The number of staff the Co-op employs is likely to drop as management search for efficiencies. Staff who remain are likely to find themselves loaded down with various restructuring efforts. Despite assurances by the new owners, the Co-op is likely to have a more commercially focused culture.”
The Hedge Fund companies involved were Aurelius Capital Management, Beach Point Capital Management and Silver Point Capital (along with some other firms - see below). So who are these firms?
Aurelius and Silver point appeared to be in the vanguard and were working together according to this report in the Guardian. The two firms worked together before.
Aurelius (and other similar firms) are classed as vulture funds. The firm had been pressurising Argentina to pay its debts after the country defaulted in 2002. And the firm also managed to involve itself in Ukraine’s problems.
This article from RT outlines what its all about:
Since its economic crisis in 2001, Buenos Aires renegotiated its debts, in 2005 and 2010, through new repayment schedules and a reduction of the face values of the debt(s) by 70% to about $13 billion with 92.4 percent of its creditors. A 7 percent minority of the bondholders, however, held out and rejected Argentina’s proposals. These holdouts are hedge funds that have been dubbed as vulture funds. Like real vultures circling and hovering around a dying carcass these bondholders strike distressed economies and take advantage of fiscal crises to make windfall profits.
These predatory hedge funds and private equity funds operate by buying debt at bargain discounts and wait for distresses and defaults. Their strategy is to profit off the defaults and to amplify their profits through maximizing the interest returns on what debtors owe them or to use litigation to sue debtors for even larger amounts that would they would have received if the debt was paid in full.
It is within the framework of the above rationale that NML Capital Ltd. and Aurelius Capital Management have refused to accept any debt swaps or any form of settlement with Buenos Aires. They have tried to derail the Argentineans and prevent them from paying off their debts. This is why they have demanded the full payment of Argentina’s debts on the basis of the face value of approximately $1.33 billion. Ultimately, this would force Argentina into default and increase its other debts by 70 percent.
The firm is run by Mark Brodsky, a former bankruptcy lawyer who in 2004 left Paul Singer’s Elliott Management after 10 years to strike out on his own. He tends to keep a low profile refusing to be interviewed.
But in a move after the Flowers scandal erupted, Aurelius sold its stake in the Co-op to Perry Capital. In 2016, Perry Capital shut down, liquidating its funds. Other funders that have sold their stake according to Save Our Bank are: Beach Point Capital Management, Caspian Capital, Canyon Capital Advisors and Monarch Alternative Capital and York Capital Management.
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ilver Point Capital was founded in 2002 by former Goldman Sachs partners, Edward A. Mulé and Robert J. O’Shea.
Goldman Sachs needs little introduction. One of the worlds biggest and most powerful investment banks, it has been regarded as instrumental in causing the financial crash as well as ‘helping’ Greece inherit its debt crisis.
As things stand (August 2021) there are six co-owners of the bank. This infographic breaks down the current ownership:
This was essentially the culture the co-op involved itself with. Firms that pick up debts dirt cheap and take advantage of companies and countries that are in difficulty.
The RT article implies that the US legal system has been influenced by the vulture funds and as such has obstructed Argentina’s progress regarding settlements of its debt issues. As a result:
Standard & Poor’s declared Argentina in default on July 30 [2014], after Buenos Aires was prevented from making its debt payments. Not only were investors scared away and Argentina’s access to global capital markets hurt, but the threat of default at the end of October 2014 also put additional pressure on both Argentinean economy and the Argentine peso.
The Independent also picks up the story, noting how the co-op was left in the cold by the vulture funds tactics.
This article from the Jubilee Debt Campaign goes into some detail concerning vulture funds in general. It started the campaign ‘Stop the Debt Vultures’. It sums up thus:
They’re the financial speculators chasing obscene profits from debt crises around the world. Again and again — from Argentina to Zambia, Liberia to Greece, Congo to the Co‑op Bank — vulture funds have shown how our financial system allows money to be made from the most distressing situations, while governments sit back and declare ‘that’s just the way things are’.
The article goes on to say:
Vulture funds see this kind of social upheaval and think of one thing: profit. Pioneered in Latin America in the 1990s, these funds have become part of the ecosystem of global finance in an era of debt crisis. It is bad enough that countries must endure years of forced austerity in return for cancellation of some unjust debts, with the highest costs borne by the poorest in society, and inequality deepening as a result. But the first thing many countries have encountered as they start to rebuild their economies is vulture funds demanding to be repaid on old debts in full.
As the article points out, the vultures also swooped down on Ireland and Greece. Whenever there’s an opportunity to make money from chaos, the vultures will be circling.
So how does all this tap into the pro Israel culture that has discreetly surfaced in the background? The clue here may be the connection with Elliot management.
The Republican Jewish Coalition (RJC) — an organisation that is high on Singer’s contribution list — website notes that ‘Singer accompanied President George W. Bush as part of the honorary delegation to Jerusalem for the celebration of the 60th anniversary of the State of Israel.’ The RJC is a high profile supporter of Israel with itself being supported by top Republican luminaries, including George W Bush.
This article from Mondoweiss sums up Singer’s Israeli connections. He is also a big donor of AIPAC (American Israel Public Affairs Committee). There isn’t any documented links to pro Israeli groups and Aurelius. But given Brodsky’s former high profile within Elliot and the fact the two firms occasionally worked together on projects, it’s likely that Brodsky would have been involved with Singers activities in some capacity. And there appears to be some clues in the Argentine debt crisis.
According to the Guardian:
Argentina’s President Cristina Fernández de Kirchner has gone on the offensive against her critics by claiming she is the target of a conspiracy between US “vulture funds,” Jewish community groups and the prosecutor Alberto Nisman, who died in suspicious circumstances earlier this year.
It all revolved around Argentina seeking closer ties with Iran. Linked into this is a bombing 20 years ago of the Amia Jewish community centre in Buenos Aires by Iranians allegedly. Hovering in the background is Paul Singer, with the President connecting him with pro Israeli groups in Argentina and making connections with US Iran relations. Then of course there is the coincidence as to how the Co-op suddenly out-of-the-blue altered its ethical policy and decided that pro Palestine groups didn’t fit its ‘risk appetite’ — a vague term that appears to be obfuscating whoever was responsible for the alteration.
This definition of ‘risk appetite’ has a remarkable applicability to the sort of policy direction a vulture fund would take:
The ultimate goal of risk management is generation of efficient income. The aim is to generate the maximum return for a unit of risk taken or to minimize the risk taken to generate the return expected, i.e., it is the optimization of a financial institution’s strategy. Therefore, by measuring its exposure against its appetite, a financial institution is assessing its coupled risk-return. But this task may be difficult as banks face various types of risks, for instance, operational, market, credit, and liquidity, and these cannot be evaluated on a standalone basis; interaction and contagion effects should be taken into account.
In short, the risk appetite regarding pro Palestine groups was fine before, but not now. So what changed? The answer seems pretty obvious. But there’s another mysterious link in chain, a shadowy organisation closely associated with media giant Thomson Reuters.
World-Check
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ice News reported on ‘the Terrorism Blacklist Secretly Wielding Power Over the Lives of Millions’. The article points out many inconsistencies inherent within the world check database, which is owned and run by Thomson Reuters:
The confidential service, part of an unregulated industry, claims that it is used by over 300 government and intelligence agencies, 49 of the 50 biggest banks, pre-employment vetting agencies and 9 of the top 10 global law firms. It provides “an early warning system for hidden risk” — and is used by banks, for example, to minimize their risk of complicity in terrorist financing or money laundering.
However, numerous individuals and organizations have reacted with anger and shock to the discovery that they have a “terrorism” designation on World-Check’s database, which is compiled using public domain sources.
It’s now pretty certain that the Co-op has been using the database given that:
Banks are not legally obliged to tell their customers why they have closed their accounts and World-Check binds its users to secrecy about use of the database. Both PSC and the Cordoba Foundation are currently terror listed by World-Check among a number of other major British non-profits.
World Check emphasises that it uses ‘reliable and reputable public domain sources’. But the evidence clearly points to a lack of consistency. The article points out that some listings have been ‘created solely from allegations written on conservative blogs, Islamophobic websites and political organizations.’ It also notes that the PSC had received a ‘terrorism’ designation. People associated with world check have admitted inconsistencies regarding the checking and updating of sources:
…two senior World-Check employees who asked not to be named told VICE News that in over eight years working at the firm they had not seen a single case of an individual successfully challenging their terror designation.
“Once a terrorist always a terrorist — no matter what he says, he stays where he is,” said a current senior analyst. They spoke to VICE News on condition of non-attribution.
“Because of World-Check’s confidentiality clause, the overwhelming majority of people affected by World-Check’s profiling will have no idea why they have been refused a bank account or had a transaction blocked,” said consultant Hayes. “So it is preposterous to suggest that World-Check is genuinely interested in removing innocent parties.
“Even someone on the Al-Qaeda, Taliban UN 1267 sanctions list has more rights to an ombudsman than someone caught up in this,” said RUSI’s Keatinge.
World check also has other subjects on its database, such as ‘violent animal rights extremists’ and ‘ethno-nationalist groups.’ And given the recent pre-occupation of describing environmental campaigners as ‘eco terrorists’, perhaps its only a matter of time that certain environmental groups become blacklisted.
An article from charity & Security Network covers similar ground and notes the vice article. It also notes a Canadian report:
A report commissioned by the Canadian government to investigate the possible effect of private sector terrorist and money laundering databases shared many of the same concerns. The report noted that “individuals could be flagged ‘persons of special interest’ due to their economic activities” and that, “such determinations would be made behind closed doors…and would impose very real economic consequences upon an individual who had not been convicted in a court of law for any predicate offense to money laundering or terrorist financing.” Leppan does not dispute this fact, admitting that once a person is on the World-Check database, “the likelihood of them opening up a bank account or applying for a passport in their own name is very slim…”
The fact that World-Check is part of a huge media conglomerate — facilitated by the merger of Thomson Corporation and Reuters News Agency - is of great concern.
The future of the Co-op
In October 2013, the Save Our Bank campaign was established by customers of the bank. The focus of the campaign was to persuade the bank to stick to its ethical policy. In 2015 the campaign paid off as bank launched a new ethical policy. With support from Ethical Consumer, the campaign Group formed a Customer Union after crowdfunding over £30,000. In July 2016, following the account purges, the Union (now listed as a co-op):
held a round table with Amnesty UK on the impact of bank account closures on charities and campaign groups. Our work on this together with Amnesty leads to the bank putting in place a reinforced approach to de-risking, with the Values and Ethics team reviewing the impact of account closures.
Despite what many saw as a hostile takeover, the Bank managed to retain its independence, helped by the campaign and in December 2019:
the bank formally recognised the Customer Union in a ground-breaking recognition agreement - reflecting the productive and cooperative engagement that has been growing between the bank and the union.
Against the odds, the Co-op Bank has managed to retain both its independence and its ethical status. As such the bank actually has a future and that at some point the bank will become fully independent. Ironically as Ethical Consumer notes:
members of the customer union have more influence on the direction of the bank than members of the Co-op did before the bank was sold.
Disclaimer: I have an account with the Co-op Bank and membership of the Customer Union.
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