Neither crystal meth nor rent boys are entirely unknown pleasures among churchmen or bankers. But we do have to thank the Co-Op Bank for bringing all four together in the one person.
Paul Flowers, the so-called “Crystal Methodist”, was kicked out of first the bank and then the Church after lurid accusations emerged about expenses abuse, drug binges and £1.5 billion holes in the bank’s finances.
That, though amusing, was not the stand-out part of the story for me. Instead, I was much more amused by the protests that followed. When Lord Myners, and the Prudential Regulation Authority, started to insist that perhaps a bank ought to have, among its management team somewhere, some people who had the first clue about banking, it was met with strenuous objections from the Left side of the aisle. Why shouldn’t people who had no idea be allowed to play with other people’s money?
This week, the Bank has effectively admitted defeat in terms of its turnaround strategy, and put itself up for sale. In doing so, it has illustrated the real story here – behind all the juicy gossip – which is the value of having shareholders.
Sure, when times are good they’re just the bandits who carry the filthy lucre gained by their exploitation of the customers and workers off to the mountains. But when times are bad, they’re the people who lose the lot. That’s what the Co-Op Bank, and the Co-Operative Group which owned it, so sorely missed – people who stood to lose their equity as the management team buggered it all up.
It’s worth reminding ourselves what really happened here. The Co-Op decided to take over another mutual, the Britannia, which itself had remutualised the Bristol and West network, at some cost.
The various computer systems never could be got to talk to each other, and then it was found that there just wasn’t enough capital to keep the show on the road. In other words, it had nothing to do with the Rev Flowers’ more interesting activities – although the fact that a man who knew so very little about banking could be appointed to run one was certainly a symptom of the deeper problem.
No, the Co-Op Bank’s problem was simply that as a mutual, there was no outside source of capital: that’s what the word mutual means.
I should note here that there’s nothing wrong with the concept of a mutual – except when there is. Whether it’s organisations owned by the customers (building societies, or the rest of the Co-Op Group itself), or the workers (Mondragon, John Lewis) or even the suppliers (various agricultural marketing cooperatives), there’s no logical problem – nor even economic problem – with any of them.
Except that we do then meet the great truth of economics: there are no solutions, there are only trade-offs.
That absence of the capitalists grinding the faces of the workers into the dust is indeed a benefit. But the absence of the capitalists and their loot is a problem. Especially if more capital is required in a business. Which is, of course, why the capitalists are there in the first place.
And that’s how the Co-Op Bank story played out. They found they needed more capital – billions of it, in fact. But they didn’t actually have any capitalists. So the bondholders got bailed in.
What that means is that the widows and orphans who thought they had just lent money to the bank, a little step up from having a savings account, suddenly found first that they were actually part-owners, second that they weren’t going to get their interest, and third that they had stub equity in something heading around the U-bend.
All this was simultaneously most amusing and highly tragic – your view probably dependent upon whether you merely read about it or suffered through it.
But we can go one level deeper into this as well. It’s common enough to hear that the crash of 2008 was all about the quite despicable idea of shareholder capitalism. That the hunger for profits among the capitalists is what drove us all off the cliff.
This is not so. Just as many, if not more, building societies went bust in the crash as did banks. The Derbyshire Building Society, Chesham, Cheshire, Barnsley, Scarborough….
Capitalists have a use. As shareholders, they provide the capital. And if things go kaboom then it’s they who lose their money. Plus, in the case of a banking organisation, what tends to drive it off the cliff is not the capitalist lust for profits: it’s bad banking.