Change in fortunes shows risk of politicians favouring a firm

 
Tim Wallace
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THE CO-OPERATIVE is a favourite among politicians. As a caring, sharing mutual with a big high street presence it has much political appeal.

The coalition wants more mutuals, and Labour banks with the Co-op – even offering a credit card through the lender as part of a party donation scheme.

Speeches encouraging employees to take over their employers have cited the success and popularity of retailer John Lewis in stark contrast with the bad behaviour and failures at shareholder-owned banks as evidence that this model is best.

But the backing for the Co-op has begun to look reckless as problems at the bank suggest its reputation may not be fully deserved.

The first big problem came with the Verde deal falling apart. Lloyds’ chosen partner in the forced sale of 632 bank branches was the Co-op.

Lloyds insists it was the best match, a bank with a track record and an existing high street presence which could handle the expansion.

But the Co-op’s finances deteriorated and despite a range of innovative ideas to sell units and raise capital, it had to drop the plan just months before the takeover was meant to be completed.

Regulators were aware of the problem – they have warned most big banks are short of capital – but did little to warn Lloyds it might fail.

That leaves a feeling is that the government wanted a strong mutual competitor and saw the Verde sale as the best way to achieve that quickly.

But it now appears to have been built on sand. Lloyds seems to have had its suspicions – it prepared for an IPO or alternative trade sale just in case, so its plan is not far off track.

But it stands as a warning sign to politicians who try to meddle in banks based on PR appeal rather than the underlying numbers.

THE CO-OP’S QUIRKY HISTORY
Founded in 1844 in Lancashire, the Co-operative Group is now owned by over 6m members worldwide.

As well as a major supermarket presence, bank and insurance arms, the group is the UK’s largest provider of funeral services.

It has tried to become a major player in British banking, attempting to start an aggressive period of growth with the takeover of the Britannia.

The merger was made possible by a tweak in the rules which allowed mutuals to merge with co-operatives.

But it has since run up against problems including big losses in commercial real estate portfolios.

The bank’s attempt to take on 632 branches being sold by Lloyds has also run in to trouble, collapsing and leaving the group to consider the future of the finance arm.

Its mutual structure has proved popular over the years as the group acts to serve its members, who receive benefits when they shop with the supermarket and use other services, rather than external shareholders.

But it also poses a problem when the group looks to raise capital. As it cannot raise equity, the group is left with one fewer option than more conventional banks.

That ownership structure is not a problem in good times but limits the options when more capital is needed.

The group also has a long political history – the Co-operative Party is the political wing of the wider co-operative movement. It was established in 1917 and has been a sister to the Labour Party since 1927.

Labour party members can access finance through the Co-operative Bank. For every party member who takes out a credit card with the lender, the party gets £15.

They also get special deals on personal loans and for every deal agreed the party gets £75 from the bank

The Co-operative Party stands jointly at elections with Labour, meaning high profile MPs including Ed Balls and Stella Creasy are elected under its banner.