REMEMBER all those people who, just a few months ago, were proclaiming that mutuals were the answer, and had to be encouraged to improve the diversity of the UK banking system? We were told that firms owned by their workers or employers would be better, safer and more pro-consumer than the nasty old Plcs. It was all nonsense, as this newspaper argued forcibly and unfashionably at the time.
The confirmation that the Co-operative Group will be forced to list its banking unit on the stock market, as part of its bail-in, means that it will no longer be a pure mutual in any meaningful sense of that word. While the deal means that the Co-op bank is now safe, this is a humiliation not just for that organisation, with its proud history, but also for all those politicians – including Tories and Liberal Democrats – who peddled all of that extreme pro-mutual nonsense.
Don’t get me wrong: in some cases, mutuals might be the best possible business model. They may well work better than charities in providing certain kinds of services, for example, though it’s hard to test that proposition given the current tax rules, which favour charities. The mutual model was wrongly squeezed out by the state during the twentieth century: the friendly society movement used to do wonders providing extensive unemployment and health insurance, and pensions, to the working poor.
In banking, some building societies continue to succeed – though their number is much reduced – not least the Nationwide, which has emerged very well from the credit crisis. My problem is that such success stories are rare, and with financial services now a hugely capital-intensive business, the ability to tap the public markets to raise additional equity if necessary has become a major advantage. Mutuals cannot do this, which puts them at a major disadvantage and in some cases might even make them riskier.
Given all of that, the idea that employee or member ownership is self-evidently a superior model was clearly a case of ideologically-driven delusion, an attempt at third way “triangulation” between the for-profit, shareholder owned model and the socialised, public sector approach. It was confused drivel, as stupid as the idea that investment banks are higher risk than retail banks (they are not), or that retail banks with investment banking arms are in a uniquely dangerous position – neither Bradford and Bingley, Northern Rock nor HBOS were investment banks, and Co-op is the exact opposite of one. In fact, all the evidence suggests that large, diversified universal banks are less risky, but try telling that to the purveyors of the conventional wisdom.
One of the most fascinating questions of corporate governance is why John Lewis continues to do so well, despite being an employee-owned business. This deserves to be studied endlessly at business schools. No other major company in the world with a similar corporate structure is as successful and innovative. Normally, shareholder-owned, for profit companies are more efficient, more motivated, more agile and better able to raise capital. John Lewis is the exception that proves the rule.
But the government never saw any of this, believing that everybody could be like John Lewis – even though the very opposite is true, and that nobody else can be. The good news is that the Co-op’s conversion to the merits of the stock exchange will now hopefully rejuvenate it, and allow it back on the path of growth. Its bail-in – the conversion of bonds to equity – also shows that the reforms of the past few years, and the introduction of new resolution procedures to recapitalise institutions without taxpayer money, is working. What a shame the government has wasted so much time and energy pursuing a policy that was always an irrelevant distraction.
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