John Ward CO-OP: Hedge funds giving more help to bondholders than PRA

CO-OP CRISIS: Regulating the irregular turns surreal as Hedge Fund sharks pile into bondholder fiasco

FSA or PRA, it still spells gum-dog

oldcooplogoHelpers without hearts for the Co-Op victims?

There is a sweet irony this morning in that two major US hedge funds not exactly renowned for their love of philanthropic mutuality are trying to derail the Co-Op’s dastardly plan to make its bondholders stump up to plug the £1.5bn black hole in its Nottingham lace finances balance sheet. The most aggressive of these, Aurelius Capital Management, is best known for a long-running battle to force Argentina to pay out $1.3bn (£800m) while Silver Point Capital has been linked to a number of troubled financial firms such as Lehman and Iceland’s Glitnir. In other words, they tend to get what they want no matter how much whingeing takes place.

As the nasties who organised this mess cynically lumped the downmarket Co-Op savers with the disgustingly rich sociopaths, it does bring a wry smile to my face that the latter are now engaged in saving the former: my enemy’s enemy and all that. In taking on the Co-op, Aurelius is working with the Silver Point Capital firm set up in Connecticut in 2002 by two former Goldman Sachs employees Edward Mulé and Robert O’Shea. Earlier last week, the Co-Op Board was forced to respond to the (still secret) members of their so-called LT2 Group

There is No Alternative having been flogged to death by the Gargoyles now in charge of what used to be the Cooperative Group, recently appointed boss Euan Sutherland, warned defensively that the only alternative to his Co-op plan was nationalisation. This is the last redoubt of all neoliberals who’ve f**ked up: threaten the Tories with having to nationalise a left-wing organisation, and ensure the Left itself isn’t allowed to forget just how close it is to global insolvency. So far, as a means of silencing Westminster, this strategy has worked rather well for Sutherland and his fellow would-be fraudsters.

Mr Sutherland (who knows next to nothing about banking) was hired from B&Q, the boring DIY segment of consistently underperforming Kingfisher plc, the group which spectacularly failed over many years to find a niche in the retail sector for Woolworths. Before then he was a marketing oik at Mars and Coca Cola, and thus knows a fair amount about alleviating the acrid taste of unpleasant products with lots of sugar. This would presumably make him ideal for any role where there is sugar to hand – unlike this one, where there is no sweetener at all for the bondholders being offered suicide pills in return for their loyalty.

In this confused and deliberately obguscated context, it looks like our brand-spanking-new Prudential Regulation Authority (PRA) is as toothlessly onanistic as its predecessor. These extracts from bondholder supporters’ group boss Mark Taber make the point extremely well:

Taber: Be honest with the market on what commitments the PRA has obtained form the Co-op Group in terms of future support for the bank. At a minimum please clarify that you have obtained an ironclad guarantee that the proceeds from the insurance businesses will be injected into the bank in all circumstances?

PRA response: the way in which the Co-operative Bank chooses to raise capital is not a matter for the PRA but for the firm itself. The PRA is therefore not in a position to provide the “ironclad guarantee” you request that such sale proceeds be injected into the bank in all circumstances as this a matter for the Co-operative Group/Bank to determine.

Well fiddly-dee there PRA, but excuse me…..of course it’s your concern: what if they choose to raise the money from f**king Colombian drug lords or the dormant accounts of dead people?

Shortly after this risible response, Taber fires another Exocet into the PRA’s path:

‘Despite being of the opinion, as stated in your evidence to the TSC [Treasury Select Committee] that the Co-op Bank needed to raise a substantial amount of capital and that it had management and other issues to address you decided to give its ultimate controlling parent, CGL, a waiver from being a “mixed financial holding company” as so removed your power to direct CGL to provide the capital its bank required. Not only was this an incredible waiver to grant in the circumstances but also its existence was not disclosed to the market which had very reason to believe that the CGL stood behind its Bank and could be required to do so by the regulator.

Your answer to me that the PRA is not in a position to provide an ironclad guarantee that insurance sale proceeds will be injected into Co-op Bank is not true. CGL itself is stating that the PRA has powers of direction over Co-operative Banking Group Limited which holds the insurance companies and which will receive the sale proceeds.’
He gets no response. But MP Jesse Norman then asks, “Why has the Co-operative Group not been asked to make good the losses as the equity shareholder in the Co-operative Bank?” To which the PRA reply is:
‘We have identified the capital shortfall and we have put it to the Co-op that they have to solve this problem, because there is no evidence to suggest that they do not have the resources at their disposal, and I would define that broadly, to do so. They have come up with the approach. The Co-op Group is putting resources into this.’
Picking up on this, Mark Taber writes, ‘….based on its press statements the Co-op Group is now expecting the Bank’s bondholders to accept that it is not capable of meeting the £1.5 billion capital requirement by at least £600 million. This is quite a difference from what you indicated to the TSC and it is clear that you need to publicly state your view on CGL’s capacity to support its bank. CGL is citing the position of its syndicate of nameless major clearing banks as the problem. Assuming that these banks come under the regulation of the PRA it would follow that the PRA may have some influence in this matter.’
This too has received no response. Imagine that. But Taber presses on:
‘In his letter dated 30 August to Andrew Tyrie MP (TSC Chair) Niall Booker has stated that the PRA used its section166 powers to commission a skilled persons review (by Ernst & Young) due to uncertainty over future losses. As a result the Co-op Bank has made additional loan loss provisions of about £900 million in the 12 months to 30 June 2013 and, on the basis that its proforma CET1 ratio will now be 7% at the end of 2013 rather than the 9% announced in June there will be a further £350 million provided in the second half of 2013. Against the backdrop of an improving economy and property market this level of provisions is unprecedented and, on a relative scale, exceeds the scale of losses at RBS during the banking crisis. There is legitimate concern that these provisions are based on overly conservative accountant’s modelling rather than being balanced by a realistic assessment by commercial property experts. Combined with the Bank’s strategy of an accelerated rundown of its ‘non-core’ loan book through disposals there is a high risk of undervalue sales with the benefit of future writebacks going to the purchasers rather than bondholders who are being expected to fund the capital requirement resulting from the excessive provisions.

 These are very serious issues of inconsistent information from the regulator. The timetable you have imposed on the Co-op for execution of its capital plan, with £1 billion being required from an exchange offer by the end of this year, means that bondholders will need honest answers in very short order. I look forward to hearing from you.’
He is still in an ongoing forward-looking situation. Thus far, the PRA has failed to respond to Mr Taber’s letters of 15th August, 3rd September and 9th September.