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Vulture funds take control of Cooperative Bank

The same vulture fund which is trying to make Argentina default on its debt has now wrested the Cooperative Bank out of cooperative hands.

Aurelius Capital Management, along with Silver Point Capital, have demanded more ownership of the Cooperative Bank in return for reducing the debt they are owed. The end result is that 70% of the Bank will now be owned by private investors rather than the Cooperative Group, including 10% each for Aurelius and Silver Point.

A vulture outside the UK house of Parliament, ahead of a law being passed in 2010 to limit vulture funds ability to sue the most impoverished countries in UK courts.

A vulture outside the UK Houses of Parliament, ahead of a law being passed in 2010 to limit vulture funds ability to sue the most impoverished countries in UK courts.

Daniel Tischer writing for Red Pepper has explained how the Cooperative Bank took on loans which were not going to be repaid, through its merger with Britannia. The government encouraged the deal to get Britannia out of bankruptcy without another bailout. And the Cooperative Bank saw an opportunity for rapid expansion.

With £1.5 billion of loans likely to be defaulted on, the Cooperative Bank owes more money than they are owed; which ultimately leads to bankruptcy.

As well as taking money from depositors, the Cooperative Bank has borrowed money through tradable bonds. This is where the vulture funds come in. Once it became apparent the Cooperative Bank was in trouble, the value of the bonds fell on fears they would not be able to be repaid. Aurelius and Silver Point stepped-in, buying up bonds on the cheap.

The Cooperative Bank’s own rescue plan involved reducing the amount owed on each bond, whilst giving the bondholders ownership of some of the Bank. This originally would have still left the Cooperative Group as the major shareholder, but Aurelius and Silver Point demanded more, which they have now got.

The vulture funds bargaining position was strengthened by the fact bankruptcy – under which the speculators would have lost money – was not considered a realistic option. Either the Bank of England would have stepped in and forced through a deal, possibly similar to the one agreed, or the government would have got involved in a bail out.

Probably rightly, full bankruptcy is never going to be a realistic option for banks (given the impact on depositors and wider finances), which is why there needs to be much greater public control over their lending and borrowing in the first place. Though a mix of bankruptcy and bail outs, as practised by Iceland, is an interesting alternative.

This power of vulture funds over the Cooperative Bank was the same power they hold over governments. No bankruptcy rules exist for states, so vulture funds can buy up debt on the cheap, sue for exorbitant profits, knowing that the legal system puts all the power on the side of creditors rather than debtors.

There are huge questions as to why the Cooperative Bank was borrowing through bonds, and merging with reckless lenders like Britannia, in the first place. But the case also highlights once again why a financial system skewed in favour of creditors damages the public interest.

For both the financial system, and government debt, we need stronger regulations to make creditors reduce debts, especially vulture funds which buy up debts on the cheap when a crisis has already begun. But we also need to control the financial system through greater public control over how much banks, hedge funds and others can lend.

Aurelius will next be in the news through the case it is pursuing in the United States against Argentina. It, along with NML Capital, has refused to take part in internationally agreed debt relief. Instead, it is seeking profits of 1,400% on its speculation by demanding that either they are paid in full, or Argentina should not pay everyone else. Vulture funds are wrecking lives across the world.

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Countries

Argentina, United Kingdom
  • abchambers

    I am one of those evil bondholders, I hold some bonds in the coop bank. When a loan is given, against security, I expect to get paid or take the security in exchange. So I am very happy to be in the same group of people as these so called “vultures”. At least they are looking after the common man, not incompetent bankers.

    You are addressing your anger in a misplaced way. The people that mismanaged the cooperative bank where the owners of the cooperative bank. The blame does not lie elsewhere.

    You wider issues with debt are related to a systemic problem with banking generally. I.e. the ability of banks to create credit based money. If you truly want the system to not be rigged, then lobby the government to enforce full reserve banking. This would tilt the equity vs. debt balance back to the equity side.

    The only point were I could probably agree with you, is that these “vultures” probably had to loan money from another bank in order to buy these bonds. Which was almost certainly also created with money based on fractional reserves (i.e. created from thin air).

    But, to put equity on an equal footing or higher footing than debt would only have the effect of profoundly destroying society. Imagine what would happen if every time a factory owner got into trouble, they could just not pay the debt for the factory machinery, without any legal issue occurring. All this would mean is that you could never build a factory, unless you saved up all the money before you started building. Or more short term, they did not pay for their input goods.

    • Carol Jones

      I’m an ordinary account holder with Co-op Bank. I remember in the early days of the banking crisis, they wrote me a letter explaining that they operated in the traditional manner of using customers’ savings to fund the loans they give. It all seemed very sensible at the time. Taking on the Britannia’s bad debts seems to have been a bad decision, and it now seems the head of the bank was not qualified to be doing that job!
      I do understand that creditors deserve to be paid back. But I object strongly to the way Vulture funds extract payment with massive interest from developing countries. This is not the same situation as an ordinary creditor, this is buying up debt to make a massive profit.
      What should I do? Stay with Co-Op Bank? Will that give me any influence against Aurelius?
      Carol Jones

      • Tim Jones

        As well as taking on the Britannia’s bad debts, the other bad decision in my view was that the Co-Op Bank borrowed from financial markets through ‘bonds’, not just through customers deposits. This is what left the bank open to being taken over by the vulture funds once it became bankrupt because of the Britannia bad debts.

        Aurelius have now sold their stake in the Co-Op, presumably because the deal they pushed through meant they had made their targeted large profit. But a variety of other hedge funds continue to own the bank, and 70% of its ownership will be continually traded privately on the stock market.

        I don’t want to tell anyone where they should bank, and there will be many things you will want to take into account. We don’t know how the Co-Op Bank’s ‘ethical’ policy will continue under its new ownership, or how it will be decided what the Bank judges as ‘ethical’. We do know it will now be run primarily in the interests of making profit for its private owners.

        The whole Co-Op Bank story shows that just because an institution presents its lending decisions as ‘ethical’ does not mean its whole approach to borrowing and lending is sustainable and helping to create a more stable financial system. It is difficult to see how this could ever happen through decisions of one institution, which is why we need regulations to control the financial system and prevent large debts continually causing crises.

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