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.
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.