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Should we save building societies?

Robert Peston | 15:14 UK time, Tuesday, 12 May 2009

I know I've said that funding conditions in financial markets have been improving, that the risk of another cataclysmic banking crisis has diminished very significantly and that the rate of contraction of our economy appears to be slowing down, but...

That "but" means it's not going to be all plain sailing from now on.

Take the mutually owned building societies.

These relatively uncomplicated lending institutions, which don't pay dividends to shareholders, have weathered the financial storms of the past 21 months better than large, complex commercial banks - largely because they were less reliant on flighty wholesale funding and because they made fewer crass loans and investments.

But they have two serious vulnerabilities (neither of which should come as a revelation to you):

• they are "monoline" businesses, almost totally dependent on the health of the British housing market;

• as mutuals, their ability to raise capital in a hurry to absorb losses is limited.

So with the slump in the housing market in its 18th month and as growing numbers of mortgage borrowers are having trouble keeping up the payments, it has become highly likely that a few more societies will have to be rescued - either through shotgun mergers with the biggest societies (a big hello to Nationwide) and/or with financial support from taxpayers.

A tiny number could be broken up, to protect depositors, under the new so-called Special Resolution Regime administered by the Bank of England.

Strikingly the Treasury signalled in the budget that it wants the mutual sector to thrive.

So we may see something of a taxpayer bailout of societies deemed fundamentally viable - even though no society, apart from Nationwide, can be deemed a lynch pin of the financial system, or too big to fail.

The trigger for a gloomier assessment of the societies' prospects was a downgrade last month by the agency Moody's of the credit ratings (a measure of financial health) of seven societies to below the top "A" grade.

The tarnished societies, in order of size, were Yorkshire, Chelsea, Skipton, West Bromwich, Principality, Newcastle and Norwich & Peterborough.

For clarity, there's no reason to assume that any of the Moody's seven is facing imminent difficulties. But the loss of their "A" badges has made it harder and pricier for them to attract and retain finance from institutions.

It may seem extraordinary to many that credit rating agencies like Moody's still have tremendous influence on the fate of banks and building societies: if the agencies hadn't awarded impeccable AAA grades to investments made out of subprime loans that turned out to be toxic, the global financial mess wouldn't have been quite so acute.

However even the Bank of England and the Treasury continue to defer to the agencies' judgements.

One of the reasons a few societies are in a spot of bother is that only those with the highest credit ratings can take advantage of two kinds of support provided by taxpayers (the Bank of England's Special Liquidity Scheme and new state guarantees for asset-backed securities).

To add municipal insult to central bank injury, a number of local councils (having been humiliated by their losses on deposits in Icelandic banks) have decided they will not place deposits in societies other than the very biggest and soundest - which means that some societies are losing a valuable source of finance.

Although it may seem odd that the Bank of England and Treasury don't exercise their own independent judgement to determine whether individual societies are worthy of help - or at least haven't decided to ignore Moody's by relying instead on the assessments of the Financial Services Authority - it would be silly to blame the woes of the societies on Moody's.

House prices are still falling (though just possibly the turn may not be too many months away, if recent data, including today's survey results from the Royal Institute of Chartered Surveyors, is a guide). A number of societies are bound to incur losses this year.

Understandably, the FSA is in the process of verifying whether all societies - not just the Moody's seven - have the capital to cope with further strains in the housing market and whether they have sufficient access to finance to withstand a prolonged drought of wholesale funding.

Societies unable to demonstrate they can absorb potential future losses comfortably will not be allowed by the FSA to retain their independence - unless the Treasury were to invest in them on taxpayers' behalf (not impossible).

As for those with adequate capital but inadequate access to deposits and wholesale finance, their future hinges on whether the Treasury and Bank of England relax their conditions for providing taxpayer loans and guarantees.

To be clear, this is an eminently manageable problem. And I see no reason why retail depositors in societies should fear they'll lose a penny, though part of the challenge for societies is that the same comfort can't be given to providers of wholesale funds.

Here's the measure of the challenge.

The seven societies which lost their Moody's "A" have £71bn of mortgages and other assets on their balance sheets in aggregate. Which means that if you were to lump all of them together, the combined balance sheet would be 30% smaller than Northern Rock's was in 2007, when its funding dried up.

As important, the seven are reliant on money from wholesale sources to fund about a quarter of the value of their assets. Which means they are much less dependent on wholesale funding than the Rock was in its pomp.

In other words, this isn't a story of some great looming financial crisis.

It's really about what kind of financial services industry we want for the years to come.

Do we want diversity (to use the politically correct cliché), an industry where the biggest banks are kept on their toes by competition from mutual tiddlers?

In which case, taxpayers' money should be deployed to keep the most viable societies alive through this severe crisis in the housing market.

Or would we be content to save and borrow exclusively with giant banks and new retailing interlopers (such as Tesco)?

My guess is that there would be some sadness if yet more societies with roots in local communities were to vanish.

Comments

  • Comment number 1.

    Sadness isn't the first thought that comes to mind when considering we will only be able to save and borrow exclusively with giant banks and Tesco's.

    With the Lloyds merger we can see where policy is taking us. Brown to be employed by the new mega bank?

  • Comment number 2.

    "Small is Beautiful". There was a book written with this title by Schumaker in the 70s and it would appear that this is the way to go for the future despite recent actions by HMG to merge banks into colossal beasts. Massive institutions are unwieldy and often become inefficient despite economies of scale. Building societies have been on the whole more conservative and I think most people like the idea of the way they operate by lending to those wanting a house using deposits from savers and not borrowing from the money markets. We can all understand this business model. None of your high faluting high finance nonsense here. Thank goodness for them now as they can provide a little bit of stability to our battered financial system.

    Perhaps there are too many and some consolidation is necessary but there are enough to provide some healthy competition and enough that savers don't have to put all their eggs in one basket.

  • Comment number 3.

    Mutuals are victims of the credit crunch and deserve support from the government. Sentimentality is not necessary but sensible medium to long term business viability is the aim not least for setting examples to the banks and to hopefully recover the original purpose for their existence - to provide sustainable finance for house and other long term purchase.

    Hopefully the support will be unnecessary.

  • Comment number 4.

    Building Societies have been around a long time - for the most part they survived 2 World Wars, the great depression and the demutualisation craze.

    They´ve had their day, If they won´t die of natural causes then they need to be wiped from the pages of history by government (or Moodys)decree.

    Bring on Tesco - they have a national presence, not just confined to obscure places like Norwich and Peternorough - Who would go all the way to Peterborough just to get a mortgage?

    Also Tesco have probably got pretty top notch contacts with Moodys, so they can be all but guaranteed A status. Imagine some poor analyst from Moodys trying to find Norwich or Peterborough - I don´t know where they are but I´m pretty sure they are outside zone 1 on the tube. As for West Bromwich - well the name alone tells you all you need to know. They have probably had a hundred years to rebrand into something more modern - but no, couldn´t be bothered.

  • Comment number 5.

    So does this mean the housing market is going to lose even more value than already expected? Can we have a formal statement from the man in charge: whoever he might be this week?

    From one person we hear all about `green shoots', from another cries of woe that the world is coming to an end. Just what is going on?

    I feel that there is an agenda being pushed which the ordinary people know nothing about. This is very disagreeable.

    I save in mutuals. I always have. I don't trust big banks to look after my savings. Got that right didn't I?

    What the government should be doing is supporting people sufficently so that they can pay their mortgages rather than trying to find yet even more devious ways of screwing the little people of their hard won savings.

  • Comment number 6.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 7.

    If Building Societies didn't have to cough up an excessive amount in 2008 to bail out the failed banks because of the way the FSA set up the compensation rules then many wouldn't be in the position you state.

    http://www.ybs.co.uk/your_society/latest_news.html

    and

    http://www.ybs.co.uk/your_society/latest_news.html

  • Comment number 8.

    So many of us are still bemused at the 300% rise in property prices in 7 years.
    If half the population knew that property was wildly over-priced, why didn't these building societies?
    It must not happen again, the disaster is evident.
    Vendors are able to sue estate agents who they believe have sold their property under market value.
    Why can't the reposessed sue estate agents and valuers if they believe they were sold a house way over true value?
    Perhaps they can.

  • Comment number 9.

    Who's going down next week Robert/ Seems an odd piece to put pout unless you've got some source?

    The problem remains. The government are turning a blind eye to the banks abusing the system again. What are the off-balance sheet toxic assets? Anyone know yet?
    The banking system is broken. Those too big to fail are being joined by those not too big to fail but with an election next year we shouldn't upset the status quo.

  • Comment number 10.

    Having recently needed to move from a monolith to a mutual, I firmly believe that mutuals have a place in the finance market. That they may, possibly, run into trouble because motgagees run into problems repaying their mortgages is not, in general, their fault. Unlike some monolithic financial institutions they have not lent irresponsibly and, unlike those intitutions, neither have they rewarded abysmal and abject failure by paying large bonuses to their management and senior executives only then going cap in hand to the Government for a bail-out.

    If any mutuals do encounter trouble then our so-called Government should give them every possible assistance.

  • Comment number 11.

    If Nationwide is anything to go by, bigger is definitely not better - abysmal service just as bad as the big banks. Large corporations operate what is known as a confusopoly where there seems to be competition but in reality the offerings are made so complex no-one knows where the best deal is, stopping the normal market forces from driving rates down and value up. The problem is there is no point in switching as the others are just as bad. Look at energy, phones, mobiles and broadband for examples.

    We need 20 or more lenders for this not to occur. Don't reward the Nationwide for its customer unfriendly, big bank policies by giving it a gift of smaller, viable societies at a knock down price, Mr Brown.

  • Comment number 12.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 13.

    The widely trumpeted fluff from the surveyors about the housing market recovering is just that - fluff. It is wildly inconsequential and is produced for the sole purpose of providing some 'cheer'.
    The figures used are based on the number of surveyors reporting a rise in buyer registrations.
    A big fat 'SO WHAT' is the only appropriate response to this. Everyone on the planet could call up and register as a buyer, but this does not mean that actual sales will rise. All it means is that more people have actually bothered to register.
    Last time I moved home, I registered with around 100 agents to cover two large areas and spent around 18 months looking.
    Did all of these agents separately reply to the survey and log the same registration 100 times? Almost certainly.
    Did it result in a measurable increase in sales? Almost certainly not.

  • Comment number 14.

    I think the point that you mention about moodys is the most pertinent here. What we need is to understand the risks we are taking in relation to the return we are expecting. Where Building Societies win hands down is they are relarively simple for ordinary folk to determine how much risk they are taking. Mistaken assumptions or 'group think' caused moodys to loose all sight of the real risks which got us in this hole in the first place. Although IMHO anyone who thinks they can make 20% legally when the rest are making more like 5% has got what they had coming to them!

  • Comment number 15.

    A ridiculously out of control housing boom and now near zero rate interest on deposits.

    We cannot blame the US for this.

    These building societies have provided finance for our bricks and mortor through one recession after another. They have always been a save haven for our savings.

    They don't rip us off because there are no shareholders baying for high dividends and the service they provide is localised and personal.

    Now they suffer not because they are inefficient but because they are caught up in a catch 22 situation caused by government policy.

    In my view they should take priority over the banks when it comes to taxpayer support. After all this government are already taking millions from them to support other financial institutions.

    Without them as competition the big banks will have free rein to ride rough shod over customers and charge what they like. Big is certainly not beautiful as we have all found out.

  • Comment number 16.

    We should not forget all those folks who have been left with enormous debts and reposession because of the last property "beano".
    We live in a land of "compensation culture".
    Is it possible for such an unfortunate person to claim compensation for their plight from estate agent, valuer or even bank or building society?
    Using a no-win-no-fee compensation lawyer?
    Were you sold a house that was wildly over-valued?
    Are you in a desperate situation because of that?
    Food for thought.

  • Comment number 17.

    It would be useful to know what rules we can rely on. Happy Gordon says no private investor will lose out if a BS goes down but the law only guarantees up to £50k per liscence. Is this another case of Rules being there to be bent. If so what is the point of the legislation.
    Even I withdrew from N Rock a year before their demise because it was clear what would happen when the housing bubble burst. Ditto there was no way anybody who raised there head above the parapet would have put money into the Icelandic banks. Politicians were so intent on making money from second homes that they bought into the whole idea that there could be no bust. We have totally lost our rigour because money was too easily acquired by too many people.
    I know it is another subject but what about our Goods and Services Balance of payments. At the end of this budget period the cumulative deficit since Labour took power will be £500 billion. It does not even get a mention and we don't seem to be bothered.

  • Comment number 18.

    Good piece Robert, and almost the first mention I have seen of the role played by ratings agencies in the meltdown. I actually think they are far more culpable than has been generally recognised as the Big banks and financial institutions are like sheep led by the nose of these idiots and as much attention should be paid to Moodies/Standard Poor's ratings as to the ramblings of mystic meg at the local fairground.
    Most building societies have been run in a very conservative, boring way and they deserve to survive and thrive. The first thing that should happen is prudently run Building societies should be exempt from the levy being charged to financial institutions for the mess that idiots like Goodwin have created, this is totally unfair.

  • Comment number 19.

    Yes, we should save building societies. The mutual business model impacts the greed/fear vortex in a different way.

    Isn't the question should we save 'ratings agencies'. Their business model has been central to the current collapse. The way in which the derive much of their income should be made illegal on the ground that they pretend to provide an independent assessment of risk when in fact a substantial proportion of the income is derived from the organisations presenting bonds etc. for rating. We should have seen this as a catastrophic flaw and the regualtors should have stepped in and prevented the collapse. (By the way this same argument for auditors etc. can be made.)

  • Comment number 20.

    BUT ROBERT ,

    You said only last month that no more building societies were under threat !!!!!

    No apology, no reference to your mistake, no reasons given for the change.

    Others have accused you of being a Government propoganda mouthpiece. With a record like this, why do you lend credence to their views ?!?

  • Comment number 21.

    Why would big banks be a good thing? We have these today and they failed. The suggestion is our politicians are in denial about this, in spite of the global financial destruction right under their noses! Yet it seems in order to qualify as a politician, being able to deny anything and everything is a mandatory personal quality.

    The problem is smaller banks might collectively be less profitable than the bigger entities we have today, perhaps because of a higher cost base. Also meaning less tax revenue as well.

    A little tragically the majority of people don't really care a jot what the banks do, so long as their mortgage repayments are low or their savings produce reasonable income? It's not until it's too late that they react.

    For me the banking reform politicians said would be made just isn't happening and very probably isn't going to happen, they'll just shy away from things and use weasel words to walk away.

    All I know is, the banking system should not be reformed by people who are or were ex-bankers. The industry needs radical, not fresh, thinking.

  • Comment number 22.

    I hate to say I told you so Robert, but I told you so at the time of the demise of the Dunfermline Building Society.

    You stated in your blog on the 30 March that "There's evidence that the authorities are confident that no other society is facing disaster - because there is only one significant building society whose new PIBs (capital issued by societies) the Treasury hasn't been prepared to guarantee through the credit guarantee scheme.

    The sole society of any size categorised as too feeble to receive the guarantee was - you guessed - Dunfermline."

    I was aware of the Moody's downgrade and I'm still waiting to see how bad the "baggies" building society report is before risking their PIBS, perhaps.

  • Comment number 23.

    Being a Final-Year graduate having looked for Finance Jobs and interning in an investment bank over last summer, I've gained a feel for the different cultures from the big banks and Nationwide (where I've hopefully got a job).
    Nationwide may have saved 3 sizeable Building Societies in the last year, but as a help to the treasury and on their own terms - I doubt Nationwide would pick up more failing BS's if they were seen as the lender of last resort - they want people to know them as the Lender of First Resort.

    Two of the big problems hurting building societies are:
    1) The fees forced from them to pay for the Depositor Protection - Having to high amounts for Banks riskiness due to their high savers ratios was unfair and questionable
    2) having all deposits seemingly protected - normal savers can now just put their money in the highest interest paying accounts - regardless of the risk. This loss of Risk/Reward attracts people to places like Barclays rather than Building Societies since if Barclays were theoretically to collapse - Mr Darling would just save their accounts with the rate of interest accrued, making it essentially risk-free.

    People don't realise how valuable Building Societies are to the Country. Financing incredible amounts of projects such as schools, office leasing, etc they are part of the lifeblood that pumps through the economy. They may not invest in BRIC companies, expecting mega-returns, but they take note of the risks involved with everything more closely since their shareholders are their savers.

  • Comment number 24.

    Robert, you appear to talk with authority by suggesting the banking crisis is over, that is not teh case at all, off balance sheet liabilities are as much there as they ever were and no bank has come clean on this matter. You shoudl remember to stick to the facts and not let your TV ego get carried away.
    One other thing if Tories are paying back money they should not have received does that mean we can expect a repartiation of bonuses paid out so irresponsibly by banks? Please start the debate now.
    Memories do not evaporate as quickly as some may wish!!

  • Comment number 25.

    #23 Gradof09. Building Societies have had their day, and need to be consigned to the pages of history.

    As you say they take note of the risks involved - but only at the level that it applies to themselves. They have been comprehensively outmanouvered by Barclays, RBS et el - because they take no notice of risk at all. Therefore they can potentially produce staggering returns for their investors. Investors can´t lose because if the risks all go wrong then the government steps in and gives the investors all their money back.

    Who in their right mind would deal with a bunch of obscure building societies with an outdated business model "part of the lifeblood that pumps through the economy" - Zombies don´t need no blood, therefore we don´t need no one wasting time by pumping lifeblood anywhere other than to big banks.

    You probably think I´m crazy but the FSA agrees with me - check out the links in post #7. No-one could argue that the FSA don´t know about finance!!!

  • Comment number 26.

    Should BoE use quantative easing money to buy assests from mutuals? - no worries about about dividends

  • Comment number 27.

    The building society issue is really just a side show as your numbers illustrate. The real joker in the pack is still the amount of derivatives exposure held offshore and out of sight by the main banks which will continue to ooze poison into the global economy over many years.The governments of the UK and USA may feel that a slow drip feed of bad numbers over a long period of time is preferable to a 'big bang' clearance of the toxicity but but I am not convinced. Knowing how large the bad news could be would probably be a good starting point for a rational debate, but keeping us in the dark seems to be the mainstay of the present game plan. I suspect if truth were known the inadequacy of the current solutions would be so stark that confidence would be shattered once and for all.The tax regime needed to pay for this all will mean poverty for generations of the most vulnerable not just in the UK,Europe and the USA but across the globe. Shameful.

  • Comment number 28.

    When I firs took out a mortgage the first port of call, for just about everyone, was a Building Society. They may have been conservative institutions - even staid - but they were the bedrock of mortgage lending.

    That had to change, of course, because their conservative lending practices were keeping house price down; the Government of the day needed a surge of potential lending to those who were buying their old council houses; and the banks saw a large area of secure, and securitisable, business.

    And so the boring old building societies were demutualised. The brakes were off - and look where we've ended up.

    Was this all for the best? I don't know. Perhaps someone could tell us whether we would all be better off today had we kept house prices within reasonable bounds - and worked hard to produce tangible wealth rather than living off the supposed investment income from our property.

    That's the choice we still face as we try to answer the only question tha tmatters - ie where do we go from here?

  • Comment number 29.

    call me a conspiracy theorist, is it not ironic that a ratings agency who were complicit in the Great British Rip off now have credence to affect the small guys, the very places that have been attracting peoples money as they take it from the banks and place it in a building society.
    If I didnt know any better, I would have said that a bank person tipped off the ratings people to give the upstarts a crack in the ribs, this allows more speculators spivs to now pile in grab some shares as the big banks who are crippled gobble up the supposed poorly rated building societies , more money for someone ???????????

    meanwhile the public gets less choice this stinks to high heaven and your piece is a little tester for public opinion.

    we had no choice bailing out the banks, are we again going to get no choice letting the building societies be gobbled up by illicit means

  • Comment number 30.

    Is there anyone who stills gives any credence to Moodys ratings? Surely not having an A rating is good given their track record?

    How much has the imposition of the new FSA compensation scheme affected the aforementioned BS and are we now in danger of allowing the slump to be mismanaged as well? To all intents and purposes it's the same people who couldn't manage the boom in charge of the bust

  • Comment number 31.

    #29 romeplebian You are a conspiracy theorist.

  • Comment number 32.

    #29

    Yes.

    I am sure the small mutuals, which are generally run on comparitivly ethical and sustainable lines would also maintain their ratings if they were badly run and too big to fail.

    What kind of madness is this where small sensibly run busineses are pre packaged up for the slaughter on the alter of huge badly run ones at the bequest of the incompetant (or corrupt) and discredited ratings agencies aka the spanish inquisition of the banking world.

    Who are these people in tjhe mysterious ratings agancy? why have they got off scot free? what is their business model? Why have they not gone bust ?

    How come moodys still exists for goodness sake given its track record?

    Why is no journalist asking these questions?..


    Anybody out there know how we could set up a ratings agency? How hard can it be, if we got a bunch of monkeys and a random number generator we could hardly do worse than their recent past track record.

    Can i have a rating please?

    Who are you?

    An investment bank in new York and london

    Ahh that will be AAA then.

    Thank you very much.

    No problem.


    Did i miss something in that scenario anybody?

    Jericoa


  • Comment number 33.

    Robert

    We desperately need diversification and business/building societies outside of central Westminster control.

    So long as we are "captivated" by political and financial controls from only London and the City, the Country will never regain its strength.

    London based media, finance people and politicians speak a common language with the rest of us, without understanding who we are, our values, priorities and hopes and dreams. We feel dis enfranchised, dis empowered and angry that every decision effecting our lives directly is taken distantly from either Westminster, some Bank or other or Moody's rating Agency. Power back to the People I say, watch this space at the June Elections, both Labour and Conservatives may well suffer a real shock.

    I feel many will vote for "Independents", UKIP or the BNP so as to make a clear statement to those who want power over us. This Government and Labour are clearly lost and finished for a generation but the Conservatives also have a lot yet to learn. We the People, have been damaged, not so much them. We have lost savings, security and may have lost hope. The British will ensure their collective voice and response to this "Crash" will yet be heard via the Ballot Box- it is rumbling away already.

    For the first time in my voting life of more than forty years, I shall not vote for any of the so called "Main Parties" this time, my protest will be heard alongside thousands of others, I feel sure. We want CHANGE and very big change at that. We want to clear Westminster, the FSA, the City Boards and Banks and start again with people of impeccable background and proven integrity.

    SUPPORT SMALL BUILDING SOCIETIES NOT MEGA BANKS

  • Comment number 34.

    And who gets to choose who gets saved?

    In the US its the "Fed", and we ar eled to believe that is the Government. But as Bloomberg reports today "The trustees..(of AIG) were appointed in January by the New York Fed, a private institution owned by member banks...".

    It is time that shouts of "conspiracy theorist" were met with the question "Which one of the facts do you dispute?".

  • Comment number 35.

    Any Building Society which is at risk due to house price deflation will have by definition lent out money irresponsibly and thus contributed to the housing bubble which is causing so much strife now.

    I would be incensed if they were rewarded with a bailout from taxpayers' money.

    Instaid, they should be let to go to the wall, without a moments hesitation.

  • Comment number 36.

    The Building Socs deserve a little help, but please don't forget the Post Office pension story Mr Peston. That's the biggie, and it will be a national disgrace if Brown, Mandelson and Darling get away with it. It's a £10Bn off-balance sheet scam, and it would be shameful if they got away with it.

  • Comment number 37.

    why are Moody's still in business? they contributed to the banking problem and along with auditors appear to have emerged unscathed... And why are we sacrificing our childrens and grandchildrens futures for the sake of more expensive houses?

  • Comment number 38.

    @31 armagediontimes
    I did ask for that :) made me laugh anyway

    I see a lot of people are taking heart from the article in the FT claiming green shoots , we are now officially being taken over, robbed blind and then Cameron will ride in on his pony and pave the way for the World Bank , you read it here first

  • Comment number 39.

    Even if building societies were replaced by Tesco, this would never silence the doom-mongers on here (yes, you know who you are) from doom-mongering.

    If you want to point fingers at who has blood on their hands for this mess, don't look at the building societies. Do your research!

    The credit ratings agencies like Moody's gave false impressions of the credit-worthiness of companies then, what makes any of you think that they can be trusted now?

    In the boom times, building societies did relax their lending criteria, but not nearly as much as the banks. Why? It seems that they had to, they didn't control the competition, but they had to be a part of it to keep going and growing. Even for some who bought mortgage books from others, they didn't buy too many, and also tried to stay clear of the riskier loans. That's of course not including Dunfermline, who seemed to have gone too far and eaten the "wafer thin mint" of GMAC and Lehman's Brother's loans.

    Finally, it isn't just a fact that building societies should be preserved, but not preserved as they are. We need the choice and the variety, and the competitiveness it brings in the market (a quick glance at best buy tables will show you who is offering the best savings products right now). After this crisis has abated, and a new financial market is forged, we will need the building societies. After all, these are unique to this country.

  • Comment number 40.

    The image Robert is trying to project of kind and cuddly mutuals is way wide of the truth

    Whereas the banks have shown some social responsibility and reduced their mortgage rates as base rates have dropped, most of these vultures are caning their borrowers like there is no tomorrow

    Borrowers reverting to or already on the building society variable rates are paying upwards of 6-7% as compared to the average banks 3%

    And the BS's know they can get away with it as the borrowers cant move to another lender as funds have nigh on dried up

  • Comment number 41.

    #39 lukeo1980 Why do we need a new forged financial market? we already have one.

  • Comment number 42.

    I watch with concern the progress of Terry Leahy's monopolistic ambition (also that of Robert's revered Nationwide) and wish for the survival of the remaining 'people's banks', the smaller mutuals and those who resisted the fashionable pressure to convert. Whenever I touch anything on the shelves at Tesco a bell sounds off. If this is the character of future relations between big lenders and their customers I shall keep my ambition reined in and pay for everything with cash.

  • Comment number 43.

    Lets not forget who caused the credit issues.

    1.Big banks gambling our savings on high risk loans.
    2.Credit agencies providing AAA ratings to junk investments.
    3.The government / FSA having no effective regulations.

    In my view the building societies are a victim of circumstances,not of their making.For very little money they can be assisted in the short term to provide much needed competition in the years to come.

  • Comment number 44.

    Is this a Northern Rock type story Robert? WHat do you know? Should the police be involved?
    After all this must be a good week to bury bad news.

  • Comment number 45.

    During the feudal era the working class or peasants or serfs had local economies based on slavery, barter, theft, pillaging and rapine.

    The overlords stuck to owning slaves, theft, pillaging and rapine.

    100yrs ago the working class had slavery, co-operatives, mutuals and theft.

    The overlords stuck to slave owning, theft and pillaging but added swindling.

    Now we have Tesco and the megabanks and petty theft and petty swindling.

    The overlords simply mega-swindle.

    I would like a return to the good old days as I'm articulate enough to come out best in most bartering and a reasonably effective killer, though too old to be bothered with the rapine much ; life would be so simple. I want it, I'll get it.

    Perspective again; 10 Billion pounds to the UK gross national product is the same as forty quid to a Tesco RDC store delivery driver on 35k. or half a saturday night out.

  • Comment number 46.

    Robert - you talk as though the problems are nearly over. I believe they have not yet started. 2009 will be far worse as the year progresses. There will be far more unemployment, the hidden problems within the banks will resurface and the huge credit card debt bubble and auto loan bubble will finally burst. I base this view, not on economic analysis, but on the evidence of my own eyes. Tonight at B & Q I saw any number of expensive new cars in the car park - cars suitable for millionaires, not people who have to do DIY!! These idiots have been succoured in by huge discounts and the low cost of borrowing. There is huge trouble ahead.

  • Comment number 47.

    Mutual Building Societies can be usefull alternatives to banks and I have always been a member. However, many have recently been run like private fiefdoms for the Directors and until a shareholder vote is required by over 75% to allow the directors to take any controversial action they will never be controlled by the members.

    The building society I am a member of, and one that is supposedly rescuing a smaller society in financial difficulty continues to use old accounts at derisory interest rates and acts in almost every way like a PLC bank. The only difference is that the Directors are answerable to no one except themselves.
    I have just recieved the "Pravda" magazine which is a self praise production for the Directors (paid for by the members) and they even have the cheek to hold a "Mock" interview with the Chairman who answers his own "mock" questions and they call it "Mutual"

    I would like to see independent members committees with a direct veto on Directors in line with members votes. AGM votes are useless because of the loading of the questions and obsticles put in place by the Board.

    I see those Directors facing the same fate as our politicians soon and hope they dont get off the hook quite so easily as the politicians have.

  • Comment number 48.

    #47. At 11:33pm on 12 May 2009, GrumpyBob
    excellent comment GrumpyBob, the directors of these so-called building societies are just like the rest of the banking hierarchy.
    Does anyone remember the comment from the Dunfermline member who was surprised that his BS could be taken over by a larger one with NO VOTE required from the members ('cause it's in the small print of the rules governing the BS)?
    Robert...meanwhile back at the banking scandal...what happened to the taxpayers 37 billion? what was it spent on? another scandal here methinks.
    If the BBC investigative reporter of the year cannot (or will not) get answers from HM Treasury then what is joe public to conclude?

  • Comment number 49.

    #41 armagediontimes - no, the financial market is still being forged right now, our problems are not yet over.

    #46 economaniac - perhaps our troubles are fueled by something altogether more human, the human vices of Greed and of Stupidity. Most of us are guilty, but some are a lot more guilty than others.

    #47 GrumpyBob/#48 splendidhashbrowns - I wonder if this supression of power a society's members had something to do with carpetbagging in the '90s. In many instances during the latter part of this period, it needed a Yes vote of 75%-90% from members for a conversion to take place. Not surprisingly, the buck stopped there.

  • Comment number 50.

    #49 lukeo1980

    Quite right, it no doubt had a great bearing. I didnt participate and stayed with my own BS

    However, I suspect most of the spoils of ALL those mutualisations went to the Directors, ! What other motive did they have for pushing through such mergers ! Halifax ? is a reasonable example. You are also right that many members simply couldnt be bothered or saw a short term few hundred pounds as a sufficient "Fob" to vote for it ?

    Under the circumstances the rewards were probably less than a few months extra charges and interest for borrowers and less for savers. Short term greed but glossed so much by the hype surrounding the whole process.

    We have the good old "Mutual" turned giant Norwich Union, why they are allowed to even use ANY of the previous members "Orphan Assets" for their own use is nothing less than a scandle and we have good old Claire trying to ask nicely that they share a little of it with members ? There should be directive NOW that Norwich Union (or its new nondescript title) should pay out every penny to those members or face the consequencies. We hear the Directors issuing threats to withdraw any payment ? They wouldnt be so brash if we had a decent and honest system or a regulator or legislators who stopped pandering to their lunching friends and actually worked for the people of this country.

    Nothing will change, the old boys network will keep their heads down for a while and when this inept Government are thrown out of office, Cameroooons new lunching circle will take the same useless path and enjoy the free brandy after expense account lunches.

  • Comment number 51.

    All very interesting, but frankly an irrelevance:

    I suggest everyone starts looking at what is happening to 10 year treasuries, then dust down their economic text books under the chapter "crowding out".

    Then sell. Everything. Equities, Corporate Bonds, Sterling, Real Estate.

  • Comment number 52.

    #23 "They may not invest in BRIC companies, expecting mega-returns, but they take note of the risks involved with everything more closely since their shareholders are their savers."

    The banks and "building societies" that "failed" did *NOT* invest in BRIC countries !! They invested in "safe" countries like the US or UK where their investments have been wiped out !! All their CODs and CDSs are turned into toxic assets !! Meanwhile, the BRIC countries are vehemently opposed to producing their own CDOs and CDSs !! Any of their citizens who offend against the others may be taken out and shot !!

    Welcome to a democratic country where those who made zillions disappear are given half a million a year pensions and knighted "for their services" !!

    That said, the ratings agencies seem to have a poorer performance than my local bookie !! At least, my local bookie gives reasonable odds on each race. They will not make a three-legged horse into a dead cert !! Where is Bear Sterns now ?? What price Lehman Brothers ?? Citigroup, the world's biggest bank, cannot possible fail !! HBOS, in the absolutely rudest of health, right up until it went bust completely !!

    And then there's the government - THERE WILL BE NO MORE BOOM OR BUST !!

    Meanwhile, boring old Coop keeps plodding along, making a little here, a little there but never in trouble !! 40 years, I've had my account there and it is *definitely* safer than banks !!

  • Comment number 53.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 54.

    #39 "After this crisis has abated, and a new financial market is forged, we will need the building societies. After all, these are unique to this country."

    Actually, no !! They may, however, be unique to the British Commonwealth. There are many Commonwealth countries that have their own building societies, modelled rather like the old Mutuals !!

  • Comment number 55.

    So whats the big concern. Smaller building societies have been disappearing for years. just recently derbyshire, britannia, before that portman etc.

    small is not beutiful in financial markets even if it is local. A bankrupt local building society can lend to no one.

    We need medium sized solid instituitions which are properly regulated and policed, call them mutuals or banks we don't need mega monopolistic banks nor miniscule building societies.

    But I can't see one appearing in the market place, perhaps tesco/sainsbury's is the place to go after all, I could pick up my veg at the same time I get the cash out to pay for it??

  • Comment number 56.

    There seems to be a continual underlying pretense that things are just a little bit abberant and the position is implied that it doesnt need much to make it all come right. Building Socs are now joining the orderly queue for taxpayer money.

    Is there nobody on the planet who does not think a little bit, or even a big bit, of taxpayer money is the answer. The whole financial system is fried. The idea building societies are put on life support is bizarre, let somebody else take the books and get on with it.

    Presumably if you offered higher interest rates then people will chose you to deposit with. If that means those branded mortgages have to rise then holders can remortgage elsewhere. Every town romantically wanting their own building society is as clever as every little island wanting their own airline, usually subsidised.

    This idea that taxpayer money can somehow bridge the gap between the here and now and some more comfortable time just around the corner has got one main drawback. Nobody knows how big the gap is or where the more comfortable environment is. This smacks of the same problem as the automakers, oversupply.

    Continually slinging money behind irrationale risk takers and trying to prop up oversupply just weakens things in the long term. Its just back to capitalism on the way up, socialism on the way down, and capitalism on the way up again. It really is the worse of all worlds.

    Meanwhile the queue for taxpayer money grows and addittionally some of those who have already been to the front to collect will undoubtedly promptly join the queue again at the back, complaining about the lack of service (not quick enough, not enough dough, too many conditions, I'm a VIP dont you know, to paraphrase some reports) and to also complain how many are in the queue. The 'Pass ''Go'' and collect' card seems popular, but the 'Go to jail and do not collect' card is apparently out of print.

    The management of decline seldom stops decline.

  • Comment number 57.

    #50 GrumpyBob - True, AND had your BS demutualised, it may have suffered the same fate as all the other former building societies who went the same way.

    As for regulation, the FSA at times do seem like a joke - they are slow to act and their motives don't always sound genuine, particularly when you see where their top brass come from.

    And as for a general election, it more and more looks like an option to choose our punishment for the next few years, than to obtain some positive change.

    All in all, are we truly powerless?

    #54 ishkandar

    Actually you're right there, sorry!

  • Comment number 58.

    Small with a hint of inefficiency has to be the future if we are to have anything near a reasonable level of employment!

  • Comment number 59.

    Someone please correct me if I am wrong but from whatever I have understood in the last 18-24 months (I used to work in a hedge fund as Data Manager) is that the housing market IS inflated. Assets have been grossly overvalued to inflate the securities that could then be used to bundle them and sell them.

    If that is correct then

    1. Why is the housing market (or the assets) coming down severly in price? To this date in big affluent parts of south east England the prices have barely moved. I wouldn't consider a 11-12% correction as a "real correction" given the massive over inflation in the prices that happened in the past few year.

    2. Aren't those building socities whose sole business model was to keep the money flowing to ease selling and purchasing of these assets doomed anyways now?


  • Comment number 60.

    Post 50 GrumpyBob, if you would have bothered to read any of the press re the Aviva orphan assets attribution you would have realised it is nothing to do with Norwich Union and the mutual side but actually the old Commercial Union and General Accident funds.

    Norwich Union was merely one of three parts of the Aviva conglomeration. In the faustian pact that led to the two mergers the life & pensions side went to the old GA Life head office in York. The corporate Head Office is in the old CU Tower in Leadenhall Street and UK General Insurance to the awful concrete square in Surrey Street in Norwich.

  • Comment number 61.

    It is very important to ensure that building societies are saved and maintain their local roots. This can be achieved by three strategies;-

    1 The FSCS levy has had a dramatic influence on the balance sheets of the building societies. The funding of the FSCS is based on savings balances and hits building societies particularly hard as they do not rely heavily on wholesale funding. Therefore they pay proportionately more. This is wrong. The scheme should be linked to risk that institutions take both in lending and funding. That would move the emphasis away from building societies to the banks themselves (who lets not forget caused the problem in the first place).

    2 Local and central govt departments should be encouraged to place funds with local building societies. By placing funds with the societies it will avert any risk of them collapsing as they will now become well funded. The Treasury/Bank of England could assist this by guaranteeing those funds. It seems wholly reasonable to ask a local authority to place their funds with the local building society

    3 Regulation by the FSA is becoming more and more costly. Back office costs are becoming more costly. It must be possible, in the medium to long term, for building societies to share the back office and call centres. they could strip these costs out and place the work in an outsourced business centre who would do this work for a number societies. The costs would be passed back to each society but it would be less than if they incurred it themselves.

    By taking these measures we can bring back some stability to the remaining building societies and thus ensure competition within the marketplace.

  • Comment number 62.

    #60
    I do read the press and I am aware of the setup and who the orphan assets belong too (the original policy holders if there was any honesty in the financial sector)
    I termed the Group as Norwich Union (if you read the press, that is how the Policy Holders Champion, without teeth, refers to it)

    I didnt use AVIVA as I have no doubt most people still dont know who the Company with the nondescript "new" title, are ! A title dreamed up by consultants no doubt and paid for by policy holders and shareholders, of which I am unfortunatly one for the moment. gained via the break up of Norwich Union which I voted AGAINST.

  • Comment number 63.

    HERE is an interesting article about Moody's - and it's biggest shareholder, Warren Buffet.

    I have always told my students that, when assessing any research, the most important question to ask is: who's paying the researchers' salaries?

    Hence it's also interesting to note that various US states and others have threatened to sue the agencies, claiming that the ratings are discriminatory: designed to earn fees and commissions, rather than give an objective assessment of risk. In fact, my rather cursory research suggests that this has been an issue for a very long time - back to 1995 at least.

  • Comment number 64.

    Why trust the credit rating agencies, or the auditors, they were as much the problem as anything else, how independent have they been in the last 10 years with the organisations they were running the rule over ?. Surely, one issue that needs resolving is the independence of such organisations, until you do that, we have the same situation in banking as we do at Westminster, scrutiny has to be INDEPENDENT, it continues not to be the case

  • Comment number 65.

    There is a lack of proper regulation which needs to be addressed as a priority, not so as to dampen enterprise and business, rather to close loopholes and shine light on the dark art of accountancy principles particularly for larger organisations.

    Transparency must reign supreme.

    It is pointless criticising the ratings agencies without addressing the basis of how they work- assessing risk is and will always be based on available information. The problem has been that the information available previously skewed to appease shareholders and ensure financial investment. It has been of low, biased quality, hence the accounting regulatory improvements I propose to assist the ratings agencies.

    This in turn will bring back confidence in the markets and in lending liquidity.

    Of course I gloss over the specific accounting regulatory improvements necessary, which is the rub (and will take time), but this must be identified as the problem before the solution can be adentified and implemented.

  • Comment number 66.

    #63 sashaclarkson

    Interesting article. I particularly like the starting quote:

    Imagine if you had a rabbi and said, All the laws of kosher depend on whether this rabbi decides if food is kosher or not. If the rules say You have to use this rabbi, he could be totally wrong and it wont affect the value of his franchise. The rating agencies have been mislabeling the goods for a long time. A lot of investors have been eating pork recently and theyre not too happy about it.

    -Frank Partnoy, a professor of law at the University of San Diego


    ...And the ratings agencies are continuing to tell porkies.

    I've had a read of Warren Buffett's profile on Wikipedia. If he is as good as he seems, maybe he could use his influence to get Moody's working properly.

  • Comment number 67.

    Glad you've at last picked up on the sham/scam which is the rating agencies, but I disagree about not decrying them. The fact is, they were key to enabling much of what went wrong, and it profitted them to do so. Now, they survive because despite all of their incompetence and connivance, it is still easier for box-ticking inepts elsewhere to simply rely on them. Investors large and small and business partners of every colour must learn to rely on their own investigation and judgement. The economy is in no condition to rely on outsourcing the rational process, which basically makes desperately important decisions into a mundane and uncritical exercise where inadequates try to pay to export possible blame. Frankly, executives need to exercise the skill and judgement for which they expect to be handsomely rewarded, and to stop just paying money to have someone to point at if it all goes wrong.

  • Comment number 68.

    A very poor column, Robert, when you are usually on the ball.

    The reasons why the Building Societies are suffering is because they have diversified beyond their core products, the very ones that you say makes them vulnerable!!!

    All of the struggling ones have diversified into either Commercial Lending, Securitisation, Buy to Let, or Sub-Prime. All was done to maximise profits, and maximise executive bonuses. They did not have the capital base to support the expected losses on these (although they reaped the profits and bonuses on these in boom time) and they are now paying the price. It's noticeable that the likes of The Coventry that didn't follow this path are doing well.

    Having sat through many a Moodys review, I don't think that their view is all that important in terms of core credit quality, they only send out "little boys" to deal with this kind of counterparty, and it is well known that the FSA has become toothless. I don't beleive that many are on the verge of collapse, although their capital position has been weakened. Of course they don't have shareholders to be responsible to, and their AGM's (as championed by Prestridge in the daily Mail) are nothing more than tea dances for OAPS.

    The model is flawed and will not survive. The Societies need to generate more profits, but as a brand (Nationwdie aside) they have nothing to differntriate themselves with. Their customer base is ageing, and many Societies have no Clearing/Internet/ATM's to appeal to the young. All they can do is offer market leading (i.e. at a loss) savings, and Resi Mortgages make next to no profit anyway. They are struggling to keep up in the world of modern banking, and have no resources to modernise.

    Sure the "rate tarts" will put savings in, and take cheap mortgages from them, but in the modern world it is survival of the leanest. I would be surprised if there are more than half a dozen "major" societies in 5 years, and I bet that the FSA will only be crying crocodile tears when the "mavericks" who are on the verge of going bust are out their hair forever.

  • Comment number 69.

    There is no evidence for RP's statement that building societies have weathered the storm better than large complex banks. It is just another fashionable preconception on his part. Dunfermline went down, Cheshire, Derbyshire, Britannia, Scarborough and others were all forced into rescue mergers due to their mistakes. The downgrades by Moody's reflect mistakes on the part of many other societies and pose a real threat to the sector. Indeed, despite being 'less reliant', wholesale funding is the big risk factor for the sector. Meanwhile, among the complex banks, HSBC, Barclays, Standard Chartered, Lloyds (before being strong-armed into the merger with HBOS), Abbey all weathered the storm relatively well. It is true that demutualised building societies did strikingly badly (Northern Rock, A&L, B&B, HBOS). But smaller banks like Co-op have done okay. This is just more populist Government-influenced propaganda from RP. Building societies have a useful role to play as monoline domestic and non-shareholder oriented institutions. But the incentives that influence their managements' decision-making have to be looked at just as closely, perhaps even more so as they are less straightforward than in the shareholder model. Alas building societies are not going to be the foundation for a viable banking system.

  • Comment number 70.

    Due to their monoline business models building societies should have adopted a more prudent approach.

    Its interesting to note that deposits are guaranteed when in many ways these also represent a shareholding.

    Of course, if the governement provides guarantees and cheap finance to banks and not building societies, that's surely biased and anti-competitive - but of course GB and co won't be looking for a non-executive thankyou job with a building society.

 

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