Co-op Bank to be probed and probed

 
co-op bank Will the probes have a bearing on the value of the bank?

The announcement by the prime minister that there will be an inquiry, into the near collapse of Co-op Bank and the appointment of Paul Flowers as chairman, feels like quite a big moment.

It would be an independent inquiry, arranged by the Prudential Regulation Authority (PRA), and ordered by the Chancellor, under powers George Osborne obtained in the 2012 Financial Services Act.

And of course, as and when it happens, it would involve the participation of the Financial Conduct Authority.

Nor would this be the only probe.

There is the police investigation of Paul Flowers' conduct.

And I also understand that the Financial Conduct Authority is evaluating whether to launch a formal "enforcement" investigation of events at Co-op Bank - to assess whether in the last few years, as it careered down a path to near ruin, it broke the financial rules.

Recovery

None of this is designed to cheer up those working for Co-op Bank or its owner, Co-op Group.

It could be a bit destabilising (ahem) for the current fevered attempts to rescue Co-op Bank.

As you will recall. Co-op Bank is in the last stage of this recovery plan.

It involves holders of £1.3bn of Co-op Banks' bonds and preference shares putting around £1bn of new loss-absorbing equity capital into the bank, by converting their current investments into ordinary shares and new bonds.

Perhaps most importantly in all of this, it involves a group of hedge funds putting in £125m of extra cash for additional ordinary shares.

Here is the point.

It is very difficult to know what the three probable official probes would uncover about wrongdoing at and by the bank.

There could be fines. There could be abuses that made the bank vulnerable to civil prosecution.

Or to put it another way, the investigation could have a bearing on the value of the bank.

Change clause

So if you are a hedge fund that has agreed to invest £125m in the bank, you may feel a little bit queasy - because the shares you would be buying may not be worth as much as you thought they were worth, before the prime minister announced there would be a formal investigation.

The hedge funds may therefore be thinking that they would like to renegotiate the terms of that £125m investment.

Now my sources tell me that the hedge funds can't do that. I am told the hedge funds have given irrevocable undertakings to do the deal, and that what David Cameron said in the House of Commons would not trigger a material adverse change clause.

So perhaps Co-op Bank will continue to bump along towards its phoenix-like rebirth, which the PRA has said must be completed by 31 December. As I understand it, Co-op Group thinks that is what will happen.

Clouds

The alternative, you will remember, is takeover by the Bank of England, in a process called resolution, which would protect depositors savings, keep the bank's essential functions running smoothly and heap losses on the bond holders.

Whatever happens to the ownership of the bank, it will be under the cloud of investigation for many months.

That independent investigation that the chancellor will order would be very lengthy. And, under the law, it cannot start until the police and FCA enforcement probes decide whether the law and City rules have been breached.

PS: Here is an interesting dilemma for Co-op Bank and City regulators.

On the Co-op Bank board as a non-executive director is a former executive of Royal Bank of Scotland and Abbey National called Graeme Hardie.

He is that rare thing therefore on that board: a proper banker.

Now Hardie was appointed to the board in February 2013, when Flowers was still chairman of the board.

But Hardie has a bit of history with Mr Flowers and with Co-op Bank - because he was an advisor to the Financial Services Authority, the now defunct regulator, and he was involved in interviewing Flowers in 2010, when the Co-op Bank wanted to promote Flowers from non-executive director to chairman.

He was, in the words of sources, involved in the process of the FSA approving the appointment of Mr Flowers.

So knowing what we now know about Mr Flowers, some would say it is a bit odd that Hardie sits on Co-op Bank's board.

I am told, however, that the regulators like him being there, because he knows about banking, even though he was one of those in 2010 who failed to prevent the promotion of Flowers.

UPDATE 16:10

I know a bit more about the hedge funds' material adverse change clause in the Co-op Bank rescue deal.

Apparently, they can only refuse to put the additional £125m of cash into Co-op Bank if creditors fail to vote for conversion of Co-op Bank's £1.3bn of bonds and prefs into shares and new bonds.

So they don't have a lot of leverage to improve the terms of the deal.

As for scuppering the rescue altogether, that doesn't look altogether rational - because hedge funds' significant investment in Co-op Bank bonds might well be wiped out in those circumstances (though it would not necessarily be wiped out altogether; they might still be able to convert their bonds into shares, I am told).

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    -6

    Comment number 40.

    Each time someone buys an over-priced Co-op product they feel probed.

  • rate this
    0

    Comment number 39.

    I wonder what impact the new ownership will have on existing loans and future financing of the Labour Party and Labour 32 MP's

  • rate this
    +3

    Comment number 38.

    You still haven't explained, Robert, why, even though you're the BBC's business editor, and even though you'd written several stories about the Co Op bank, you failed to investigate Flowers' history *at all* until the press broke the story. You said on R4 you knew nothing about him, nothing about his background - don't you think you were remiss? Couldn't be because he was too close to Labour?

  • Comment number 37.

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

  • rate this
    +9

    Comment number 36.

    Ooh look, a distraction from the real issues facing the UK - a pointless, politically-motivated enquiry. Thanks Cameron.

    Meanwhile, still no prosecutions for the wreckless City bankers who broke our economy. Warped priorities.

  • rate this
    +5

    Comment number 35.

    Look what happened to banks that did (presumably) have people with banking experience as chairmen. Like having to be mega bailed out by the taxpayer. That Flowers had no banking background might have saved Co-op from far worse. Plus having been 'outed' on several fronts he's almost as entertaining as 'Strictly'.

  • rate this
    +4

    Comment number 34.

    Labour Party member appointed to run the Co-op Bank, despite having no experience of banking.
    Labour Party extended tens of millions of pounds of low interest loans.
    Surely they can't be related!

  • rate this
    +9

    Comment number 33.

    Vickers and Leveson. Very high profile. Watered down and essentially ignored by DC and his cabinet colleagues.

    Will things be different this time? If so, why?

  • rate this
    +8

    Comment number 32.

    Off subject but why has a thread been opened on HYS on this topic which will be a mecca to the rabid right when government disasters in recent days like NHS statement from Hunt and Army mess created by Hammond that would attract government critics have been ignored by HYS editors?

    My real fear is that the BBC are caving into Grant Schapps and avoiding any form of government critism

  • rate this
    +54

    Comment number 31.

    So the tiny Co-Op bank is going to be the only bank in the UK which will be probed by the Government for wrong-doing whilst the likes of Barclays, RBS, and their employees who collectively destroyed our economy still haven't had any criminal investigations into what they did. I suppose the fact that the Co-Op is connected to Labour has nothing to do with it? Bah! This is simply politics.

  • rate this
    +16

    Comment number 30.

    Nice to see some proper investigation into a banks activities. Shame they don't really appear to have bothered so much with the others.

    I wonder, will we ever proper justice meted out to those in the banking sector who have played fast and loose with other peoples money?
    Just seems the 'bank' get fined but never individuals, except in this case because of the drugs thing.

  • rate this
    -6

    Comment number 29.

    What is a Mutual,its a group managed by individauls who are effectively self elected.Once in control they are answerable to no shareholders,no companies act and no lisiting rules.The co-op has always has been a form of Marxist management ,where many contribute to the enrichment of a few .How idiotic the FCA look,How idiotic the city advisors look. Finally all members say thanks to the hedge funds

  • rate this
    +5

    Comment number 28.

    This just highlights even more how corrupt the financial industry and governments are. Billions and Billions in fines (and a lot more to go), and still it goes on. Banks fined for money laundering, financing drug dealings, miss-selling, fixing libor, currency & energy, the list goes. But after all this .... still no law to throw them in jail. Get these financed MP muppets out !!

  • rate this
    +3

    Comment number 27.

    Dear RP
    I think I can summarise your last paragraph as:

    who probes the probed, when one of the probed previously probed the probed

  • rate this
    +1

    Comment number 26.

    Interesting also that Flowers was chair of the Group Remuneration and Appointments committee. He was bound to be popular with the then CEO......??

  • rate this
    +44

    Comment number 25.

    The Co-op Bank is under investigation for the appointing David Flowers as Chairman. It is a ridiculous appointment and David Cameron is right to criticise this because Flowers had no experience of banking before his appointment. However, Mr Cameron was happy to appoint Michael Gove as Secretary of State for Education. He has as much experience working in education as Paul Flowers has in banking.

  • rate this
    0

    Comment number 24.

    Of course we cant bail out a ethical peoples bank, they didnt play the game like all the others and invest in arms, oil etc..not part of the club, not tory stuff..so lets make sure they dont rise up again, dave and george have friends to think about.

  • rate this
    +1

    Comment number 23.

    The squirming from the left is terrific to watch. Their 'ethical' bank, seems to be not quite as ethical as claimed. For more than five years I have seen demand after demand from the left that bankers should be jailed. Now that one of their banks has shown its own quite unbelievable flaws, those same lefties are having second thoughts. Oh the delicious irony!!!

  • rate this
    +2

    Comment number 22.

    The “defloration” experience is seldom a happy one. A good deal of gloating, no doubt. Remember: “But for the grace of God . . .” and all that.

  • Comment number 21.

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

 

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