Mark Taber, who successfully represented retail bondholders in the recent restructuring of Co-op Bank, has called for further investigation into the FSA’s part in the decision to allow the Co-operative Bank to pursue its bid for 632 Lloyds branches in 2012 known as Project Verde.
In an email seen by Euromoney, Taber wrote to Andrew Tyrie, chairman of the TSC, and its members on Monday highlighting details from redacted FSA minutes included in regulator Andrew Bailey’s evidence given to the TSC’s ongoing inquiry into Project Verde.
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| Regulator Andrew Bailey |
He claims these minutes show that the FSA clearly had grave concerns over the financial health of the bank as long ago as mid-2011 but nevertheless facilitated the bid going ahead. “It is clear that back in May to July 2011 Andrew Bailey [now chief executive of the Prudential Regulation Authority] was not pulling any punches, was waving big red flags and had resolved to ensure that the problems were addressed,” Taber states.
“What is not clear is how, despite Andrew Bailey's resolve, the Co-op Bank was afforded a further two years of forbearance during which time it raised no meaningful capital nor addressed the other issues.
"Furthermore how the Co-op Group came to be granted a FSA waiver from being considered a mixed financial holding company in June 2012 and so absolved from having to provide the capital of up to £2 billion, which [former chairman] Paul Flowers had already indicated was in the pipeline.
"To get to the bottom of how the Co-op was allowed to pursue Verde for so long it is clear that the TSC needs to explore these issues with Andrew Bailey and, his then boss at the FSA, Hector Sants.”
The Bank of England has not yet responded to Euromoney’s request for comment on the claims.
In his January 27 letter to Tyrie, Taber also claims that Andrew Bailey’s dealings with rating agency Moody’s in 2011 contributed to a delay in the downgrade of the bank.
“In July of that year Moody’s had put Co-op on alert that it was considering putting the bank on negative watch for a downgrade of up to four notches based on its updated view of recognizing systemic support," writes Taber. "Bailey said that he had publicly expressed his view that whilst there was a need to wean banks off public support, the ratings agency needed to be responsible in its management of the issue... He confirmed that he was meeting Moody's the following week and would repeat the message then.
“Andrew Bailey was aware of the threat of a massive four-notch downgrade of Co-op Bank by Moody's and seemingly intervened to persuade Moody's not to act. This will have contributed to delaying the downgrade for nearly two years and added to the unacceptable false market in Co-op Bank's listed securities which has ultimately cost the Bank's bondholders hundreds of millions of pounds.”
Discussions between rating agencies and regulators are common practice.
Project Verde collapsed in April 2013 as the extent of the problems at the Co-op became public knowledge. Lord Levene, former chairman of competing bidder NBNK, told the TSC he believes the deal was politically driven: “In our view they chose to concentrate on all the positive aspects of the Co-op and none of the positive aspects of ours.
"I believe that Lloyds was swayed by political considerations. I would say that their assessment of our bid was not done fairly. I was told at one stage, quite late, that I should look at the reference to financial services in the coalition agreement. One of those said it was in the interests of the coalition to promote the interests of mutuals.”
Taber says that the evidence shows that as early as May 2011 the FSA was concerned that Co-op Bank’s core tier 1 ratio was one of the lowest of the major banks. Over lunch on May 16, 2011, then chairman Flowers said that the bank was considering the possibility of a "member's bond”, via which £2 billion would potentially be made available to the bank.
According to the minutes, Bailey made clear that to Flowers and former chief executive of the bank Neville Richardson that a higher CTl was more appropriate – of the order of 10% on a sustainable basis.
The evidence submitted to the TSC shows that Bailey already had “serious concerns” about the bank at this stage. At a Co-operative Financial Services (CFS) board strategy day on July 12 he introduced his presentation by indicating that he intended to give CFS some “strong messages – messages that, frankly, the board and management might rather not hear”.
It had come to light that CFS had significantly overstated its liquidity position by misreporting the maturity of corporate accounts. Bailey stressed how seriously the regulator took this incident and said that FSA intended to commission a Section 166 report in order that it could have independent assurance on the position.
The misreporting of the liquidity position was used by the FSA to illustrate the deficiencies that existed in CFS' risk management. Bailey said these were not acceptable and were indicative of weaknesses in the group's broader risk-management capacity and called into question its ability to entertain transactions such as Project Verde.
Bailey emphasized the need to increase capital under Basel III, potentially of the order of £900 million. “We discussed that under Verde, more work was required to establish the amount of capital needed since there remained a number of questions to be answered, including whether the assets would benefit from IRB treatment or be treated on a standardised approach.
"Nevertheless, it was evident that a significant additional sum would be required, perhaps of the order of £2 billion. We reiterated that we had requested that, if it wished to proceed, CFS arrange an early meeting with us to go through the detail of its plans to demonstrate these were viable."
One of the most contentious aspects of the recent restructuring of Co-operative Bank, under which bondholders took control of the bank, was the extent to which it knew the extent of the bad real-estate lending that was on the books of the Britannia Building Society when it was acquired in 2007.
The redacted FSA minutes show that during a meeting on July 28, 2011, Bailey stated that Britannia would have failed had it not been for the Co-op, and Richardson had been lucky to survive, not least as CEO of the merged organization. He said that FSA continued to have issues with the effectiveness of the Group's risk management and controls, and he was not persuaded that Richardson had ever grasped those issues.
Consequently Bailey was unconvinced that Richardson would ever fix them. This evidence is in stark contrast to the view that the extent of the problems at Britannia did not come to light until recently.
“Andrew Bailey was of the view that Britannia would not have survived without the Co-op merger,” Taber points out. “This is consistent with what I have been told, by managers at CFS at the time of the merger, that Britannia's capital and loan book problems were widely known and it was effectively a rescue.”
