Graphic Co-operation for Children

The wonderful thing about the summer is remembering how lovely it is to lose yourself in a book. My own delight is somewhat reduced by the fact that I have a desk full of books I should have reviewed around a year ago, but leaving that aside I would like to share one with you today: The Co-operative Revolution, a graphic novel by Polyp.

This is an ideal book for children or grandchildren you may be having to entertain this summer. It is a story of the ongoing adventure of co-operation in three sections: past, present and future. The historical section packs in information about the Tolpuddle Matyrs, Peterloo and a host of other iconic working-class events, together with the bare bones of the story, and the promised graphic illustrations. The culmination, inevitably, is the Rochdale Pioneers and their decision to liberate themselves from capitalist shop-keeping. The final image is the grave of George Holyoake, appropriately next to George Eliot in Highgate Cemetery--another excellent outing for young people and those looking after them in London this summer.

The middle section tells the amazing story of the global co-operative movement today. This section is rather heavier on data and may be a little too worthy for some young people (or older people!) But the short interlude spent with the Brukman Street Gang (telling the story of Argentina's empresas recuperadas) helps to lighten the load, to coin a phrase. The sections on the inevitability of co-operative at the biological level is one in the eye for Richard Dawkins et al. and reinforced the need to join the co-operative evolution rather than revolution.

Finally, we have Polyp's vision of the future of co-operation, a futuristic fantasy where an entirely politically correct workers collective called Rochdale Aerotech successfully equip a future Mars exploration project with special 'atmosphere parachutes'. I must confess that this section strained my bioregionally honed senses to breaking point, but it might find more favour with those who still see Forward to Mars as a promise rather than a threat.

The book is a wonderful inspiration with all the key players and a concluding co-operative timeline that would be useful in the classroom as well as for reading on the beach.
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When is a Co-operative Not a Co-operative?

I was glad to be able to host Peter Pannier's well-informed explanation of the travails of the Co-operative Bank. Since I have spent years recommending on this blog and in public talks that people shift their bank accounts to 'the co-op' I feel a responsibility for its failure. For me, criticising any part of the co-operative movement feels like attacking a member of my own family and I am well aware of the glee with which capitalist apologists are greeting the bank's problems. But if the advantage of mutual economic is our genuine ownership the along with this comes a responsibility to be questioning and critical.

My reluctance to comment is also because I have long known that the answer to the question is 'when it is the co-operative bank' but I have never been sure of the exact ownership structure of the bank. The organisational chart shows that the bank is owned by the Co-operative Group. It is the co-operative bank because it is the banker to the co-operative movement, not because you own and control it if you have an account. We know that anyway because we have never elected the directors and did not get to vote on the decision to buy up the Britannia.

Which brings us to the nub of the problem. Peter Pannier's data demonstrate to my satisfaction that bad decisions were taken by Britannia executives which led to the crisis of solvency. It was exacerbated by the financial crisis but was vulnerable before. Like the managers of other mutuals, at Britannia the directors seem not to have understood the market they were involved in.

I am still left questioning why the credit-rating agencies condemned the Co-operative Bank because of the weakness of its lending against commercial property when they have not done this to the other banks who are holding loans to businesses that are effectively bust and whose collateral has lost so much value since the beginning of the recession that the loans are bound to be bad.

A second question: if the control of the Co-operative Bank now passes to shareholders, as the result of a grand-scale debt-for-equity swap, is it worth continuing to hold an account? We are promised that ethical standards will continue but if your motivation is to avoid the extraction of value by the holders of capital you are left with a difficult decision.

In trying to see the bright side to this gloomy news I am left asking whether it offers evidence of solidarity that you would hope to find in the mutual sector. Just as with the collapse of some of the building societies, which were absorbed by others, the decision to buy the Britannia was argued at the time to be about gaining access to the High Street, but was it really about supporting a mutual in trouble? If not, one is left with serious questions about the quality of the due diligence that was undertaken.

You might also argue, a a pinch, that the solution announced earlier this week is based on self-help. The movement has come up with a plan that avoids government involvement, although it reduces the proportion of the bank that can still be considered 'co-operative'. Many of the bad decisions made by co-operatives and mutuals, especially their excessive borrowing from financial markets, resulted from an attempt to compete in a capitalist market, which is always a weakness of the idea of co-operation within capitalism.

But even these reasons to be cheerful cannot conceal that we are losing a bank that has been part of the co-operative movement for 150 years. As capitalism's crisis slouches on, this seems to be yet another example of how it is sheltering its own while the interests and institutions of working people are being sacrificed.

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What is Going on at the Co-operative Bank?

A longer-than-usual guest blog by Peter Pannier and begins a process of analysis of the troubles at the Co-operative Bank and their implications for UK mutual and/or financial institutions (questions and comments welcome via @peterpannier on twitter)

The idea that the Co-operative Bank and the 47 remaining building societies represent a positive alternative to mainstream banking been most enthusiastically pushed recently by the Move Your Money organisation as well as by anti-capitalist activists, Greens and supporters of the alternative economy. So where are we following the furore surrounding the Bank's 'rescue plan'?

Yesterday (17 June 2013), the Co-operative bank announced its plans to meet the capital requirements of £1.5bn (non-specialists might prefer the Guardian summary). This follows a decision earlier in the year to abandon a bid to take over 631 branches from Lloyds Banking Group, dramatic downgrades by Fitch, S&P and Moodys, and a changing of the guard at the boards of both the Bank and the wider Co-operative Group.

Some people have started asking some pretty good questions about what went wrong at the Co-op: Ruth Sutherland comes up with a dozen and more recently Patrick Collinson put forward another eight.

The problems can be traced back to the takeover (announced in October 2008 and completed in August) of the Britannia Building Society, where the issues were:

• A high volume of (mispriced) commercial property loans, made at the top of the market. With empty shops and low consumer demand, this portfolio seems unlikely to regain any value in the near future.

• A high volume of (mispriced) risky mortgage lending, also made at the top of the market. Again, arrears and repossessions are rising, real wages are falling (meaning making mortgage payments is getting harder), while we still have record low interest rates.

• The need to raise capital ratios because of higher capital requirements instituted since the financial crisis, and the difficulty of doing this through retained profits.

• An inability to raise capital by issuing shares. Many people have suggested this is because of the banks mutual status, but this is wrong. The Co-operative Bank is a plc, hence its ability to convert bonds into listed shares (see this diagram of the ownership structure). The reason the Co-operative Group could/cannot raise capital through issuing equity is two-fold. First, despite the fact that its ownership model does not prohibit it, it has been trading on the idea of being a ‘mutual’ ‘alternative’, and shareholder equity doesn’t fit with this PR image. Secondly, if it tried to issue equity while in crisis it would likely experience the same problem as RBS – no-one wants to buy shares in your bank when it looks like they are going to be throwing their money away. Hence why it has converted bonds (which don’t count toward capital) into shares (which do) instead.

Before the merger with the Co-operative Bank, Britannia was the second largest Building Society in the country. Contrary to perceptions of building societies being safe, traditional, and guided by ethics and principles rather than profits and growth for their own sake, Britannia was following a business model not dissimilar to those of HBOS and Northern Rock: borrowing from the wholesale markets to fund asset growth, frequently via mispriced risky lending, with an increasing interest in (large) commercial property loans.

Perhaps the aspect of the Britannia’s business model that made it most vulnerable in the crisis was its high reliance on wholesale funding. In the UK, building societies face a regulation that means they must raise 50 per cent of their funding from individual retail depositors. Everything else (wholesale borrowing from the short-term money markets and longer-term capital/bond markets , combined with non-retail deposits from other organisations such as local authorities) counts towards the ‘Funding Limit’. Britannia had the highest funding limit ratio of any building society at year-end 2008, and in all but one of the previous five years (it was still the fifth highest in 2005).

Just as they face regulation on liabilities side of the balance sheet, building societies are also limited in the kinds of assets they can hold: they must hold 75 per cent of commercial assets (liquid assets are excluded from this calculation) in the form of residential mortgages. Here too, Britannia was pushing the limit.

In 2008, the lending limit ratio was the highest for a UK building society. Though this was not true in previous years, the trend line is worrying: the Britannia was rapidly increasing the proportion of its lending not in the form of residential mortgages. A particular focus was commercial property, and rather than building up a portfolio of small, relatively safe loans to B&Bs and flats above shops, £900m of the £1.7 bn of ‘impaired’ loans is from just 12 big loans (Collinson, 2013: url, paragraph 1).

This is not to say Britannia were not also making lots of mortgage loans: in terms of mortgage lending as a percentage of prior year loans, Britannia were the 7th fastest growing building society 2007-2008. It appears that the decisions about who to lend to were not well made: 'Impared loans on a book of former Britannia mortgages known as 'Optimum' are running at 17 per cent--way above the industry average--with £1.2bn. of home loans at risk of going bad . . . Across the Co-op Bank’s whole mortgage book, 6 per cent of lending is classed as impaired. A further £1.1billion of loans are in ‘forbearance’, meaning borrowers in supposedly temporary straits have agreed a deal such as a payment holiday.'

In hindsight, these graphs and statistics show that Britannia went into the crisis with pretty much the worst business model possible. It would perhaps be OK if there had been profit in this model, and it was all being put into capital in case of the eventuality that things didn’t turn out well. Unfortunately, as the next graph shows, even as it continued to lend more and more, and in areas theoretically more risky for a building society, Britannia was making less profit per pound of lending (in other words, mispricing risk on a grand scale). I cannot believe that these graphs were not considered as part of a due diligence process (but, if you read the PR from the time you might conclude otherwise).

According to my analysis there are three broad reasons why the merger took place:

• The Co-operative Group had long wanted to take on / offer an ‘ethical’ ‘alternative’ to the larger retail banks in the UK. It had identified various large building societies as routes to this objective, lobbied for the Butterfill Act and took the opportunity when it came, paying little or no heed to the realities of Britannia’s past or the unfolding financial and economic crises. This might also explain the wholly misguided project of taking on the Lloyds branches.

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• The Co-operative Group was interested in growing its banking operation (consistent with above). The senior management at the Co-operative Bank did the due diligence on Britannia, and decided that the risk was worth taking on. Such a conclusion would rely on an expectation that the UK economy would recover strongly and quickly, and that the turmoil in financial markets would end soon.

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• The Co-operative Group did the due diligence on Britannia and, given this and the deteriorating economic environment and continuing turmoil in financial markets, decided it would rather not take it on, but gave in to pressure from the FSA and government to persuade it to do so.

As far as I’m concerned Option 1 amounts to hubristic foolishness, Option 2 amounts to naive optimism and Option 3 amounts to dangerously craven weakness. The Co-operative Bank was facing a capital shortfall of £1.5bn. I personally cannot see how selling off great chunks of your business (life and general insurance arms), ceasing lending to new business customers, and undermining your brand by introducing external shareholders to what had been considered a ‘mutual alternative’ are going to combine to create a business model that can ride out the problems that remain.

Just about the only shining light for the Co-operative Bank is that, thanks to a reputation for customer service and an ethical stance, it has in the words of Frances Coppola 'an amazing customer base which has been astonishingly loyal'. Some of the Co-operative Bank’s customer base will remain loyal. However, for new customers (of whom there were apparently as many as 100,000 last year) this loyalty will be very shallow. Anecdotally, such customers feel betrayed and are already leaving. Even old and traditionally loyal customers may reconsider their relationship with the Bank following the introduction of shareholders and the associated incentives to maximise short-term profits, not to mention the revelations of previous bad management. If I were a retail customer, I’d certainly be thinking twice. Perhaps more to the point, I’d wager that larger borrowers and investors aren’t feeling too positive about the Co-operative Bank at the moment, and that won’t help them one bit.

But this isn’t the bad news. The bad news is that the UK financial crisis of 2007-8 was not solved, but merely deferred (much like the crisis of the 1970s that lies at the root of our current problems). The problems at the Co-operative Bank are just the beginning. Your money is probably safe (assuming you haven’t got very much), but our financial and economic systems still very much are not. The storm that is coming is as likely to selectively avoid particular ownership models in finance as nature’s storms are to avoid houses on the basis of whether they are owned by the occupier, a landlord or the local authority.
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University Futures

The hiatus in posts was caused by a brief trip to Cambridge to see my son graduate. The ceremony was typically bizarre in a way only Oxbridge can manage. The graduands were gowned and robed, but had little sense of what they were undergoing, since the ceremony took place in Latin. Much of this seemed entirely appropriate to a ceremony which is one of the few rites of passage that remains in our civic life and would have provided excellent subject material for an anthropological study.

More fun might be had designing the robes for the co-operative university, which has been under discussion here and elsewhere. The UK Society for Co-operative Studies held a session at Co-operative Congress last week as part of an ongoing debate about the need to establish a co-operative business school for the UK. The document produced there for discussion, and the report Co-operation in the Age of Google to which it in part responds, can be found on the Social Exchange Repository.

One aim of the Society is to take forward the debate about the structure of education: 'An educational programme, therefore, is not simply an opportunity to accredit what is already taking place. It is a mechanism by which those who have spent years on co-operative development activities can contribute their knowledge in a way that informs the development of higher education.'

In this regard there are interesting developments already underway in Lincoln's Social Science Centre, which is 'run as a ‘not-for-profit’ co-operative and managed on democratic, non-hierarchical principles with all students and staff having an equal involvement in how the Centre operates'. Staff donate their time for free, but such models could be developed as alternatives to the elite private universities that the government is encouraging.

Perhaps more important, though, is to build up our research knowledge about alternative economic models. So much of the existing neoclassical framework, from economies of scale to the concept of profit itself, have no meaning in the context of co-operative businesses. Until we can create our own concepts and coherent intellectual framework we are not equipped to replace the destructive and defunct capitalist paradigm with a new business model that we can teach with confidence in our universities.
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Vote for the Original Red Robbo

Robert Owen was a paradox. A self-made millionnaire entrepreneur who is considered to be the father of co-operation. A pioneer of mutualism, all of whose schemes failed, and who was only able to be successful by using capitalist methods. With his 'silent monitor' system at the cloth mill in New Lanark he could also be considered a pioneer of modern managerial methods, and yet he is considered to have liberated the working man.

Owen was a living manifestation of the truth of Oscar Wilde's epigram that the truth is rarely pure and never simple. I wonder if the two ever met. I like to think of Owen in his Manchester days, possibly rubbing shoulders with the radical thinkers of the day, who congregated in the unitarian chapel. Did he influence the philosophies of Marx and Engels? Did his work experience find its way into the novels of George Eliot?

The English are rather embarrassed about Robert Owen and not only because he was a fan of naturism. He is claimed by the Scots, because of his stature as a businessmen in Clydesdale, although he was actually a Welshman. His greatest popularity today is in Japan, where the Robert Owen Society keeps his memory alive and the country's co-operative sector flourishes.

And now, perhaps the greatest paradox of all, there comes a petition to call for Owen to be commemorated on a Scottish banknote. Owen saw through the iniquities of the banking system and how it was used to extract value from working people. His Equitable Labour Exchange and his time-based money were established precisely to end this exploitation. So should we support the campaign? I think so, if only because the paradox would probably have amused Owen himself. Tweet

Extraction of Value(s)

Two reports are published today that are implicitly linked, and yet I wonder how many media commentators will make that link explicit? The first is the lengthy and damning report into the buyout of MG Rover by the team led by John Towers. Known as the Phoenix Four, since the final collapse of the car company in 2005, their reputation has turned back into ashes.

Yet what we witnessed during the five years of scavenging, while the suited vultures stripped the value out of Rover was no different in type from what happens every day in capitalist business: the extraction of the value of workers' expertise, skills and commitment by a small number of people who have the control of capital. That's why the system is called capitalism rather than labourism.

Ok, in this case the scale of the rip-off draws public attention, and the fact that Rover was an inconic national company that had also received public support added to our interest, but the model is the same in every shareholder-owned business in the world.

Which brings me to the second report, published today by Demos, and called Reinventing the Firm, it presents a strong case for the movement of a much larger proportion of what is currently the private sector into some form of worker ownership. There are several strong arguments presented, an interesting one being the nature of current ownership. Since shares are now so commonly held by institutions (70% as compared with only 25% in 1963) power over companies is now distant, consolidated and purely profits-driven. Why should a pension-fund manager whose bonus and continued employing relies on delivering a fixed percentage return show any regard to the human or environmental consequences of his investment decisions?

The report also makes clear the significance of the broadly defined mutual sector of the economy, which has annual revenue of £84bn. and £476bn. in assets. This is a whole alternative economy and one which has performed better financially during the economic crisis, and routinely performs better in ethical terms. Demos cites an index of productivity performance since 1992 which shows that mutual companies have out-performed the FTSE by an average of 10 per cent over that period.

Worker ownership is not a panacea - we all know examples of people who merely exchange hiearchical exploitation for self-exploitation when they set up a social enterprise or co-operative - but it is certainly a model for reorganising corporate life that has demonstrable advantages over the limited liability corporate model. It is time that co-operatives ceased to be Britain's best-kept secret and moved into the mainstream of our economy. Tweet

It's a ballot, Jim, but not as we know it

What is it about numbers that makes us so competitive? Being an economist I live in a world of numbers and so I am always deeply sceptical about them. So what am I to make of the fact that I appear to have been ranked seven in a list of green blogs in the UK? This is a datum that confuses me personally, as well as statistically.


Let's start with the easy stuff. The number in itself is meaningless unless I know how many green blogs I am contending with. Last year it was 100; this year only 20. Has Jim eliminated the rabble to allow more glory for those of us who remain? Or have the serious people found something better to do, so that even being 7 out of 20 only proves I have been left behind in the rush to the next great media revolution?


Perhaps Jim didn't even rank the list, allowing the citizenry to do that via the People's Vote. And if he did how does 7 compare with 1: is it seven times less good? Are we dealing with logarithmic scales here? Incidentally, while I'm on the subject of numbers, have you ever noticed how, when media people get into discussions like this one, they start referring to rocket scientists. As though finding ways to travel to other distant planets to colonise and mess them up were somehow cleverer than finding a way to survive on our own beautiful planet, which already has life on it.

What is distressing me most about this process is that I actually care about it. I am a sad competitive person masquerading as a co-operative green who isn't interested in status. Can I blame it on capitalism, the need to compete to survive, or is it just my personal karma? This is summed up by the fact that my deepest regret in life is never having been on University Challenge, although this may now have been surpassed by the regret that I didn't write the book called Starter for Ten.

Oh, shit, there it is again: a number. Why ten points for a correct answer, rather than 1 or 20 or 200? That is such a University Challenge thing isn't it? You know what: I've depressed myself. This strange relationship with the numerical is what being an economist does to you. . . I would still like your votes, though. You'll have to go to Jim Jepps's site at: http://www.jimjay.blogspot.com/ to help me out of my misery. Or will it just make it worse? Tweet