From the disaster at the Co-op Bank, driven into the hands of hedge funds by incompetent management, to the Royal Bank of Scotland, which forced small firms out of business so it could buy up their assets on the cheap, the message is clear.
Five years after the great financial crash of 2008, the regulators still haven’t got a clue what is going on and bad debts are threatening to bring the whole system crashing down in an even more calamitous way.
What’s the government been doing? Apart from bailing out banks like the RBS, the answer is precious little. The banking bill going through parliament ignores or weakens many of the recommendations made by the Banking Commission set up by the ConDems.
The Commission proposed strict separation between the lending and trading arms of the global banks. But the government, fearful of the reaction of the financial sector, watered this down.
As to the notorious RBS, which after it was nationalised continued to pay vast bonuses to senior staff, including disgraced CEO Fred Goodwin, it has taken a self-commissioned report by Lawrence Tomlinson, a care home entrepreneur, to expose how the bank is wrecking small businesses. His report claims:
“The experiences of many businesses across the country suggests that, at least within RBS, there are circumstances in which the banks are unnecessarily engineering a default to move the business out of local management and into their turnaround divisions, generating revenue through fees, increased margins and devalued assets.”
Viable companies told Tomlinson that RBS had put them into the hands of what they called the bank’s “hit squad”, which imposed vast fees and fostered a “climate of fear” among its struggling customers. When the firms went into default, another division of RBS bought them for a song as a way of reducing the bank’s nominal debts.
RBS is desperate because its debts are astronomical. Over and above the £36bn of toxic loans RBS has put into its “bad bank account”, The Herald reports that there are a “number of enormous landmines that continue to lurk just under the surface”, amounting to a staggering £1 trillion.
Over to the Co-op Bank. Once it was part of a group that had its origins as a mutual created to help working people and the labour movement. Today it is a shambles, driven into the ground by people like former chairman the Reverend Paul Flowers, whose colourful private life has boosted tabloid circulation.
His is a story of sex, drugs and politics that helped bring down a bank. After owning up to a £1.5bn capital shortfall, it was recently acquired by vulture funds group LT2. Poor management and light-touch UK financial regulation lay behind its demise.
Flowers, who once underestimated his bank’s asset base by £44bn in public evidence, was appointed to the Co-op’s board in 2008 after using his network of labour movement contacts to his advantage. In the last months of New Labour in 2010, he was appointed chairman of Co-op Bank.
The Financial Times reports: “Crucially, he had been made a non-executive director of the bank the year before, passing a lengthy ‘significant influence function’ interview. So he got only a light grilling from the FSA on his suitability for promotion. Labour links counted in his favour, say people familiar with process.”
In 2009, the Labour government persuaded the Co-op to buy out the Britannia Building Society, which came with vast debts. This was a major factor in the Co-op’s eventual collapse. The ousting of Flowers in June this year was too little too late to save the bank.
Of course, the ConDems are milking the Co-op story for all its worth for their own political ends. But the Blair-Brown governments and their ministers also share political responsibility for the debacle at RBS and the Co-op, not that they will ever acknowledge it.