No wonder Andrew Tyrie is baffled. The two versions of the Co-op Bank disaster that his Treasury committee has heard are so far apart they cannot both be true. Last month Andrew Bailey, head of the Prudential Regulation Authority, told the committee that loans made by the Britannia Building Society were the prime cause of the bank’s life-threatening problem. Last week Neville Richardson told Mr Tyrie that the Co-op’s own dud assets were two-thirds of it.

Mr Richardson, boss of the Britannia when the Co-op took it over, and of the enlarged bank until 2011, has been cast as the fall guy in this drama. Mr Tyrie will want to hear from him again, but the more interesting role is Mr Bailey’s.

The hearings follow the discovery of a £1.5bn hole in the bank’s accounts. The parent Co-op Group is trying to fill it, but wants “burden sharing” by the junior bondholders (I am one). In return for the group rescue, it proposes a £500m haircut, with a “take it or leave it” proposal due next month. If the holders refuse, the implied threat is “resolution”, a process which might make the bonds worthless.

It might also oblige the taxpayer to step in, hence Mr Bailey’s role. The PRA has the power to force a parent to rescue a subsidiary bank if it can. The Co-op is already shedding its insurance businesses, but that doesn’t raise enough. The funerals business made £42m in the latest six months, but it’s at the core of what the Co-op thinks it’s for, and a sale might spell the end of this unique slice of corporate bio-diversity.

There’s worse. Mark Taber, who has been running a campaign on behalf of retail debt-holders, has written to Mr Bailey pointing out that £300m of abortive IT costs, incurred by another Co-op subsidiary, have been charged to the bank, and what does the PRA think about that?

Mr Taber is not the only one who’s cross at the Co-op’s refusal to treat with the bondholders. Aurelius Capital, a vulture fund which has bought into the bonds, might take a leaf from the unrelated vultures who impounded an Argentinian naval training ship, and seize your local Co-op store. Only kidding, guys…

Carney blarney

It wasn’t such a good week for the Bank of England’s new governor: Mr Market seems to be taking no notice of Mr Carney, who rather sensibly decided to say nothing after the Bank Rate meeting on Thursday. After all, he would hardly wish to point out that over the last year, the return on medium-dated UK government stocks, those “risk-free” assets so popular with the actuaries, has been minus 9.2 per cent.

If the next bear market in bonds has yet to start, it’s at least clear that the great bull market is over. The artificial prop of quantatitive easing looks increasingly rotten; far from buying in more stock, the Bank may soon find itself wanting to sell some of its vast holding, to add to the similarly gargantuan appetite of the government for cash to fund its deficit.

This is not all bad news. Company pension schemes, driven into fixed-interest investments, may be showing an uncomfortable loss on their purchase prices, but rising yields will shrink the present value of their liabilities. Those deficits, the unwanted by-product of QE, will start to melt. Companies will be able to invest their cash in something productive, rather than having to pour it into schemes which increasingly resemble mere conduits for funding government spending.

Phew! What a scorcher!

While Land Securities’ Walkie-Torchie building in the City has been frying passers-by, its competitors at Great Portland Estates demonstrated some pretty hot footwork in the bond markets, raising £150m from the issue of a five-year convertible at a yield of just 1 per cent. Not only is this less than the UK government must pay for five-year money, it’s significantly less than the !.6 per cent yield on the shares, which must rise by 35 per cent to make conversion worthwhile. The bonds do provide protection against a collapse in the share price, but if you fear that, you shouldn’t buy either.

This is my FT column from Saturday

 
 
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