The West Brom Building Society - time to go local again...
When the banking crisis entered a new and decisive phase last Autumn and the government bailed out Britain's bust banking system (unlike manufacturing by the way), many of us pointed to the strength of the traditional building society sector both in terms of its mutuality and its aversion to some of the worst excesses of global financial system.
Since then it has become clear that we were only partially correct. The 'traditional' mutual model has indeed held up quite well and the building society sector on the whole has not needed a vast state rescue as has the banking system (partly because mutual societies tend to look after their own).
However, it is now evident that some societies had got into much more risky business activity than many - including myself - had previously realised. The 160 year old West Brom, which has been rescued his week, is another example, after Cheshire and Dunfermline, having racked up losses of almost ÃÂ£50 million last year. The Society has assets of around ÃÂ£10billion, 850 staff, 350,000 customers and 46 branches - mainly here in the Midlands.
Many of us thought it was another risk-averse, safe and respectable mutual society and were happy that Aunty Molly and Uncle Arthur had their savings tucked away there. Yet it now seems it was operating more like an aggressive profit-hungry bank, moving into commercial property lending and the buy-to-let sector.
In so doing, rather than providing a local circuit of capital whereby local savers in effect lent to local people buying local houses, the society started to borrow more and more from the wholesale markets and became part of the globalised financial sausage machine.
And therein lies the problem. The West Brom had neither the expertise to dabble in high risk commercial property loans, nor did it have the resilience required when the wholesale markets dried up after that global financial machine went into reverse. Steady-as-she-goes local lenders were effectively insulated from the global financial mess but the West Brom was in the firing line.
All of this, of course, goes back again to financial deregulation and the fact that banks bought and sold 'assets' they didn't actually understand (derivatives, syndicated debt etc) and some building societies like the West Brom moved too far away from their traditional, low-risk localised roots into high risk markets that they were ill-placed to understand.
To save itself, the West Brom - with the support of the FSA - has had to effectively give creditors an equity stake, swapping some ÃÂ£182 million of debt for capital to underpin its Tier 1 capital and financial strength. In other words, this mutual society will now effectively have shareholders.
Quite how West Brom's members will react to having to hand 25% of the Society's profits over to shareholders has yet to be seen. The West Brom says this anyway will be cheaper than trying to service the debts it has racked up.
Not all building societies got the profit bug, and those that stuck to their core (local) mainstream mortgage business and took fewer risks are now better placed to get through the current turmoil.
Mutuals like the building societies are also meant to offer the choice of a different model for savers and investors; whether in terms of socities' mutuality, in avoiding the worst excesses of financial risk taking, or in providing local circuits of capital for savers and borrowers. The latter also provides a buffer against financial contagion in the event of a global financial shock.
The West Brom now promises a 'back to basics' strategy drawing on its local roots. That is not only sensible but also necessary, and perhaps should be part of the necesssary re-regulation of the financial system so that such excessive risk-taking can be avoided by the sector.
A final point. Not all societies got into such troubles. Somer were much better run than others, raising issues of corporate - or in this case mutual - governance, that need to be examined. Do annual elections to the Society board actually work well in appointing strong Non-Executive Directors who can stand up to Execs who might want to go down a high-risk-high-return route? Does Building Society mutual democracy still work, and what is its role going forward?
Afterall, the debt-for-equity swap may have saved the independence of the society for now, but comes at the expense of members. The latter have had no say on the deal, which has been imposed on members without them having a vote; where does that leave mutuality?
Professor David Bailey works at Coventry University Business School.