h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

A couple of places have made the point that, in the UK, all of the mutual Building Societies that demutualised and turned themselves into banks have now gone - either bought up in rescue packages by bigger commercial fish or nationalised.

Is there any significance to this? Is it a valid negative comment on the policy of demutualisation of building societies or is it just how things have turned out? Could it have been, indeed was it, predicted? Did those new banks have any real option but to choose the policies they did in order to find a niche in the finance sector?

Was it not the case that those 'demutualisations' were motivated by purely short-term individual profit?
No pretence at a longer term 'doing well by doing good' ethic?

Not a solid foundation, perhaps.

>>A couple of places have made the point that<<

Whoever's doing the pointing is clearly misinformed.

RF

this entire crisis can be laid directly at the feet of the American sub prime mortgage industry

they sold a flawed product and then sold the debts to institutes who bought them in good faith

its amother case of when america catches a cold the rest of the world start sneezing

ok but RF could you expand upon that? I take it there are demutualised building societies that haven't gone under/been bought out?

And Taff - yess, the sub prime market is a major factor - although I think the greed and short termism of UK finance bods has also played a part. My question was strictly in reference to these ex building societies and whether this was inevitable.

Woolwich
Cheltenham & Gloucester
Birmingham Midshires
Abbey

All spring to mind immediately. None of these were in any way "rescued".

RF

True.
Mind you, none has survived as their own independant entity either.

Well often the goal of a small company is to be successful enough to be noticed and bought up by a larger one. It pushes the share prices right up.

not exactly the same though is it?

Although given that these processes were instigated basically to make rich people richer - hence the carpet baggers - then I suppose the plan worked. And thus it was inevitable that the companies that did so would eventually disappear as seperate entities.

Woolwich seems to be owned by barclays.
Cheltenham & Gloucester is part of Lloydstsb.
Birmingham Midshires is part of Hbos, and now part of lloydstsb.
Abbey is part of the Santander Group.

Nice list there RF.

I don't think any of them were sold in firesale conditions (except hbos), but the *important* point is that demutualisations has created fewer, bigger banks and concentrated power and wealth. Hardly a boon to competition, and it's competitive markets which economists love to love, not *free* ones.

I know it's a nice list. And I know exactly who is owned by who. It's my job.

What the OP was confusing, I think was "still independent" with "rescued". I was pointing out that none of those listed had been rescued.

RF

Yes, I agree. But moving on, and from a professional point of view, how about addressing the meaty issues raised there?

<>

>its amother case of when america catches a cold the rest of the world start sneezing<

Too right Taff.

All this discussion about little brit stuff is just pathetic deck chairs on the Titanic shuffling. America clearly doesn't give a stuff about its capitalist friends.

And judging by what happened earlier in the h.o.rep vote they don't give a flying fig about the average person in the rest of the world, whose money, savings etc is affected.

I think more than anything, this whole debacle will affect the way people view the US and its attitude to people the world over, far more than all the Iraq wars you could imagine.

Last I heard they were planning to bail out some British banks with holdings in the US.

There are 59 UK building societies that haven't been demutualised, the biggest one being the Nationwide. They all refused to follow the fashion, so demutualisation wasn't inevitable.

If you save with a building society you own a small fraction of the organisation. Those building societies that decided to become banks bribed their savers with cash, payable on demutualisation, to encourage them to vote in favour. I was on the receiving end of one of these bribes. I took the money and ran, because I couldn't see the point of entrusting my small savings to a second-rate bank.

I'm not saying I foresaw the current crisis, but it was obvious that money on deposit would be safer in a real bank or a proper building society, and I could see no advantage to outweigh this increased risk.

I could see the advantage to the directors: they all got increased salaries and bonuses, but once I had trousered my bribe I could see no advantage to me. I'm no financial expert, I was just applying common sense.

So yes, the current problems were predictable.

Of the societies that chose to demutualise, only two could really claim to be playing anywhere near the same playing field as the established banks in the UK: Halifax and Abbey National. The only other society of anywhere near comparable size, the Nationwide, has so far chosen to remain a mutual society.

Before its takeover by Santander, Abbey was the "fifth bank of the big four" in terms of current accounts. Whilst Halifax mainitained its No. 1 position in mortgages, it lagged in provision of other services; then it dragged the woeful Howard from behind his desk and tried to persuade more people to open bank accounts.

Abbey's takeover was, in part, due to the self-inflicted wound of dabbling in Treasury instruments without effective risk management (sound familiar? ).

A number of smaller societies were demutualised by being taken over by an existing bank without first having an independet existence: Bristol & West and Cheltenham & Gloucester being prime examples. Others tried to go it alone, but were too small to compete effectively and eventually succumbed to agreed takeovers, such as The Woolwich by Barclays.

But is this all just an effect of building societies demutualising? I'd say not. The examples of Midland (remember them?) falling prey to HSBC, and Nat West to RBS, show that banks are just as capable of over-extending themselves in markets they didn't understand (the US and insurance, respectively).

The bank that was the steady plodder of the big four has suddenly got exciting by snapping up HBOS, in a moment of weakness. Whether this will prove to be a good move remains to be seen.

Finally, two mutual building societies have recently run into trouble, and the willing arms of Nationwide, without going to the trouble of demutualising: Cheshire (which dabbled disastrously in commercial loans - again, a sector that it didn't understand) and Derbyshire (sub-prime lending - last one to the party and subsequently got burnt).

RF

The Newsnight economics editor's just said that if markets fall tomorrow the way they did today 'we're in Wall Street Crash territory'.

Oh, simulthingy.

Noce post RF.

>>"I could see the advantage to the directors: they all got increased salaries and bonuses"<<

The Nationwide directors certainly don't seem to find running a building society any impediment to paying themselves extravagant amounts.

bit of commentary here on this.

http://www.guardian.co.uk/commentisfree/2008/sep/30/bradfordbingley.banks

So it does sound to me like the demutualisation thingy was a case of short term greed which hasn;t panned out due to several reasons, including lack of expertise, but which has run headlong into the current financial situation and failed.