I am trying to make sense of this past week, which has seen two major co-op crises on the global scene: The Co-operative Group is losing majority control of its bank, which was until recently the inspiration for much buzz about a cooperative challenger to the UK’s big banks; now, it seems to be at the mercy of a couple of US-based hedge funds. Meanwhile Fagor – the oldest of the Mondragon cooperatives and its largest industrial firm – has filed for a sort of pre-bankruptcy, with efforts underway to salvage perhaps only 1/6 of the company’s overall jobs (already down 40% from its 2007 peak).
I won’t try to delve into either story in detail, but I do think that co-op promoters need to look at the big picture and ask what it all means. Yes, this is an unvarnished pair of giant messes. Yes, this all raises serious questions about large-scale cooperative structures. But this doesn’t appear to undermine any of the fundamentals; to the contrary the early indications are we have a pair of cautionary tales that support the cooperative model and challenge growth and hybridization.
A lot of businesses fail, and its not surprising that a major bank might run into trouble with ambitious expansions, or that an appliance manufacturer with nearly 60 years of history and accumulated baggage would run into trouble after years of grinding recession has devastated the economy in which it is situated.
The Wall Street Journal is gleefully twisting the knife about the supposed failure of ethical banking. And from the left there is blame on cooperative hubris to grow and challenge the big banks (which, I must admit, I shared during the heady days of the Co-op’s expansion bid).
There will be lots of time for second-guessing the decisions that led to these twin crises. For now I’m going to be content with assembling a collection of news stories and commentary to get a handle on what is known so far.
The Co-operative Bank
The loss of the Co-operative Bank comes as something of a surprise. The crisis is apparently rooted in a severe six-notch ratings downgrade last May, which provided an opening for “vulture capitalists” who have their tried-and-true methods of attack. But as recently as last week, Co-operatives UK Secretary General Ed Mayo was proceeding on the assumption that the Co-op would maintain a majority stake, which he took as reassurance of the soundness of hybrid models involving non-cooperative investors. But concerns have been mounting since this summer. The camel’s nose was in the tent.
UK-based Co-operative News has provided coverage that includes Co-operative Group Chief Executive Euan Sutherland’s video message to members, which points out the bright side that the bank remains intact – without a government bailout and with its cherished ethical stance preserved. I’ve also heard that cooperative control is being maintained, although the only explanation I’ve found so far is that the bank’s cherished ethical stance can be altered only by 75% supermajority, while the Co-op has a 30% share and therefore an effective veto. I haven’t found indication of true cooperative control, which means one member, one vote.
British co-op blogger Andrew Bibby has so far paid the closest attention to the developing story, with almost-daily posts as well as a column in The Guardian wrestling with the meaning of this disaster, whose scale he describes as “hard to exaggerate.”
In addition to Bibby’s piece, The Guardian has been running solid coverage including fairly frequent commentary like this piece by Nils Pratley acknowledging that “pragmatism” had to win out once a pair of US hedge funds established a “stranglehold.” Pratley has also provided useful reflections on accountability.
The Guardian has posted a collection of letters expressing great bitterness by members at this development and suggesting substantial depositor flight in the wake of this development.
So what the heck happened? It’s not surprising that there is outrage about hedge funds knocking over one of the world’s great models of ethical banking under cooperative control. But as far as I can tell this wasn’t a decision made by the bank; rather, a consortium of hedge funds called LT2 gradually amassed a large enough stake to block the original plan that would have maintained the Co-op’s control. Jim Armitage attributes the loss of the bank to targeted attacks on mutuals, although Joseph Zammit-Lucia argues that the bank has been ethically adrift to get in bed with these hedge fund characters, who are just doing what they always do. Either way, I am quite anxious to see what further mischief is in store.
Update 10/25: It appears that this is going to be painful, with Moody’s predicting serious cost-cutting and indicating that more information about management and direction should be forthcoming to prepare a prospectus for bondholder approval. Stay tuned…
The situation at Fagor seems to be a little more sudden and threatening of the two crises. As recently as a month ago, the Mondragon Cooperative Corporation (MCC) was touted in the international press as “recession-proof” despite Fagor sales dropping 37 percent since 2007. The voluntary pay cuts at Fagor (and to a lesser extent at the other co-ops in the system) seemed to have done the trick. But now, a company that makes up roughly 7 percent of the Mondragon workforce and 8 percent of total turnover is apparently shutting down. It’s hard to imagine that this episode will pass without further challenges to Mondragon as a whole.
I am seeing the Fagor development described as a new sort of “pre-bankruptcy” called preconcurso, that has been created in Spanish law to provide a 4-month period to negotiate debts. But I also found a report from the Basque public broadcaster EITB (which presumably would know, and has been cranking out several pieces per day on what must be their main business story, akin to our own General Motors bankruptcy) that Fagor is suspending all production and the MCC Congress will consider a proposal to devote 50 million euros to maintaining at least 1000 jobs to replace Fagor, which is seen as “not viable” with debts perhaps as high as 800 million euros and 50-120 million euros needed in short order to avoid bankruptcy. Pressure is also growing from below; there appears to have been at least two 1000+ person marches in protest of the decision and a group of 200 workers who made voluntary capital contributions of 20 million Euros wants their money back.
Of course, this is all automatically translated and might be incorrect. I’ll be grateful for any well-translated news that readers can share. Please add new links in the comments below. The links above include the original URL of EITB coverage, in case anyone with fluency in Spanish or Basque wants to double check my interpretations. Thanks!
Update 10/25: MCC’s new employment office has begun reassigning Fagor workers to other firms.
What does it all mean?
As large as Fagor is, it is still only one of 110 cooperatives in MCC and nearly 300 firms overall, including one of Spain’s largest banks. MCC has put out a press release reaffirming “full confidence in the co-operative model.” I’m optimistic that they’ll weather this challenge, however severe it may be; they are a smart bunch of people with a lot of resources at hand. Of course, I do worry that their remarkable 57 years without laying off a member has come to an end.
As for the Co-operative Group, I imagine that this will ultimately be one more bump in a long road stretching all the way back to 1844. It’s a big bump to be sure, but they’ll get through it with a large and robust line of other businesses. On the other hand, having already moved out of the insurance and travel industries, I would not be entirely surprised if further contraction is in the works, at least to retrench and move forward. As for the bank, it’s far too early to tell what’s coming.
I’ll be looking for more information about both of these stories, so watch this space for further updates and analysis.