Lessons From the Co-op Crises

October was Co-op Month, which is usually supposed to highlight the benefits of cooperative economics but this year featured a large-scale PR nightmare in the form of three serious setbacks for the global co-op movement:

• Fagor Electrodomésticos, the direct descendant of the original Mondragon co-op, has declared bankruptcy after failing to reach agreement with creditors.
• The Co-operative Bank, a financial institution previously owned entirely by the world’s oldest modern co-op, was taken over by U.S. hedge funds as its leadership faces grilling from parliament.
• Rabobank, a cooperative Dutch bank directly descended from the original German Raiffesenbanks, has agreed to a settlement of more than $1 billion in the ongoing LIBOR-fixing scandal.

So what might these stories together teach us?

We need to have co-ops supported by cooperative systems, not much unlike the way that organisms require organic systems. Each of these crises illustrates the cooperative model’s strength in some way, and we should not forget that a great many other enterprises have already failed in the aftermath of a global financial crisis.

My enrollment in MMCCU during the fall of 2008 coincided with onset of the crisis. My earliest memories of the program were of lively discussions of current events, which often meshed neatly with our course material. I also saw first hand the transformative impact of the program: More than one of my cohort “got religion” and we all were deeply inspired by organization like the Co-operative Group, Mondragon and Raiffeisenbanks. We looked forward to seeing how cooperatives would step up during a massive-scale market failure.

Our movement is certainly sadder and wiser after the past month’s developments. And I imagine that I’m not the only one wrestling with discouragement over the severity of the problems illustrated, wondering why cooperatives can’t even hold on to the gains we’ve made. However, recent events seem to affirm what I took as MMCCU’s core lesson: Co-ops are collectively a movement and we will sink or swim, collectively.

The brightest spot I see is ironically in the bankruptcy of Fagor Electrodomésticos (which I shall refer to here simply as “Fagor” despite the existence of several other Mondragon co-ops sharing that name). Although I know that the local impact is devastating, the Mondragon Cooperative Corporation’s decision to let Fagor fail without further support (300 million euros were provided in previous salvage efforts) appears to vindicate MCC’s cellular method of organizing new co-ops when one becomes too large (hence several “Fagor” co-ops as well as 100 others).

One fascinating sub-story is that Edessa – a Fagor product line – launched a spirited attempt to break away from the bankruptcy, arguing that it could be a viable business if freed from the foundering mother co-op; the provincial government was interested enough to extent a 3 million euro credit guarantee. For a time the idea seemed to have traction and the bankruptcy declaration was delayed while the provincial government offered a line of credit to save the Edessa plant. In the end, Edessa will apparently be included in the bankruptcy being filed this week, but the fact that there was some degree of worker-driven consideration that Edessa might split from Fagor suggests a multi-level autonomy within Mondragon’s constituent cooperatives. This deserves further study.

The more I look at this, the more it seems like a painful but also beautiful illustration of the brilliance of Mondragon’s decentralism. As pointed out in an Oct. 31 statement:

This is an association of independent, self-managed cooperatives that have furnished themselves with a series of mutual support mechanisms. The Corporation protects the interests of all its member cooperatives, although the responsibility for their business management lies entirely with each one individually.

This means that the circumstances affecting Fagor have no bearing on the other cooperatives within the Corporation because it is not a business holding, but rather an association of independent, self-managing companies.

Regardless of claims that might be made about Fagor’s supposed inability to let go of members (the basis of the “no layoffs for members” narrative that can make the Mondragon model so appealing), this co-op made a valiant effort to protect its members until the market forced its hand. Fagor was in a difficult line of business: It grew along with a massive real estate bubble in Spain and globally, and when that bubble collapsed Fagor found itself, in the words of the statement above, “no longer respond(ing) to market needs.”

Some reporting has suggested this weakens the overall case for co-ops, claiming for example that Mondragon “was thought to be flexible enough to adjust to Spain’s economic crisis” (in the past tense) as though closing down a flagship enterprise while finding employment for many of its workers isn’t a sign of flexibility.

Still, we should not assume that the vaunted Mondragon model will get through this unscathed. As UK co-op blogger Andrew Bibby points out,

the decision was seen as a bitter blow by Fagor’s workers. One local commentator wrote that “the wounds which have opened between the Mondragón Corporation and Fagor Electrodomésticos following the emergence of a crisis without precedents are going to be very difficult to heal.”

Despite the apparent stability of MCC as a whole, it appears that some elements of the Basque government were interested in an increased state role, perhaps an “intervention” or “conversion.” However, the presidency was more interested in a supporting role rather than serving as the “locomotive.” Presumably there are a lot of opinions about the proper role of government among the Basques, much in the way folks in the US hotly debated what to do with General Motors. However, the Fagor situation is different because GM didn’t have a larger system of support to fall back on.

To the provincial government’s credit, it offered assistance contingent upon MCC’s decision to salvage Fagor. And to MCC’s credit, they made their decision based on what they see as market realities.

In the end, there was no government bailout to prevent the bankruptcy of Fagor. But that was not due to external political realities so much as the decisions made by the cooperative system at multiple levels, for better or worse: MCC decided not to risk further losses by drawing a line under funds already given to Fagor. Fagor then decided to declare bankruptcy and include Edessa in the bankruptcy filing, despite Edessa’s spirited attempt to break free by means of public funding from the province.

I’m oversimplifying, of course. Each of these decisions was surely made by some combination of management and governance, under significant pressure from governments and creditors. The decisions were most likely also influenced by workers exerting pressure via both internal co-op processes and repeated direct action in the streets surrounding Fagor facilities and MCC headquarters.

Likewise, the Co-operative Group and Rabobank both agreed to the terms of their respective situations, presumably through elected governance structures. These co-ops may have been under a good deal of duress but nevertheless they did make decisions leading up to today (and leading into the future). And in the Co-operative Bank’s case, small bondholders could still sink the deal through a series of votes on the terms.

However, a rather different picture emerges from the collapse of the Co-operative Bank, which seems at least partly the result of dysfunctional relations with the government in a country whose political landscape includes a “Co-operative Party” embedded in Labour, and a general interest in co-ops from all major parties.

Second-guessing bank regulators is above my pay grade and I’m certainly no expert on British politics. But I can’t help noticing a spate of media coverage about the apparently serious breakdowns in oversight of the Co-op/Britannia merger that laid the groundwork for the bank’s collapse: There appears to be a variety of regulatory issues/problems, quite possibly aggravated by the government and opposition both having a vested interest in the project. Suffice to say the bank’s problems are related to its entanglement with a nexus of government and the banking crisis, as well as its tremendous size and rapid growth.

Rather than relying on cooperative systems dedicated to the needs of members, there seems to have been misplaced trust that government would take care of things. And now the government is investigating its own activities while the co-op itself embarks on a “root and branch review” of what went wrong with its own governance, including (ominously) the possibility of bringing in new leadership from outside the cooperative movement; already the Group’s chair has resigned effective immediately despite only having six months left of his term. This all was triggered by a sordid scandal that broke over the weekend as former bank chair Rev. Paul Flowers was caught on video buying drugs. This is simply too much weight to put on the misbehavior of one individual, and I think it further supports decentralism of the sort displayed in Mondragon.

I’m also seeing accusations that Dutch regulators failed in their oversight of Rabobank, contributing to a situation in which traders were allowed to go astray, under the influence of a corrupt industry in which they saw themselves as merely not the biggest crooks. This is a far cry from the idealized image of a bank that is a federated co-op formed to meet the financing needs of farmers.

While both Fagor and the Co-operative Bank have turned out to be too tightly tethered to the speculative global economy (while Rabobank is also ensnared in the culture of global banking) it currently looks like MCC is making the kinds of decisions needed to weather the storm.

This show is not over, and I’m not predicting that MCC won’t experience further setbacks as they face their greatest challenge so far. But the Basque cooperators are at least showing that they can make hard decisions when it really comes down to it, even if that means cutting some massive losses.

A key question to keep in mind is as we watch these stories unfold is this: To what extent has the existence of a cooperative system contributed to the overall success of the model? And if early indications that cooperative support systems are outperforming government support systems, what does that suggest about our way forward?

There are certainly still many developments to come, and we should all be watching them closely. Even if these distinguished cooperatives do hit rough patches from time to time, we have much to learn from their experiences.