Shadowy saviours of the Co-op
Hedge funds, renowned for their relentless pursuit of profit, now own 70 per cent of the beleaguered bank – and that hands its customers a huge dilemma
Jim Armitage is the City editor of The Independent and London Evening Standard group of newspapers. He has been a reporter and editor for more than 20 years and was recently shortlisted for the Press Gazette financial journalist of the year and The Society of Editors financial journalist of the year awards. He contributes news, investigative reports and comment to the Independent titles plus a daily column in the Evening Standard.
Tuesday 05 November 2013
For most people with savings in the Co-op, the last thing they expect to learn is that a major shareholder of the bank holding their account is also derailing the debt forgiveness programme of poverty-stricken Argentina.
Or that two of its other backers are among those accused of holding a metaphorical gun to the Obama administration’s head during the darkest days of post-Lehman economic apocalypse, ordering it to hand over billions of taxpayers’ dollars in state aid or face the destruction of Detroit’s car industry.
Or that another shareholder is run by alumni of the 1980s junk bond titan Drexel Burnham Lambert, which collapsed amid a scandal that sent its most famous son, Michael Milken, to jail. But this was the uncomfortable truth facing customers of the bank yesterday as a list of six names of the 12 hedge funds now in control of 70 per cent of the company was announced.
They come from a world where companies in financial crisis constitute ripe hunting grounds for profit. The names sound innocent: Aurelius Capital Management, Beach Point Capital Management, Caspian Capital, Canyon Capital, Monarch Alternative Capital and Silver Point Capital. But for those loving the ethical, mutual stance of the Co-operative movement, their previous investment strategies leave much to be desired.
Aurelius has come under fire for its treatment of Argentina. There, even as it was negotiating with the Co-op board in the UK last month, in a Manhattan courtroom it was waging a battle to block Buenos Aires from making payments to the 90 per cent of its creditors who have agreed to forgive part of the debts built up before its economic catastrophe of 2001. Aurelius bought up a slug of the debt on the cheap and is now demanding it gets paid 100 cents in the dollar before the original lenders receive another cent.
Charities such as the Jubilee Debt Campaign, War on Want and ActionAid have been forced to think whether they can continue banking with the Co-op. Jubilee’s Jonathan Stevenson said: “We are seriously considering whether we can continue to bank with them. And we’re not alone. Many charities are having the same discussions.”
While Aurelius’s attitude over Argentina seems to be the most contentious issue, the behaviour of Silver Point and Monarch as owners of US car parts giant Delphi has also given rise to concerns. They and other bondholders bought up Delphi debt on the cheap, then wrested control of the business, demanding billions in state aid and slashing thousands of jobs.
The Co-op restructuring is different because it avoids Government bailouts, but the 50 branch closures and 1000 job losses announced yesterday have a familiar echo. The hedge funds refuse to disclose what they paid for the debt but London bond market sources said last night that they had bought it for 50-60 cents in the dollar, spending £400m-£500m in total. Time will tell how much their new shares become worth.
Specialists in debt collection are nothing new to capitalism, but the current breed of practitioners in “distressed” corporate bonds are a phenomenon of decades, rather than centuries, standing. They trace their genesis back to the 1980s junk bond machine that was Drexel Burnham Lambert. Canyon Capital’s founders, Joshua S Friedman and his Harvard room-mate Mitch R Julis cut their teeth with Mr Milken at Drexel before it imploded in scandal. They then set up shop on their own, making billions of dollars with the tricks they learned there.
At Drexel, the pair met Ken Moelis, whose investment bank organised the hedge funds’ campaign against the Co-op. Mr Moelis has brought them lucrative deals in the past but sources at his bank said he was not personally involved with the Co-op transaction.
The Drexel legacy runs through Beach Point, too. Its wealthy founders Carl Goldsmith and Scott Klein worked under former Drexel high-up Larry Post at Post Advisory.
There is no suggestion any of these executives should be blamed for being connected with the Drexel name. On the contrary, for many it is seen as being a badge of honour to have worked for the business that created the modern-day market for junk bonds – cleansed these days by the term “high yield”.
But its aggressive pursuit of profit and bonuses, like that of the hedge funds it spawned, is the very antithesis of the Co-operative movement. And therein lies the dilemma for the Co-op Bank’s customers.
Black day: the highlights
The Co-op Bank’s chief executive Niall Booker admitted yesterday it would take five years to turn the business around even though the wider Co-operative group is putting in £462m of extra capital in return for a 30 per cent stake. Hedge fund investors will put in £125m. In return, the hedge funds, which bought the debt for about £500m according to bond-market sources, will own 70 per cent of the bank. About 1000 jobs are set to go as 50 of its 324 branches shut.
The hedge funds are acutely aware they will never make a return on their investment if the bank’s customers desert them, so they are firmly behind the strategy confirmed yesterday to rewrite the constitution to state that it must behave ethically. An independent committee reporting to the board will oversee the ethical culture.
Founded by former PwC executive Carl Goldsmith and financier Scott Klein. They worked for Post Advisory, the distressed debt investor set up by a former executive of Drexel, before setting up their own fund.
Run by Mark Brodsky, it is renowned for its relentless pursuit through the courts of its targets. Brodsky worked at Elliott Associates, which made billions pursuing debt repayments from Congo, Peru and Argentina.
Set up by Joshua S Friedman and Mitch R Julis, who met at Drexel Burnham Lambert. Recently bought RBS-owned Ulster Bank’s loans in hotel chain Moran, adding to loans to the hotelier it bought from Lloyds Banking Group
Set up by Bear Stearns banker Mark Weissman in New York in 1997 as a specialist in trading in troubled companies’ debt. Mr Weissman later hired Goldman Sachs distressed debt traders Adam Cohen and David Coleto.
Fund run by former Lazard bankers Michael Weinstock and Andrew Herenstein, investors in “distressed debt” for 21 years. Made billions in European debt crisis by buying the debt of Spain, Portugal and Greece.
Founded by Goldman Sachs bankers Edward Mulé and Robert O’Shea, it made billions from the Troubled Assets Relief Program and other taxpayer-funded schemes aimed at rescuing the US car industry.
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