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

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 deal

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 pledge

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.

Beachpoint

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.

Aurelius

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.

Canyon

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

Caspian

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.

Monarch

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.

Silverpoint

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.

News
people
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film Ridley Scott reveals truth behind casting decisions of Exodus
News
people
Sport
footballArsenal 2 Borussia Dortmund 0: And they can still top the group
PROMOTED VIDEO
Arts and Entertainment
An unseen image of Kurt Cobain at home featured in the film 'Kurt Cobain: Montage of Heck'
filmThe singers widow and former bandmates have approved project
News
Andy Murray with his girlfriend of nine years, Kim Sears who he has got engaged to
peopleWimbledon champion announces engagement to girlfriend Kim Sears
Arts and Entertainment
Jake Quickenden and Edwina Currie are joining the I'm A Celebrity...Get Me Out Of Here! camp
tv
Arts and Entertainment
George Mpanga has been shortlisted for the Critics’ Choice prize
music
News
Albert Camus (left) and Jean-Paul Sartre fell out in 1952 and did not speak again before Camus’s death
people
Arts and Entertainment
Roisin, James and Sanjay in the boardroom
tvReview: This week's failing project manager had to go
News
ebooksNow available in paperback
News
Ed Miliband visiting the Holocaust museum in Jerusalem. The Labour leader has spoken more openly of his heritage recently
newsAttacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But are the barbs more sinister?
Arts and Entertainment
'Felfie' (2014) by Alison Jackson
photographyNew exhibition shows how female creatives are changing the way women are portrayed in advertising
News
i100
Life and Style
Fright night: the board game dates back to at least 1890
life
Environment
The vaquita is being killed by fishermen trying to catch the totoaba fish, which is prized in China
environmentJust 97 of the 'world's cutest' sea mammals remain
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Langley James : IT Support; Helpdesk, VMware; Manchester, £18k

£16000 - £18000 per annum: Langley James : IT Support; Helpdesk, VMware; Manch...

h2 Recruit Ltd: Business Development Manager - HRO - £70k+ ote

£35000 - £450000 per annum + £3k car, £70k ote: h2 Recruit Ltd: Do you want to...

Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

£Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

Citifocus Ltd: Operational Risk Analyst

£Negotiable: Citifocus Ltd: Experienced operational risk professional with ban...

Day In a Page

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

In pictures: There's a Good Girl exhibition

The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

UK firm Biscuiteers is giving cookies a makeover

It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
Can SkySaga capture the Minecraft magic?

Can SkySaga capture the Minecraft magic?

It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
The King's School is way ahead of the pack when it comes to using the latest classroom technology

Staying connected: The King's School

The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
Christmas 2014: 23 best women's perfumes

Festively fragrant: the best women's perfumes

Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

Arsenal vs Borussia Dortmund

The Ox celebrates century with trademark display of speed and intuition
Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

When two worlds collide

Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?