Jeremy Warner's Outlook: Once there were building societies. Then they became banks, and it all went wrong

Fired up by the prospect of FTSE 100 salaries and bonuses, building society bosses rushed to demutualise
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The Independent Online

Remember demutualisation windfalls? This was the closest thing to a free lunch ever invented. All you had to do was spend half a day of your time wandering up and down the high street opening an account at every building society you could see, and then sit back and wait for the share certificates to start dropping through the door.

Many of these so-called carpet baggers made tens of thousands out of the wheeze, which you could read about in any old personal finance column. Even longstanding depositors and mortgage holders seemed happy enough with the outcome. It was like money for old rope.

Today, the demutualisation dream lies in tatters. All of the building societies that did it have either gone or are shadows of their former selves. Even the mighty HBOS, the remnants of the Halifax and Leeds Permanent building societies, trades at less than half the price the shares were floated at more than 10 years ago. Alliance & Leicester has ended up as similarly damaged goods. Northern Rock is a complete write-off, Bradford & Bingley is virtually the same, and Abbey National, which led the charge to demutualisation, had to be taken over by Santander of Spain after management hubris brought the company to its knees. A perfectly viable industry which performed a vital public service in a reasonably well-managed, responsible fashion, has been completely destroyed. As ever, it was greed that did it.

Only Nationwide, which I'm happy to say The Independent supported in resisting the carpet baggers, and a few tiddlers remain as monuments to this bygone structure of ownership.

Some building societies had to be dragged kicking and screaming into conversion, but most needed little persuasion. Fired up by the prospect of FTSE 100 salaries and bonuses, building society bosses rushed to demutualise. Few in the financial press, I regret to say, opposed the process. Why would they? Journalists were some of the most active in pursuing the demutualisation dividend.

But it wasn't just about the money. Conversion was justified on other grounds, too. One was that building societies had too much capital, and that, in the interests of capital efficiency, it needed to be distributed. Not many shareholders at HBOS and Bradford & Bingley would recognise this characteristic now they are being asked to give it all back again in jumbo, distress rights issues.

But if you didn't like the capital surplus argument, there was always the one which had it that, by remaining mutually owned, the building societies were depriving themselves of access to the capital markets and all the opportunities for balance-sheet expansion that their rivals among the joint stock banks could pursue. Given what's happened in the last year, you might reasonably think that these were opportunities that would much better have been avoided.

Then there was the old fallback of the supposedly unaccountable management structure of building societies – the cosy, club-like atmosphere of the building society boardroom which was said to perpetuate rotten management. Much better that directors should be exposed to the harsh disciplines of the free market. Managers couldn't be sacked by the members, nor could they be held responsible for their mistakes. This couldn't be allowed to continue.

In fact, the governance arrangements of building societies have proved rather sounder than those of the heavily "incentivised" bankers. Building society managements may be stuffy and old-fashioned, but at least they don't go blowing their capital on CDOs and hare-brained acquisition-making. They have proved better stewards of their businesses than their converted counterparts.

Prudential regulation of building societies also seems to be sounder. The reckless expansion of the mortgage book that took place at Northern Rock under Adam Applegarth wouldn't have been allowed had the bank remained mutually owned. There are strict limits on a building society's use of wholesale funding.

By converting, building societies only seem to have joined the madness of bankers and the ruination of the banking cycle, an infectious pursuit of money and growth which for ever condemns participants to bouts of crisis and capital destruction. Still, you cannot halt progress, can you?

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