Co-op memo: Lloyds deal will never work unless we engineer the figures

 

The Co-op Bank would have needed “accounting engineering” from the auditor KPMG to succeed with its disastrous attempt to buy the 600-branch Project Verde from Lloyds Banking Group, according to an incendiary series of emails sent by its former deputy chairman, Rodney Baker-Bates.

In the messages, Mr Baker-Bates, an opponent of the deal, also demeaned Co-op managers and his fellow directors, questioning both their competence and their “guts”.

The correspondence paints a picture of a profoundly dysfunctional institution and casts an unflattering light on bitchiness and backbiting in the boardroom.

The emails were published along with a huge stack of material received by the Treasury Committee as part of its investigation into the bid’s failure and the wider problems of the Co-op’s beleaguered bank.

It was in the very last of them that Mr Baker-Bates referred to KPMG, one of Britain’s big four audit firms.

He sent it on 13 July 2012 to the Co-operative Group’s recently appointed chairwoman, Ursula Lidbetter, to voice concerns over the signing of a “heads of terms” agreement with Lloyds. “Finally, although the price is very attractive, the CBG [Co-operative Banking Group] capital ratio is very stretched and will need financial engineering by KPMG,” Mr Baker-Bates warned.

The implications of the note are potentially serious. KPMG’s auditing of the bank is under investigation by the Financial Reporting Council, the City watchdog. The audit firm’s boss at the time that the deal was being discussed, John Griffith-Jones, is now chairman of the FCA.

KPMG last night said it had not seen the correspondence before and did not know what Mr Baker-Bates was intending when making the comment. The auditor added: “However, if the assertion is that we would be prepared to countenance the presentation of financial information in a manner which does not present that information fairly, then we strongly refute that we did, or would ever, agree to this.”

Other emails reveal that Mr Baker-Bates, who joined the bank’s board from Britannia Building Society after the two merged, had an extremely low opinion of his colleagues.

He bitterly complained to Ms Lidbetter in October 2011 about the then Co-operative Group chief executive Peter Marks saying that while he had “vision” but only a “limited grasp of the detail”.

Mr Baker-Bates claimed other executives had privately expressed concerns to him about the deal but crucially “did not have the guts to express them in public forum”. 

He also expressed “my alarm at the lack of understanding of business and specifically banking around the (Co-operative) Group board table”.

And he went on to lambast the Co-op’s deputy chief executive Martyn Wates for being “vague and indecisive”.

Mr Baker Bates said he had made all these points to the Co-operative Bank’s since disgraced chairman Paul Flowers, who has been the victim of a series of lurid revelations about his private life.

In a later e-mail to Mr Flowers and the Co-operative Group chairman Len Wardle, Mr Baker Bates gave a devastating critique of Co-op bosses saying: “The overall view I have formed is that executive management is below average for the aspirations you both have for the group.

“Sadly I still think we have been and still are paying too much for at best average performance.”

He complained of a “clearly visible but often privately expressed distrust of the executive management which is reciprocated by a strong sense of disdain on their part.

“I do not know exactly what happened at the July strategy meeting but I heard words like “sham”; “pre-ordained outcome”; :hoodwinked”.”

Mr Baker-Bates further moaned about a “visceral distrust between management and the board”.

He questioned whether board members understood that bankers from JP Morgan - who were at the time working ‘pro bono’ for the Co-op - stood to “make millions” in fees from the deal if it were successful. And he described JP’s advice as “wide of the mark”.

The committee also published complaints about Mr Marks made by Neville Richardson, the former boss of the Co-op Bank and Britannia Building Society. They were contained in a script he wrote for a conversation between himself, Mr Flowers and Mr Baker-Bates.

He said his relationship with Mr Marks was becoming “untenable” as result of their disagreement over Mr Marks’ plan to integrate the bank with Co-op’s other businesses.

The script accused Mr Marks of being “reckless” and also warned that he was considering bringing a claim against Co-op for constructive dismissal.

The board of Britannia, including Mr Baker Bates and Mr Richardson, have again written to the Committee’s MPs to contest the depiction of the building society as the cause of the Co-op Bank’s financial problems given by watchdog’s including the Bank of England’s deputy governor Andrew Bailey.

They claimed that “there is no compelling evidence that Britannia would not have survived as an independent firm or that it was the root cause of the Co-op Bank’s problems”.

Co-op’s forthcoming results, in which it is expected to report a worst ever loss of as much as £2bn, are likely to cast further light on this.

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