Co-op members finding out the harsh reality of mutual banking

The ‘Terminator’-like doggedness of Mark Brodsky’s hedge fund has shocked many

Deputy Business Editor

Billionaire Mark Brodsky’s New York hedge fund is, as one financier put it: “like the Terminator – [it] just keeps on coming”.

The Co-operative Bank this week discovered the truth of that when, despite months of claims it could remain true to its mutual roots with its members in charge, Mr Brodsky and other aggressive hedge funds triumphed in their relentless bid to seize control.

For Co-op members, the sudden turn of events was baffling. Hadn’t the bank agreed a rescue deal to resolve the £1.5bn black hole in its finances? Hadn’t it told the likes of Brodsky that they would have to sacrifice £500m and accept a minority stake in the business?

For seasoned observers of Brodsky and his Aurelius fund his victory was no surprise. The former bankruptcy lawyer has made himself and his investors very rich from similar situations. “They are legal tourists, going around the world looking for opportunities to freeze assets and gain control,” says Tim Jones of the Jubilee Debt Campaign. Once they find their target, they will litigate patiently until achieving their profit. Aurelius’s Manhattan boardroom is said to be decorated with a timeline of a previous Brodsky project – the bankruptcy of satellite phone company Iridium. It spans a decade.

In the case of the Co-op, Mr Brodsky recognised that the price of its debt was too low. He bought in, with analysts saying he reasoned the bank was unlikely to be allowed to go under. And in the absence of a bankruptcy, there was a good chance creditors could insist on getting their dues paid, almost in full.

Rather than accept the £500m  “haircut” in the debt they were owed, Mr Brodsky and his fellow hedge funds refused to play ball. The law was on their side, and they won, with the spoils being stakes of about 10 per cent in the business. Each.

Aurelius is not unique in its methods. Other canny rivals, notably Silver Point – set up by two former Goldman Sachs “distressed debt” experts – reportedly wangled a similar sized stake in the Co-op this week. Silver Point is famed for making a fortune at Delphi Automotive, a supplier of parts to General Motors, during the taxpayer-funded bailout of the US car industry.

Steven Rattner, Obama’s “auto czar”, described the demands of Delphi’s debtholders for taxpayer subsidies as being like “extortion… by Barbary pirates.”

Journalist Greg Palast said their tactics resembled “negotiating while holding the pin of the grenade”.

Such vulture funds are as far from the ideals of the Co-operative Group’s founding fathers as could be imagined.

Where those Rochdale cobblers and cabinetmakers joined together 170 years ago for social equity through mutual ownership of their enterprises, the likes of Aurelius and Silver Point aggressively aim to enrich the few at the expense of the many.

And their tactics do not just focus on companies in financial strife. As Argentina was thrashing out a debt forgiveness deal with its lenders following its default in 2001, Aurelius snapped up some of its bonds at a huge discount. While 90 per cent of the country’s lenders agreed to swap their bonds for less valuable ones, Aurelius refused. Elliott Management, the hedge fund where Mr Brodsky learned his craft, did the same. The pair won a ruling in the US courts forcing Argentina to pay up, even blocking it from making repayments to those lenders who cooperated with the forgiveness plan until it does.

Jubilee’s Mr Jones says: “Vulture funds show most starkly the moral failures of the financial system. By speculating on cheap debts, they pursue profits at the expense of people.”

Not everybody sees Brodsky and co as villains. The US Tea Party website Conservative HQ praised them this week, condemning Argentina and “vulture politicians” who disregard the rule of law and renege on debts.

Mr Brodsky agrees, once declaring: “We believe wrongdoers should be held accountable rather than rewarded...” In the case of the Co-op, there were certainly plenty of wrongdoers: its acquisition of the Britannia Building Society was an act of ineptitude which brought a once-sound mutual to its knees.

But is it right aggressively to capitalise on such disastrous hubris at the expense of the Co-op’s members?

We all know what those Rochdale pioneers would have said.

BRODSKY: THE TARGETS

LA Times owner Tribune

Bought debt, later sued shareholders unsuccessfully for selling business

Argentina

Bought debt at a massive discount and successfully sued to be repaid in full

Dubai World

Bought debt at 50c in the dollar and was then the last to hold out for a better deal. Was eventually paid in full to avoid lengthy legal action

Anglo Irish Bank

Bought AIB debt then pressurised for better terms.

Citadel Broadcasting

Bought debt and challenged the reorganisation of the company’s finances

TXU/Energy Future Holdings

Bought debt then sued, claiming company was defaulting on debt

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
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

BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

£450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

Senior Analyst - ALM Data - Banking - Halifax

£350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

Java developer - Banking - London - Up to £600/day

£500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

Liquidity Reporting-Basel III-LCR-Bank-£400/day

£400 per day + competitive: Orgtel: Liquidity Reporting - Basel III - LCR - Ba...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz