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

Start your day with The Independent, sign up for daily news emails
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
people
News
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
PROMOTED VIDEO
Sport
Martin Skrtel heads in the dramatic equaliser
SPORTLiverpool vs Arsenal match report: Bandaged Martin Skrtel heads home in the 97th-minute
Arts and Entertainment
The Lord of the Rings and The Hobbit director Peter Jackson with his star on the Hollywood Walk of Fame
film
News
people
News
Billie Whitelaw was best known for her close collaboration with playwright Samuel Beckett, here performing in a Beckett Trilogy at The Riverside Studios, Hammersmith
people'Omen' star was best known for stage work with Samuel Beckett
Arts and Entertainment
Mark Wright has won The Apprentice 2014
tvThe Apprentice 2014 final
News
i100
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
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

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

SThree: Graduate Recruitment Consultant

£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'