Fresh fears for mutuals as problems return at Manchester society

The mutual was forced to raise £18m from lenders after an interest rate swap went wrong

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The hope of all political parties that mutuals and building societies can offer a serious alternative to the big four banks were dealt a blow yesterday amid growing concerns about the health of the Manchester building society just two years after its bailout.

The mutual was forced to raise £18m from lenders including the country’s biggest building society, Nationwide, after a financial product it bought known as an interest rate swap went wrong.

The Manchester bought the swap in the hope of protecting itself against moves in interest rates. But the swap went bad in 2011 when it emerged that it had not decreased the mutual’s risks as much as it claimed in its accounts.

Faced with a shortfall in its financial strength as a result, the mutual had to call on rival lenders for an £18m cash injection. In return, they were given a type of shares in the company.

Now, the Nationwide and the other lenders who contributed have called in expert advisers from the Rothschild private bank to scrutinise how much their investment is worth amid fears that the society remains in trouble.

The so-called “valuation assessment” reported by The Sunday Times is seen by some in the industry as a prelude to another emergency fundraiser from the society.

The Manchester lost £1.6m in 2013 after the mutual had to write down the value of one of its loans by £8.7m – most of which was reportedly due to the interest rate swap problem.

The society was not answering calls to the office yesterday. Nationwide declined to comment.

Mutuals like the Manchester have been courted by politicians of all colours in the hope that they can offer a way to break up the grip of the few big banks that control the vast majority of British lending. But they have repeatedly disappointed, with the debacle at the Co-op Bank being the prime example.

The Co-op had to be bailed out by so-called vulture funds after its financial crisis came to light in 2013, while a string of others have proved themselves vulnerable.

The West Bromwich building society had to be bailed out by new investors after disastrous lending on commercial property and buy-to-let lending. Others who got into trouble included the Barnsley, the Chelsea and Norwich & Peterborough, which were all taken over by the Yorkshire Building Society.

The Manchester is based in Manchester’s city centre. According to its most recent accounts, it has more than 20,000 investing members and 3,600 borrowing members.