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Robert, can you find out just what is going on with PIBS and Perpetual Subordinated Bonds of the various building societies and now banks. I've been met with a wall of silence from certain fixed interest fund managers and I'm sure you're just the man to investigate.

isnt the point of a mutual that they belong to the members? So i suppose that members permission will be required for this plan to go ahead....also by their very nature mutuals do not make profits as such...so what is in it for the investors in the new shares?

Complicated stuff, getting them out of a nasty situation.
I can only advise all societies and banks to THINK DIFFERENTLY.
The borrower is not the important thing....the PRICE is what matters.
The type of mortgage is not the important thing....the PRICE is what matters.
If THE PRICE IS RIGHT, you will always be able to get your money back, regardless of the mess created.
Banks and societies totally forgot the golden rule......what is the average salary?...what is the price of this property?
We all know from decades of experience that when the price of normal housing stock goes beyond about 5 times the average salary, we are entering dangerous ground. Flats and starter homes should have a much lower multiple.
Directors of societies and banks should write this in big letters and leave it permanently on their desks.
It's kids' stuff, but they forgot.

Hi. In a sort of related issue I have a sum of money tied up with the Anglo Irish Bank in the form of a deposit bond. This bond is due to mature in about 4 months time. Is the banking crisis over or is my deposit still at risk with this institution, I think I am more worried about Ireland's ability to honor its guarantees

At this point they'll inform loyal employees that they have to work one extra month free each year (while outsourcing work of on the sly)

One that could cause future concern is Kent Reliance, they have been until recently providing 100% liar loans in the massively overpriced Jersey housing market. People are now being made redundant, including in the main industry which is finance and few people have confidence in our Council of Monkeys (sorry Ministers). Still at least we do not have lord mandleson running the place.

I am slightly concerned about this basis of capitalisation as there appears to be a risk that, in the next downturn, all that extra capital will be risked and lost and a further re-capitalisation will be needed. Though one might hope that lessons are leaned and the practice of constantly risking (nearly) everything gained does not happen in the financial sector in the future.

"to return to its roots as a substantial regional savings and mortgage provider."

Why would anyone want to save with the current interest rates? and they have been trying to sell mortgage's to anyone who walked through their doors for years, in fact you had to fight your way out of the two door entrance.

I would like to echo #2 jolo13 concerning the ownership of a mutual.

If the Building Society still exists the management will have been granted the power to manage the business by the members. I cannot think that the management have been granted the power to do what is proposed - I may be wrong, but it seems unlikely.

1. So who exactly is authorising this transaction?

2. Is the West Bromwich is still a Building Society?

3. And if not what is it?

4. and under what law is it authorised to carry on its business?

As Robert points out, this news seems technically obscure. But on the face of it, it appears to violate a key theorem of economics. Is this true and what does it mean?

Suggest your answers to this puzzle at

BTW ´óÏó´«Ã½ thought controllers and Robert how much are we paying you to tell us what your sources are telling you ?
It seems to me the tax payer would save a whole heap on paying you if the source's just published stuff anon online.

Missing the point!
This deal appears to pave the way for any building society board to effectively sell off large equity stakes to their 'friends'.
And, from what Robert is saying, it also appears that the board can decide what share of the society's profits these new equity stake holders receive in future years.
All without reference to the members.
And of course none of the board members will benefit from the deals.
Its the next scandal waiting to happen.

This is a very interesting development, though the idea is not actually new: the Norwegian savings banks have raised equity since 1987 using "Primary Capital Certificates", which seem to be very similar to these new shares:

Eight of the ten largest savings banks have issued PCCs (25 savings banks in total have issued them). In those eight banks the share of equity taken by PCCs varies from 10 to 55%. These Norwegian certificates give a share of the voting rights to their holders. Do Profit Participating Deferred Shares come with voting rights, and if so is it the usual building society standard of One Member, One Vote?

So long as they do not give excessive voting rights to their holders, these new shares may be a boon to the mutual sector. Inability to raise equity has long been a problem.

@9, John_from_Hendon: I suspect the legal power to issue these securities comes from the Building Societies Act. This Act allows the government to push through building society mergers without a vote by the membership (as happened when Nationwide rescued various societies). No doubt there is also some provision for regulators to authorise emergency raising of capital over the heads of the membership. "This is a British democracy, Bernard!"

As a non-technical guy (as far as finance is concerned, can anyone say IF this could mean the end of the mutuals?

@2, jolo: Mutuals do make profits - their capital is made up of past profits that they have saved up. (If they don't make profits they are at risk of having insufficient capital.) The difference is that they do not distribute profits to anyone. These new shares do mean that some of the profit will be distributed to investors, which is a new departure.

Call me old fashioned, but if you go back in time (to 1980s & 90s)the Scottish banks & the Building Societies were considered leading edge in UK banking & Barclays, Lloyds, Nat West (pre RBS) & Midland (pre HSBC) were considered 'dinosaurs'. Now consider the local sources of the catastrophes that brought UK banking to its knees - yes, Scottish Banks & demutualised Building Societies. Worth bearing in mind - perhaps being a big four 'dinosaur' was a good business model with the benefit of hindsight. It is a real shame that, effectively, only one of them has survived.

Well Robert I hate to say I told you so, but I told you so when you claimed that the only building society in trouble was the Dunfermline Building Society, back in January 2009,when the West Brom Building Society was accredited with eligibility for the Governments Credit Guarantee Scheme.

With regard to how the new Profit Participating Deferred Shares (PPDS) will effect the exists permanent interest bearing shares (PIBS) we need to look at the published accounts, well at least the "Bromie" gives its current best guess (given they were in denial a month ago, it remains a bit flakey).

Initially the WB will pay the 6.15% until the PPDS come into existence.
Thereafter the interest paided is effectively reduced to 25% of the coupon value of 6.15% (i.e. 1.5% split between April 2010 and October 2010 at least.)

Thereafter the same as the PPDS, with a max of back to 6.15%. Given that the PIBS have traded at between £22, initially today, up to £24.75, and back down to £24 (compared with £43 a month ago), it would appear to be bad news.

Yet given that the "Bromie" has a call option at £100 in 5/4/2021, if the "Bromie" becomes a tasty morsel for Nationwide or another of the "scale builders" that option price looks like a price they will have to pay.

HMG has just given itself another reason to review the Financial Services
Compensation Scheme (FSCS) charge, which for the "Bromie" was £12.2 million. The "profit" before exceptions was £38 million. The PPDS get up to 25% of the profit i.e. about £9.5 million on their holding of £182.5 million, getting on for about 5%. Therefore long term the PIBS can expect to have a coupon reduced from 6.15% to about 5% ( I assuming the 25% of the profit pays the PPDS ONLY and not BOTH PPDS and PIBS.)

It is all a wild gamble, but it doesn't look too bad to me (I bought into the PIBS at £42 a month ago, gambling on a takeover rather than this reconstruction).

THe PIBS market is going to be fun over the next year or so, whilst the PPDS settle down.

Hi Robert

Thanks for the post.

As a saver with and member of the West Brom I am concerned that I have not been consulted at all. How can they give away what are member's rights without any consultation? This questions what it is to be a member of a mutual if 25% of your holding can be given away.

Also what has happened to the "old board" who caused all this? No doubt they paid themselves bonuses etc. Surely there has to be a case for claiming some of them back as rather than profits their actions have caused losses. This government has been particularly inept on this front.

Well, the obvious answer is contained in your last sentence - why not merge the football club with the building society?

I mean, who on earth would want to put their money in a building society these days with interest rates as they are? And who on earth would want to support a club like West Brom? Answer: The same diehard fanatics. Mad they may be, but there's no denying their loyalty.

No interest on your savings? Well, how about a free ticket or two? No mortgage for a house? At least you could spend a few hours at the ground.

I'm amazed no-one has thought of this before, truly I am.

Is this like selling off a mutual without giving consideration in way of payment to its members? I wonder whats in store for the nationwide ;-)

What a complicated scheme. It starts to sound like the demutualisation and death of the building society as we know it.

This one like Northern Rock and others were borrowing money from the wholesale markets and speculating into buy to let and commercial property. They deserve to go down for the future itself dictates that the property markets will continue to fall and these bad debts will worsen.

In the case of my own building society we voted against demutualisation but like others it appears to be struggling with the recession.

We have had reassurances but if they have been trading away from their original remit and get into trouble then I am the last one who would seek a bailout. If the problems are due to present government policies and will get back to normal when the banking system does then it should be given support.

The way it's all going we will end up with three banks running the whole financial system. What a thought.

When are the Fraud Squad going to get round to our financial institutions?

Surely for a board of a business to issue an over-optimistic forecast which draws savers and investors into giving them their money is guilty of trying to obtain a pecunairy advantage. It is just not good enough to trot out the old chestnut that shares can go down as well as up. We all know that; but calculated dissimulation that misleads is another matter entirely.

Have I missed something - all the mutual Building Societies have now been granted the power to issue equity shares without the members voting etc etc? If true, its almost beyond belief and many of these mutuals are now no more than small banks in which I would not deposit savings. All that stuff about the "Benefits of Mutual" ....

Dear Mr Peston,

A piece by yourself on pay back time by the banks and how the filling of the public purse wkith all those billions will influence our standing would be appreciated by myself and, I'm sure, many others.

In my view, our banks cannot wait to rid themselves of being beholden to the government of the day and I believe the repayment of this debt will come sooner rather than later.

Are we all going to get rich? Soon? Lubbly jubbly.

Robert - I think it may be too early to assert that the new hybrid mutuals which you describe will quack. Further observation is required before determining the applicable onomatopoeia.

Let's hope they don't "oink"...

Is this not just theft from the existing members of the mutual society? The holders of the Subordinated Debt lose nothing - the debt just converts to Shares, while the members see future profits being taken from the society (thus increasing mortgage rates and/or reducing savings rates for the future). So why does all the pain fall on ordinary folks who are members of the society and none on the holders of Subordinated debt?

This seems to me to be a key problem with our response to the financial crisis. Holders of Subordinated debt (and similar instruments throughout the banking system) have been 100% protected, while the long term losses have been taken on by ordinary people (mutual society members here, the taxpayer elsewhere). This is not only unfair, it runs counter to to the long term solution of reducing overall debt by making creditors take their share of the losses.

There are a log of negative comments here. I for one would like to congratulate the West Brom and their cheif exec on this ground breaking deal. It is believed that other building societys will follow suit. Rather this than break have to break the society up. What good would that do?

23, Fraud sqaud lol mate..............

Isn't this just the same old same old "securitisation of debt" superstitious nonsense again? - the false allure of the alchemical transmogrification of lead into gold which rational people should know better than to give any credence to in the 21st century?

Stevewo @ #3 - It is kids stuff, you're dead right. They didn't forget though, they deliberately ignored it.

#28 acatcalledmittens. Building Societies are owned by their members. Ordinarily membership is available only through the medium of either borrowing from, or saving with the society in question.

This scheme provides for a new class of owner, but without the need to obtain the permission or approval of current owners. The current owners are bound to see a dilution of their existing ownership. On what basis can such a proposal be considered fair or reasonable?

If your house catches fire is it fair enough if the firemen make off with any valuables that they find, and simply explain that their stealing your valuables was much better than just standing around watching those valuables going up in smoke?

@16 yes of course i meant they dont make "profits" in the accepted way, ie they retain all profits for the benefits of all members.....
What voting rights do these shareholders have? The mutual philosophy is one member one vote no matter how much money you have invested...
Surely by making this move without permission of existing members the shareholders have effectively stolen the society.....

"They will therefore become semi-mutuals, a hybrid - and who knows what effect this cross-breeding will have on the behaviour of the beast over the long term"

Yes take ya money and run from WBBS

Nos 30 Yes, its interesting that they put out stuff thats over complicated for the ordinary investor. At such a troubled time you would have thought someone would have the common sense to explain in laymans terms, so if not why not ?

Robert,
I work as a mortgage broker and and feel that it should be known that the Halifax house price index used by many commentators in the press to monitor the decline in house prices is completely inaccurate. Whenever a Halifax mortgage scheme ends and I look at refinancing I check the current index and it always shows a very low current valuation figure which seems to the clients to be vastly under valued. The Halifax allow clients to pay for a revaluation and in every case that myself and my colleagues have arranged this the actual valuation figure is substantially higher. In one case the index quoted a value of £322,000 when the client had just sold the property for £589,000. This seems to be either a ruse by Halifax to collect additional fees by charging revaluation fees, or to be able to charge clients higher interest rates if the valuation figure is not challenged as they are seen to have less equity or to be a means of making the house pric decline seem more severe than it really is!!!! What do you think?

34,

Spot on there, the entire point of the game is to keep the average joe's confused. Thus the great Ponzi can stay afloat a bit longer, until the oil runs out ;-)

I'm sorry but this just isn't good enough. I am quite familiar with IPS legislation and want to know:
by what legal authority was this brought about?
how are members rights affected?
Are these new instruments OPOV or coupon-based voting?
do bearers of these instruments become members of the society?

The implication of this move is that having failed at half-baked attempts to ape the banks the mutuals will go the whole hog and fail utterly. I think this is cause for condemnation, not fascination.

If the mutuals have problems raising capital then that is an issue which needs to be solved without breaching the very sound principles upon whuch these organisations are based. This move appears to show complete contempt for any form of democracy.

So ever since the mad butler tried to carpet-bag all of the mutuals, profit has become a dirty word. Mutuals didn't exist for profit, but for their memnbers. New customers vetoed their voting rights though, so the benefitted nobody.

Profits were surpressed, so they didn't seem to be raping the members. Mutuality bonuses were passed on, so the rate tarts went flocking to the societies. Nobody wanted to borrow from them though, becuase better rates were available from those with access to the wholesale markets.

The solution was that very little profit was made, so reserves didn't increase. The lack of capital reserves mean that losses cannot be absorbed. Losses have been made, because books have been bought in from risky sectors, predominantly sub-prime & buy to let, because nobody wanted to borrow from socieities.

So they are now propped up by PPDS, which the FSA says should be attractive to new money. The attraction is the coupon, which is a high percentage of profit, the very dirty word that the Societies have tried to surpress!!!

So there we have it. A complete busted flush, and a sector that has lost it's way. West Brom returning to it's regional mortgage roots is noble, but I wonder how many people will want to borrow from them in the long term, particularly when their mortgage rates will presumably be higher, to reflect the higher margins that they must give the rate tarts to attract retail deposits. Another two recessions, and the Building Societies will be gone in all but name.

I can see from some of the comments that a few folks don't appear to be too pleased with the news of West Bromwich Building Society, which is somewhat understandable, but surely it's better that they continue to exist than simply go to the wall isn't it? That said, if I were a West Brom' member then I'm not sure I'd be too thrilled, but can't help thinking that I'd rather have a diluted interest in a successful business than no interest in a failed business.

Henry

Henry - What benefit is there in being a member?? There is certainly no financial benefit, and new members don't benefit from any windfall benefit anyway. The lending rates aren't competitive, and whilst the borrowing rates are good, they can be matched from other institutions. Now they newed to make a profit to pay the PPDS though, there will have to be some pressure on margins to make a commercial return.

If the Socieites ever make and retain any monies, then the situation will be like "orphan assets", and someone else will make a killing when they take over these institutions.

At least 50% of the Building society's funds must be with individual members holding savings accounts? Are members / depositors treated equally with these new shareholders? PIBS to PPDS - whats the difference?

The sad reality for all building societies is that their core business isn't earning enough profit for them, especially at the current time. It is perceived that the way forward is by selling loans, credit cards, investments, insurance (life, health, buildings etc. which all provide large sums of commission) & for both the purposes of cross-selling & providing expensive overdrafts - attracting new current account customers. Sadly, the average savings account no longer counts for anything much! You will all probably have noticed this when being served in your local branch by staff who are set impossible sales targets and are forced to try and promote such products or risk losing their jobs! Whilst criticising their competitors in the banking world, the building societies hide behind their customer-friendly mutual status and pretend to be your friend. Don't believe a word of it - the bottom line for them all now is SALES, SALES SALES!

@34, 36 - exactly right, we shouldn't be afraid of asking seemingly the most obvious questions and being waved away by the financial technocrats - they have recently been shown to be kitted out in the emperor's new clothes - which are never out of fashion in the business world.

I will always join the fray swinging the trusty sword of healthy scepticism!

I'm glad the West Brom has found a way out of its mess. We've lost enough financial organisations over the last couple of years. The ones that are left are big, and that doesn't bode well for competetion. Whilst the mechanics of the 'rescue' are interesting, i think complaining that it might not be fair on menbers is a bit daft. It's a bit like shareholders of Northern rock, some of whom had piled in at the last minute when it was obviously going bust, complaining when they didn't get their money back. Without this deal there would be no West Brom. Bust is what it would have been. The danger is not for the owners of the West Brom, but for those of profitable societies that might be interseted in this new piece of financial engineering. and we know financial engineering leads to over trading and look what happened to Northern rock, Abbey, Alliance and Leicester, Bradford & Bingley and Halifax - every society that tried it needed rescue because they got a little freedom from the old rules. This deal should be mandatorily reversible as soon as the society is back on its feet again.

# 30 etc. Yes, this is 'straightforward' securitization in the tradition of US sub-prime etc. Convert debt into 'assets' and a finacial 'miracle' has taken place, akin to turning water into wine. In reality of course NOTHING HAS CHANGED. Builing societies should be broken-up and passed to other solvent institutions when they fail.

Robert,

I BROKE THIS STORY 2 WEEKS AGO HERE ON THIS BLOG.

Sadly my integrity (and the moderators) prevented me from revealing the society in question.

However - maybe you can get investigating for me. Recently the WB issued a fixed income bond at the highest rate on the market in order to improve their cash position - why don't you ask them how they are planning to pay this back at maturity?

Also, you didn't mention how the WB got into trouble - the real killer was the collapse of Woolworths as the WB had many of their commercial mortgages. This has not been mentioned - is it because you and the Government are afraid that the public will work out that "Dominoes do not all fall at once" and that effects can be hidden for a while?

Also, you might want to ask WB how many customers have withdrawn savings since this news story broke. At the rate of withdrawl the Government will be supplying all the Tier 1 capital by the end of the month.
As most savers in the West Brom are based in the Midlands - and that happens to be the biggest area for job losses - they are not going to risk loosing money they might need in the near future to tide them over between employment - would you?


You cannot stem a panic - that's why it's called a panic.

I do not criticise the WB for what it is doing - it really has little choice in the matter - however it's all based on the 'Darling recovery prediction' - which we all know if complete pie in the sky.

One day all of these 'bright intellectuals' will realise this whole collapse is nothing to do with luck, judgement, regulation or great white fairy's in the sky - but it's endemic of the SYSTEM.
We know this because only the emotionally detached product of Capitalism would be happy to throw people out of their houses, out of their jobs and into social crisis without giving two hoots about the humanity of the situation.

Logically it's not possible for a society to be 'three-quarters mutual'. It's either mutual, or it's not. PPDS holders are not members. So WBBS remains 100% mutual. The subordinated bondholders were facing complete loss under a government restructuring, so it was reasonable for them to convert into the PPDS. However, given mutuality, the management of WBBS should be acting for the benefit of the society's members. The members of the society are its share-depositors/its mortgage borrowers. The managers of WBBS can easily adjust product pricing to ensure that it does not make a profit, or only enough profit to generate adequate capital (in which case any profit distribution in the PPDS should be deferred indefinitely for prudent reasons). If any distributions are recommended by management in the PPDS, that will be unnecessary leakage away from the members of the society. If any such payments are made, members will be right to be up in arms about this 'theft'. While it was reasonable for subordinated bondholders to convert into the PPDS (because they were facing wipe-out) the PPDS should carry a major investment health warning for any new buyer. The risk of a false market developing is high. In a properly run building society, the PPDS should pay out no dividends forever.