Why re-mutualisation is the only option for Northern Rock

By Paul Appleby / @paulmappleby

The campaign to re-mutualise Northern Rock, led by the Co-operative party, has gathered momentum in recent months. It has evolved into a high-profile Labour Party manifesto pledge and, more recently, it also has been supported by the all the Labour leadership candidates. It has also, and maybe more significantly, been deemed essential by the Building Societies Association (BSA) who argue that conversion into mutuals is the only viable option for failed banks.

As a Northern Rock employee of five and a half years in Newcastle, I have witnessed all the faces of Northern Rock. I remember being sat in a meeting regarding the future vision of the Rock, the culmination of which was to lead to Northern Rock acting as one of the top three mortgage lenders in the UK. It was possible we were told; this was May 2007. The subsequent failure has been well documented and I don’t wish to repeat everything that has been said before.

I was also fortunate enough to experience first hand the Labour government’s intervention in Northern Rock, (opposed by the Tories), when it was close to extinction, but still had to observe as 1400 employees, some of which were colleagues and friends lose their jobs, with another 600 to leave this week to accommodate the imminent, formal split in the company into Northern Rock plc and Northern Rock Asset Management.

The former, as the press are keen to state, is the ‘good bank’ and the latter the ‘bad bank’. However, uncertainty remains for the staff still employed by Northern Rock after the split. The ultimate aim for Northern Rock seems to be a return to the private sector, but re-mutualisation for Northern Rock offers a superior alternative; offering security to staff who have endured tough times throughout this period.

This uncertainty also extends to taxpayers, in view of their massive investment in Northern Rock. The long-term future of the Rock must guarantee fairness and security for the tax payer’s investment, and while the process of re-mutualisation will no doubt be complicated and arduous, I do believe it can fulfil its commitments to the taxpayer while offering a viable alternative to the financial services sector in Britain.

Northern Rock prior to 1997, when it was granted de-mutualisation, was a local building society that was integral to the local community around the company’s headquarters in Gosforth, Newcastle. It offered employment, secure financial investment and working for the benefit for the area, and was motivated by far more than raking in large profits. It may not have been glamorous but it was efficient and more importantly the fundamental principles that underpinned the company were both safe and fair. This secure financial model led to the success and growth of the UK financial services sector prior to de-mutualisation, and surely should be integral to banking reform in the twenty-first century.

The de-mutualisation laws of the 90s were greeted with a wave of mutual financial institutions clambering to demutualise, many of which were doomed to failure. The new structures allowed corporate executives to gamble with investments that were built upon business models of securitisation dependency and practice – unethically and beyond their means – based purely on short term money market funding. These practices, due to under-regulation, were unloaded onto consumers, who were encouraged to take on an ever increasing amount of debt; the 125% mortgages offered by Northern Rock were a sorry testament to this.

In light of this, it was a shame to see current business secretary Vince Cable rule out the re-mutualisation of Northern Rock. Before the 2010 election he had seemed warm, even enthusiastic about the idea. For a man of such reputed economic acumen, this represents a great failure of his economic analysis and highlights yet another betrayal of the co-operative movement by the new government.

The economic merits of mutuals are visible throughout Europe; mutuals play a key role in the economies of Germany, Spain and France – as well as our own. They offer financial security to depositors, but also contribute to stable economic growth.

Unfortunately, it appears it is our government who out of touch on the issue. Indeed, the decision to throw out the remutualisation case ignores the cross party consensus for the need for mutuals and re-mutualisation through the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 indicates. As Ed Balls recently noted:

“the co-operative bank faired quite well through the economic downturn, however the de-mutualised Northern Rock did not.”

The mutual model should not been seen as vestigial and outdated, it should be recognised as offering an alternative model for doing finance that offers accountability and stability. It promotes institutions working within their means and offers a just, secure and ethical alternative for depositors.

Northern Rock will always be remembered for its role in ushering in the financial crisis. Because of this, it has symbolic value. If the Rock were to be remutualised, it would send a message that there is an alternative way of doing finance that is safer, fairer and more community oriented. Surely, those propagating “The New Politics” must – like the Labour and Co-operative parties – see the value in that.