Bailouts and the blame game

Back at the round table David Marlow, retail director at Nottingham Building Society, thinks the pitch and tone of Goodfellow's presentation was right, although unlike the others he feels the first day was rather downbeat. That was something of a positive in his eyes, as it enabled the sector to get some issues on the table.

"It was important that the sector should be seen to be addressing issues in an honest way," says Marlow. "By end of the first day what needed to be said had been said and the second day picked up momentum."

But Marlow is even more enthusiastic about the programme on the second day.

"The conference finished strongly," he adds. "My favourite session was the last one. It seemed to me that it worked well."

Coles, who had chaired one of the two closing sessions on the second day of the conference, is curious.

"Which one was that?" he asks.

Marlow confirms that it was the one on planning which included a paper by Gary Styles, strategy, risk and economics director at Hometrack, on strategic planning in a rapidly changing environment.

"You should have come to the rival one where I was speaking with Stephen Mitcham, a fellow round table participant today," says Coles.

That session was on communication and Mitcham, chief executive of Cambridge Building Society, had given a paper on getting the mutual message across to MPs. Marlow confesses that it had been a tough choice but Mitcham agrees. "We had the same feedback from our directors," he says. "They felt our presentation should have been earlier as it was forward-looking."

But Mitcham concedes that the conference ended well, providing plenty of food for thought.

John Eastgate, sales and marketing director at Saffron Building Society, was also enthused by the way the conference ended.

"I have only been in the sector for 15 months, meaning I have nothing to compare it with, but some of the challenges that were mentioned in that last set of presentations made me feel the men would soon be sorted out from the boys," says Eastgate.

"I left on a high, thinking about the need to redefine many of the things we talk about in the sector - some fundamental questions were raised about the nature of mutuality. It seems to me that the virtues of mutuality have to be better expressed and lines need to be drawn more clearly."

Marlow agrees with this assessment.

"What was instructive in one session was a history lesson about the explosion of mutuality in the 19th century, followed by an explanation of why it diminished in the 20th century," he says.

"It declined was because the government and employers stepped in but if you look at what has happened in the past 12 months, you can be sure those players won't be able to perform the function they did back then. There was a feeling at the conference that it could be time for mutuality to return."

That is an interesting thought.

"So could we see the rebirth of the self-help movement?" I ask, with a sceptical note in my voice.

Marlow considers this possible.

"If employers and the state are not able to play the role they did in the 20th century through measures such as the National Health Service and pensions, somebody is going to have to step in," he says.

Marlow says banks will do that willingly and mutuals' role must be to challenge them.

"But surely our focus should be on housing finance," I say. "One of the reasons for our present trouble is that mortgage lenders had to find alternative methods of funding as the state stepped back from social housing and Right to Buy became flavour of the day."

Marlow concurs that the housing market faces some huge challenges but goes further.

"For me it's not just about housing," he says. "What we will end up with is a low risk, low margin mortgage business. If we can draw one lesson from the past two years it is that firms that run prudent balance sheets will be OK, but nobody will make much money doing that."

I agree that this is true, and all the more so because so few lending institutions are lending any money.

"There are half a dozen big banks and Nationwide Building Society in the market - everything else is pretty static," I say.

Coles acknowledges that many societies will see their balance sheets remain static or even decline a bit this year, but he seems slightly irritated.

"The reasons for that are well known - the build-up of liquidity, difficulty in acquiring funding, the cost of funding, credit losses, the necessity to widen margins and conserve capital," he reminds me. "That's just the stage of the economic cycle we are at."

And so we find ourselves returning to one of the big themes of Goodfellow's opening address - almost. First, there's the inevitable talk of green shots to circumnavigate, fuelled by the point all the lenders round the table want to make - that despite what the newspapers say mortgages are available, and there could be more if consumers asked for them.

"There's a demand issue that is being significantly underplayed," says Marlow. "In our small way we have continued to offer to the right applicants 95% LTV mortgages in our locality, but I do not have a queue of consumers at my door."

Mitcham concurs with this.

"Yes, we have money to lend but people are not coming in for it," he says.

Despite this, the situation appears to be improving. Neil Warman, finance and commercial director at HML, says the second largest independent estate agency in the country is experiencing an upturn in business, albeit from a low base.

Ward refers to his society's modest stock of repossession properties.

"For three months in a row we have seen much higher levels of sales," he says. "Our stock has fallen and we are seeing higher levels of activity than 12 months ago. Once prices reach a level whereby individuals perceive them to be good value properties are shifting."

Coles cites recent results from the BSA's Property Tracker as further evidence that there's more optimism in the market, while Ward adds that both Nationwide and Halifax house prices indices have been positive of late.

But this presents a conundrum.

"How can you account for house price stabilisation when this depends on the willingness of lenders to lend in the first place?" I ask.

Warman warms to the theme.

"That's a quandary," he says. "It's almost like the regulator is saying on one hand recapitalise, strengthen your balance sheet, improve your liquidity and stress test house price declines, and on the other look externally to help us kick-start the market. It's a dichotomy I don't know how to rationalise."

Nobody appears to be in a rush to help Warman on that point, leaving his colleague Julian Wells, marketing director at HML, to ponder whether the movement in house prices is linked to the mortgage market and how much it is being led by investors.

Marlow says there's a healthy mix of buyers in the market.

"We are seeing 30% to 40% of first-time buyers purchasing from us," he says. "Of course, we operate at the lower end of the market so you'd expect our level of first-time buyers to be high - we don't represent the overall market."

Jon Lee, head of lending development at Ecology Building Society, says the watchwords for him are still quality and location when it comes to development finance and residential lending.

"There's still an active market for the right properties," says Lee. "There are also signs of developers starting to get interested again. In our case, this is for small ecological schemes with the right location and the right pricing strategy. Appetite tailed off from last August to this February but now it's coming back."

I wonder if Ecology has also felt the impact of recession.

Lee says his society has suffered from the same issues as everybody else with eroding margins and access to credit, and makes a point on development finance.

"I echo what was said earlier about regulation in this regard," he says.

Warman's mood brightens - we're almost back to the issue he tried to raise earlier.

"I'd be interested to know if regulators are causing firms to spend too long looking internally today rather than externally tomorrow," he says. "Are they placing a burden on firms that is making it hard for them to come up with bespoke solutions to problems?"

Ward jumps in at this point.

"That links with Paul Tucker's point," he says. "Tucker, a deputy governor at the Bank of England, says banks must lend, and he's not talking exclusively about mortgages.

"But the question is - is that a consistent view in the tripartite authority? Clearly, banks and societies will have constraints put on them because of capital requirements. It's surprising that someone as senior as Tucker is saying banks must lend or they will deepen the recession. I wonder if there's an understanding between the authorities about what is required."

Warman is keen on the theme.

"We seem to have the FSA saying one thing and the Bank, the Treasury and the government saying another," he says. "It's about how we reconcile these differing views."

Coles adds that he's been making that point every time he's met City minister Lord Myners in the past six months. But in the absence of a clear strategy from the authorities the director-general of the BSA seems to be counselling prudence at individual member level.

"It's up to firms to decide how much risk to take on," he says. "It can't be down to institutions to take on risk for the good of the market if it's not good for their balance sheets."

And so to interest rates

The table talk turns to Goodfellow's criticism of the Bank's interest rate policy and his assertion that rates have been cut too much.

His reasons included damage to savers, damage to the flow of funds into the market and margins being left exposed. This is a worst-case scenario, in Marlow's opinion.

"With the base rate at 0.5% and inflation above that one could not draw a worse picture for a business like ours," he says. "It means you can't reflect the base rate to savers.

"If we could all lend at 7% we wouldn't be having this discussion. If the market could take 7% as a reasonable mortgage rate there'd be plenty of credit available."

It sounds like that would be a tough line for an association like the BSA to sell, and Coles immediately affirms that it's one he would not seek to sell.

"I'd probably end up in jail due to competition legislation," he jokes.

But competition, or rather unfair competition, is a serious issue which Ward picks up.

"I think the point that Graham Beale, chief executive of Nationwide, made as incoming chairman of the BSA at the conference was important," he says. "Some 70% of net receipts in the second half of 2008 were from NS&I and Northern Rock. From a society perspective I'd claim this was unfair as a lot of that investment was not based on price but on the fact those organisations have government guarantees.
"It's a reward for failure," he adds. "It seems bizarre that Northern Rock has failed but it now has a guarantee."

Ward says he's pleased that in response to lobbying by organisations such as the BSA, the Treasury has said NS&I will have zero net receipts for the current tax year but that's just a sweetener to his next beef, which is the mechanisms that have been put in place for the Credit Guarantee Scheme.

"As Beale said, those mechanisms are costing Nationwide something like 65% more than Lloyds Banking Group and 35% more than the Royal Bank of Scotland," he says. "The organisations that have been shown to have the highest risk profiles are accessing retail funds more cheaply because of guarantees.

"Why should it be more expensive for Nationwide to pay than Lloyds?" he adds. "It's a key point - how can we compete? We are not asking for a better position but for a level playing field."

Coles says there was plenty of press coverage on that subject as a result of the conference but Eastgate isn't convinced.

"The coverage of Beale's speech implied that the society sector was complaining too much," says Eastgate. "So the perception is that we are moaning. The truth is that if the banking sector has sinned and gone to hell, it has now moved on to heaven and we are serving its time in purgatory for it."

Eastgate says the regulatory backlash will hit the society sector and firms will be forced to modify their models.

"Maybe on reflection the sector would be better served by focussing on achieving a level playing field with the government and Treasury and the way they are dealing with the issue, rather than the FSCS," says Marlow, perhaps recalling Beale's reference to Nationwide's £250m contribution to the FSCS.

Ward supports the attention the BSA has focussed on the inequalities of the FSCS but suggests that it's time to move on as it's not worth making the FSCS point in isolation.

The view of the round table seems to be that societies have won the high moral ground, politicians are aware mutuals have been treated unfairly and the matter will be sorted out.

But now we're on the high moral ground it's time for a little schadenfreude over the announcement that four ex-building society brands are to disappear.

Coles' take on the matter is simple.

"There is confusion about what is a bank and what is a society," he declares. "If brands that some consumers still think are societies disappear, it should help highlight what societies are."

Unhelpfully, Gary Pickering, director of sales at Chelsea, points out that Lloyds Banking Group is going to retain the Cheltenham & Gloucester brand.

"It's like Woolwich," says Coles. "But how powerful is that brand now? I think it has diminished sharply in the past 18 months."

Now I feel like the heretic in the vicarage. As my interview elsewhere in this issue with Mark Parsons, managing director of home finance at Barclays, shows, Woolwich was the biggest net lender in 2008. But that's another story.

Having dealt with the demise of the Bradford & Bingley, Alliance & Leicester and Abbey brands thoughts turn to Northern Rock and a newspaper story that the government might remutualise the former society.

"With regard to systemic diversity there would be a good argument for remutualising Northern Rock," says Coles. "I'm not sure how it would be capitalised but clearly the maximum return to taxpayers would result from selling Northern Rock either to the stock market or to another institution.

"But we can't expect its customers to put a lot of capital in - it would need government capital, and that would be a huge statement of faith on behalf of the government."

Marlow says it's probably the last-chance option but in terms of timing Coles believes the government would want to sell it before the general election. He's not sure how Northern Rock could be remutualised except by acquisition by an existing mutual, and there's only one big enough to do it.

Interestingly, a general election could clash with the BSA's annual conference in Manchester next year so one thing Coles can rule out is his 2010 event having a politician on the podium. With societies representing around 20% of the mortgage market, the days of having a chancellor flattering the faithful are long gone.

That said, Warman thinks unemployment will be an issue in future, but having decried the low interest rate envi- ronment earlier there's a consensus that this is helpful at the moment.

"In the late 1980s and early 1990s interest rates rocketed up to 15% - that's what sent repossessions into a spin," says Marlow. "That's why I think we're better off with a low interest environment for a while."

How things will pan out remains to be seen but looking back at what we debated at our round table last year, none of us anticipated the depth of the recession or the speed of the downturn. But then neither did the government, and that's a lot more damning.

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