How the players were played
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It wasn't quite something for nothing but it was close. Soon millions of savers were depositing money in societies across the UK with the idea of earning a big return should they decide to follow Abbey's example.
The minimum deposit Abbey had set to qualify for a payout wasn't that high so punters could afford to spread their money, helped by journalists who filled their columns with tips on which society would be converting next.
The age of the carpetbaggers was upon us and seven societies were to follow Abbey starting with Cheltenham & Gloucester (August 1995), Alliance & Leicester (April 1997), Halifax (June 1997), Bristol & West (July 1997) Woolwich (July 1997) Northern Rock (October 1997) and But the idea that this process, which ended in ignominy for the likes of Abbey, A&L, Halifax, B&B and most obviously Northern Rock, was driven by the greed of the carpetbaggers is misinformed.
The greed of carpetbaggers reached fever pitch around the time of the mass conversions of 1997. A report in the Independent in April that year captured the mood well. It quoted Michael Jackson, then chief executive of Birmingham Midshires, as warning that up to £1.6bn of speculative money could flow into the coffers of the remaining societies as carpetbaggers reinvested their windfalls from floatations. According to Jackson, 7,000 speculative accounts had been opened with his society in the previous month alone. This phenomenon followed the announcement of bonus allocations for savers with Woolwich and Halifax which were about to convert.
He estimated that 10% of the 16 million investors with money tied up in converting societies would open speculative accounts with others in the hope that they would be next to convert.
The newspaper noted that A&L and Northern Rock had also announced bonus allocations, leaving savers free to move their money to different societies. It estimated that £125bn was tied up in societies that were about to float as investors waited to qualify for their windfalls.
Jackson's society was eventually to demutualise too, as a result of being taken over by Halifax in April 1999, but between 1996 and 1998 it was Nationwide, the largest of the surviving societies, that was the top target for carpetbaggers.
It appeared the society was fighting a hopeless rearguard action against the carpetbaggers' campaign which was being colourfully if ineptly organised by Michael Hardern, a former butler to the royal family.
But it was Nationwide's success in fending off the campaign that provides the clue as to what was truly happening. Put simply, no society that wanted to remain mutual was ever forced to turn into a mortgage bank and the boards of those societies that decided to cross the Rubicon did so for either personal or corporate advantage, exploiting the greed of carpetbaggers to achieve that end.
The exception to that rule might be B&B but that depends on your perception of Chris Rodrigues, the company's chief executive who, after defending the case for mutuality, was accused of reinventing himself as a cheerleader for conversion.
Rodrigues was quick to embrace the pro-conversion vote once it had been cast and happily reinvented his business to make it more acceptable to the City.
The big surprise in all this was that six years were to elapse before C&G followed in Abbey's footsteps and the latter's motives for conversion and ambitions were substantially different, as was the incentive it dangled before members.
Ironically, in those days Adrian Coles, currently director-general of the Building Societies Association and one of the most vocal critics of failed mortgage banks, was a member of a BSA team lobbying for a new Building Societies Act that would give them the power to convert if circumstances merited it.
The problem, as the BSA saw it, was that its members were constrained on how they raised and lent money. Access to non-retail funds was limited and at least 90% of lending had to be secured on loans to individuals on residential property.
The trade association wanted a more liberal regime that would allow societies to compete with banks on what it called a level playing field.
But it was also concerned that owner-occupation had peaked and there might come a time when societies would have to find other markets in which to lend money. Societies' raison d'etre would be gone, so Coles made a case for conversion and the government accepted it.
Nobody at the time envisaged that the mortgage market would expand dramatically, fuelled by shortages in housing supply, changes in demography, the Right to Buy and the additional funds that the new mortgage banks, and later specialist lenders, would bring to the feast.
Nor could Coles or his colleagues have envisaged how Abbey would engineer the mechanism that achieved conversion.
The statutory hurdle was high. To convert, 25% of Abbey's seven million investors and borrowers had to vote, and 75% of those had to vote in favour of the conversion resolution. Given member apathy, all but the most wildly optimistic thought the task would be impossible.
Abbey's solution was novel - some might say cynical. None of the architects of the new Act envisaged a society dipping into the reserves that had been accumulated from its members over gen- erations to be handed over to Johnny come-latelys who had invested a few hundred quid to earn a fast buck. But that's what Abbey offered to do for members in return for a yes to a conversion vote.
The formula worked spectacularly well, but why did Abbey want to convert?
For a start its vision, led by chief executive Peter Birch who had joined Abbey from Gillette, went way beyond the traditional remit of the sector. Birch, a plc man to the bone, wanted to leverage the organisation's capital more effectively. He also wanted to take Abbey into new areas of activity - to diversify because the view at that time was that the housing and mortgage markets were mature - they would plateau if not shrink. Share options might have been an incentive.
That said, the corporate emphasis in the run-up to conversion was on competition issues. PR guru John Wriglesworth, then economist at Abbey but now a committed supporter of mutuals, was briefed by Birch to produce a series of papers for the board under the generic title of Freedom To Compete.
The main thrust of Abbey's argument for conversion was that under the restrictions of the new Act it could only hold up to 15% of its assets in the form of unsecured lending but as a bank it would be free to risk its own portfolio.
It also felt that it could finance its growth more efficiently as a bank because subordinated debt - the only security societies could issue to increase their capital - was expensive in comparison with the range of securities public companies could offer.
In addition, instead of offering cash for companies Abbey could offer paper, which was more efficient from a tax point of view.
Initially Abbey was spectacularly successful as a bank and defied its critics but when C&G decided to convert six years later it was for very different reasons. It didn't see itself having the critical mass of Abbey to survive as a plc in a competitive market but its chief executive, Andrew Longhurst, was ambitious and he and his board saw a bigger and more secure future as the retail savings and mortgage lending arm of Lloyds TSB, where the position of chief executive was soon to become vacant.
To achieve the conversion C&G also pillaged what the BSA came to call the family silver - the society's reserves - but instead of issuing shares which would have been complicated given that on conversion it would become a subsidiary of Lloyds TSB, it offered a cash settlement to members.
In fairness to the board, the new model worked well and secured jobs and the brand name of C&G. The downside, at least for Longhurst, was that he never did get the top job at Lloyds TSB.
The next society to disappear into the non-mutual fold was National & Provincial which, under the leadership of Alistair Lyons, had virtually put itself up for sale and in August 1996 was subsumed into Abbey.
Nationwide, for the record, had also been in the bidding race and some cynical observers at the time believed that if its bid had been successful, it too would now be a bank.
But it was 1997 that proved to be the big year for conversions when, in asset terms, around 80% of the society sector went over to being mortgage banks.
A&L went first in April. Halifax converted in June, B&W in July and Northern Rock in October. The odd one out was B&W. Like C&G it didn't convert to carve out an independent existence but to secure a future for itself as the UK lending arm of Bank of Ireland, a position it still occupies.
The conversion of Halifax followed on from its merger with Leeds Permanent a few years earlier. Given the success Abbey was still enjoying plus Halifax's need to optimise the balance sheet and raise money to finance the funding gap created by the government as it withdrew from the housing arena, the challenge to the board proved irresistible.
The situation at A&L and Northern Rock was perceived as somewhat different. As societies they were thought to have insufficient critical mass to survive as independents but after conversion, provided they stayed clear of acquiring other corporate bodies, they would have a five-year period of grace from predators.
At least that was said to be the plan and the late Chris Sharp, charismatic chief executive of Northern Rock, underwrote the society's commitment to independence by putting in place a generous charitable foundation to support the arts in the North-East which he thought would deter the appetite of larger plc predators when Northern Rock's period of grace was over.
Peter White, chief executive of A&L and subsequently managing director of the business as a mortgage bank, didn't show quite the same determination to go it alone and subsequently became associated with so many failed merger talks that he became a liability and was eventually ousted in a boardroom coup in October 1999.
As a footnote to that episode, A&L chairman John Windeler said the coup had been prompted by the need for a change in style at the top and White ended his dispute with the bank the following year with an £1.82m out-of-court settlement.
Woolwich was the last society to convert in that auspicious year. The decision must have come as a surprise to the BSA team as Donald Kirkham, its chief executive and chairman of the BSA only a few years earlier, had been a stalwart proponent of mutuality but as soon as he retired the board changed direction and, like the others, framed the vote and dipped into the family silver to secure the desired outcome.
All this activity inevitably whetted carpetbaggers' appetite for more of the same. Foremost in their firing line was Nationwide which, in 1997, established a charitable foundation in a bid to bring to an end the chaos in branches as carpetbaggers besieged its offices and harassed staff. Fights even broke out as desperate individuals queued to open accounts and at one point branches were closed to protect staff.
The charitable foundation was an innovation that required new members to sign away their right to windfalls as a condition of opening accounts. This removed the incentive to vote for a floatation and became a model for most of the remaining societies.
Even so the carpetbaggers' campaign against Nationwide, as fronted by the eccentric Hardern, had great momentum fuelled by media coverage and obvious greed. It almost succeeded despite the introduction of the charitable foundation model and a positive PR campaign headed by Mike Lazenby, now chief executive of Kent Reliance.
Indeed, the motion for Nationwide to convert was only narrowly defeated in 1998 and in the lead-up to the millennium the battle with Hardern was to continue to eat into senior management time and consume resources.
Thus in the spring of 1999 the board of Britannia was fending off a bid by Hardern to be elected a director but events took an unexpected turn when he withdrew his candidature. This invalidated the election but the board decided to publish the results, which showed that the butler had been beaten by a margin of two to one but still managed to attract a significant proportion of the votes cast.
Britannia could claim the margin of victory was much bigger than Nationwide's the previous year when it fended off a pro-conversion resolution from Hardern with just 50.2% of the votes. But it was an expensive victory. The anti-carpetbaggers' campaign had cost the society some £3m.
Britannia's victory was a sign the tide was turning and proved the point that when boards want to convert they can carry carpetbaggers with them but when carpetbaggers try to force their hand they don't win.
Indeed, by early 2001 the board of Chelsea felt strong enough to refuse to consider a resolution backed by more than 500 members to convert to a bank - a decision that left carpetbagger and Chelsea member Andy Naughton-Doe "shell-shocked and disappointed".
Chelsea had rejected the resolution because the language used was too prescriptive in urging the board to hold a vote on conversion.
"By law the board of a business must be free to make decisions it believes to be in the best interest of members or shareholders," it said at the time.
At about the same time Portman also dismissed resolutions to make it easier to demutualise. "After careful analysis and checking verified by legal advisers it was confirmed that these resolutions do not have the necessary support," Robert Sharpe, then chief executive of Portman, said at the time. "Therefore, we will not put these to the annual general meeting."
Given these developments it is curious how in 1999 an Ulster plumber called Stephen Major successfully led a campaign that persuaded B&B to convert to a mortgage bank.
A plumber succeeded at B&B where a butler had failed at Nationwide in 1998 and indeed at seven other building societies where he had submitted conversion proposals in 1999, specifically Portman, Britannia, Coventry, Yorkshire, Skipton, Leeds and Chelsea.
And Major's result was achieved despite the fact that B&B had spent £5m on a 'say no to demutualisation' campaign - that's £2m more than Britannia which was a larger society and which had come up with a positive result. Two-thirds of members backed Major.
At a subsequent Treasury Select Committee inquiry into the benefits of mutuality chief executive Rodrigues claimed that resisting pressure from carpetbaggers would have been as futile as King Canute attempting to hold back the tide.
At the hearing Rodrigues said he regretted the lack of support for maintaining the society's existing structure but he and the board felt there was no choice but to submit to the will of members in the face of overwhelming support for conversion. He said 63% of eligible members turned out, of whom 62% voted in favour of a conversion vote.
Many who worked for Rodrigues doubted his commitment to the mutual model although as one former colleague recalls, he changed his mind with his shirt and once he discarded the cloak of mutuality he threw himself into the task of conversion with considerable enthusiasm.
He refashioned the society as a distributor of mortgages rather than an originator and introduced a niche strategy for its subsidiary Mortgage Express as a buy-to-let lender.
Obviously Rodrigues realised that the City would not be receptive to yet another converted society and that he had to pull a rabbit out of a hat to produce a unique selling proposition. Unfortunately, in this case it wasn't only the rabbit's ears that flopped and the model was unsustainable.
Thus, when Stephen Crawshaw took over as managing director in 2004 the die had already been cast and turning back the clock to being a mortgage bank in the prime market was not on the agenda.
To continue to focus on buy-to-let and acquire high yield sub-prime portfolios would not have been so much of a gamble back then, but the market changed and the vulnerable were left exposed. This is not only true for mortgage banks but also for some societies.
As outgoing chairman of the BSA, John Goodfellow addressed this subject in his address to the faithful at the association's annual conference in May.
"As we celebrate 200 years since the birth of Charles Darwin the current situation provides a stark business example of the idea of the survival of the fittest, and we need to recognise the challenge," he told delegates.
Goodfellow says the recent Dunfermline episode shook everyone in the mutual world and adds that the society ex- panded unsustainably in areas it did not fully understand.
"This was at great cost to the reputation of the sector as a whole," he says.
However, Goodfellow also takes a wider view.
"It may be the case that the recession has a greater impact on particular institutions than the generality of institutions," he adds.
In that sense, perhaps the mortgage banks created in the rush to demutualise weren't the dinosaurs that societies liked to call them. Instead, they were a mutation of a model that survives in Santander, Lloyds Banking Group, Bank of Ireland and Barclays, which acquired LSWoolwich for positive reasons in 2000.
Source:
Lending Strategy
