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Ash4781

Rescuing The Mutuals ("profit-participating Deferred Shares")

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http://www.telegraph.co.uk/finance/newsbys...hares-plan.html

Chelsea, Newcastle and Principality are believed to be among the UK building societies considering whether to strengthen their balance sheets by following the lead of rival West Bromwich and converting outstanding debt into a new financial instrument.

...

However, PPDSs ["profit-participating deferred shares"] offer a viable financial solution when mutuals' options in raising new equity are limited because they are not listed on the stock market. It also gives them a stronger chance of maintaining their independence and avoiding a rescue by the taxpayer. The financial instrument has been devised by the Treasury and the FSA as a way of supporting mutuals during the recession. PPDSs-holders get a share of the profits, 25pc in West Brom's case, but also take a share of any losses.

If a society is sold, PPDS-holders receive their PPDS reserves, £182.5m at present for West Brom, and if it goes bust, they lose the lot, but rank above members in an administration.

Investors will get will be a share of profit / losses but considering they'll have to stick to really safe lending and will likely be uncompetitive on interest rates against the state backed entities, and possible bad loans from the past I'd think they'd be picking up the losses. Even if the investors do see small profits the members will unlikely see any benefit. The investors rank above members (well I thought their deposits were covered anyway) but in reality they'll get wiped out won't they? No doubt they will offer these PPDSs to the members.

How do you sell the things when they implode that aren't on a stock exchange ?

edit: I suppose it's a political decision but I'm a bit baffled why on one side they merge HBOS into Lloyds but want to keep a load of mutuals . The house price bubble and any collapse was always likely to cause the mutuals to implode as they are right at the coalface.

Edited by Ash4781

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Doesn't answer your Q but thought I would throw this into the thread as it is relevent to your Q.

Should we Save the Building Societies

Take the mutually owned building societies.

These relatively uncomplicated lending institutions, which don't pay dividends to shareholders, have weathered the financial storms of the past 21 months better than large, complex commercial banks - largely because they were less reliant on flighty wholesale funding and because they made fewer crass loans and investments.

But they have two serious vulnerabilities (neither of which should come as a revelation to you):

* they are "monoline" businesses, almost totally dependent on the health of the British housing market;

* as mutuals, their ability to raise capital in a hurry to absorb losses is limited.

So with the slump in the housing market in its 18th month and as growing numbers of mortgage borrowers are having trouble keeping up the payments, it has become highly likely that a few more societies will have to be rescued - either through shotgun mergers with the biggest societies (a big hello to Nationwide) and/or with financial support from taxpayers.

A tiny number could be broken up, to protect depositors, under the new so-called Special Resolution Regime administered by the Bank of England.

Strikingly the Treasury signalled in the budget that it wants the mutual sector to thrive.

So we may see something of a taxpayer bailout of societies deemed fundamentally viable - even though no society, apart from Nationwide, can be deemed a lynch pin of the financial system, or too big to fail.

The trigger for a gloomier assessment of the societies' prospects was a downgrade last month by the agency Moody's of the credit ratings (a measure of financial health) of seven societies to below the top "A" grade. ......

.......Understandably, the FSA is in the process of verifying whether all societies - not just the Moody's seven - have the capital to cope with further strains in the housing market and whether they have sufficient access to finance to withstand a prolonged drought of wholesale funding.

Societies unable to demonstrate they can absorb potential future losses comfortably will not be allowed by the FSA to retain their independence - unless the Treasury were to invest in them on taxpayers' behalf (not impossible).

As for those with adequate capital but inadequate access to deposits and wholesale finance, their future hinges on whether the Treasury and Bank of England relax their conditions for providing taxpayer loans and guarantees. .................

.............Do we want diversity (to use the politically correct cliche), an industry where the biggest banks are kept on their toes by competition from mutual tiddlers?

In which case, taxpayers' money should be deployed to keep the most viable societies alive through this severe crisis in the housing market.

Or would we be content to save and borrow exclusively with giant banks and new retailing interlopers (such as Tesco)?

My guess is that there would be some sadness if yet more societies with roots in local communities were to vanish.

There used to hunderds of building societies now there are only :

52 building societies in Britain with more than 30m customers. The sector holds more than £200 billion in savings and has lent about £400 billion, mostly into the collapsing housing market.
Ralph Silva of TowerGroup, the leading financial services research firm, said that up to 15 building societies could be forced to merge within the next year or so but that at least five others would fail on the lines of Dunfermline Building Society.

He said: "At least four or five more will go the same way [as Dunfermline] over the next 12 months. Most building societies wait too long before asking for help and the result will be that some will be too far along to be saved. I think that 10-15 societies could merge within the next year or so although to be clear, I expect them to merge into other entities, not disappear completely

Another interesting link to a report by the IPPR in which they recommend like the FSA mortgage caps to stop another bubble . Report titled :

The Madness of Mortgage Lenders

Edited by Sybil13

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