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More Building Societies Set To Merge Or Issue Shares

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http://www.ft.com/cms/s/2/ad13b1f6-8900-11...144feabdc0.html

More building societies set to merge or issue shares

By Steve Lodge

Published: August 14 2009 19:37 | Last updated: August 14 2009 19:37

Two more of the largest building societies – Chelsea and Stroud & Swindon – could be set for mergers or financial restructuring following the surprise departures of their chief executives.

Chelsea, the fifth largest society, is considering whether to seek a merger with another mutual lender or to issue a controversial new type of equity as part of a “full review of strategy†by new chairman – and temporary chief executive – Stuart Bernau.

.../

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http://www.ft.com/cms/s/2/ad13b1f6-8900-11...144feabdc0.html

More building societies set to merge or issue shares

By Steve Lodge

Interesting. IIRC the Chelsea was rescuing some other BS not so long ago. Supposedly one of our strongest mutuals after the Nationwide and Coop ....

Or am I confusing it with something else?

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Mutuals are No Longer as Safe as Houses

02 May 2009

Britiain's building societies face up to the prospect of losing capital as a result of changed credit status and must adjust to the new reality.

.......As disappointed as the societies are with the local authorities, it is Moody’s, the credit rating agency, that has attracted their ire. Last month, the agency slashed the ratings of nine leading societies, seven of them below the all-important A-standard, in a single announcement. The decision was taken despite the fact that every society had passed the Financial Services Authority stress tests.

The downgrade plunged them into crisis. Many local authorities planning to invest in societies, so long as they had an A credit rating, will now withdraw their funds. Braver institutions will demand a better interest rate, hitting societies’ profits.

Worse still was the effect the downgrade had on the Bank of England’s Special Liquidity Scheme (SLS), the state-backed emergency funding vehicle all UK lenders have been using to finance mortgages since the wholesale markets slammed shut at the time of Northern Rock’s collapse. Following the ratings cut, they are in breach of the SLS terms, which has led to frantic discussions with the Bank.

“Moody’s gave us just one hour’s warning before publication,†said one furious society director. “And we pay them for that service.â€

Moody’s has since had several awkward meetings with society bosses. The main gripe is with the agency’s assumptions of a 40pc fall in house prices and a worst case scenario of 60pc. “A worst case is going to test far more than just building societies,†Adrian Coles, director-general of the BSA, noted.

Moody’s may well be overplaying the crisis but, even ignoring that, sentiment towards the societies has soured. The Dunfermline’s collapse in March shocked the markets. In 140 years, no society had ever needed before taxpayer support. The sector, famous for “looking after its ownâ€, had always merged its way out of crises. Not this time.

“Every rescue dilutes capital and potentially harms existing members,†another society director said.

“Nationwide and Yorkshire were tapped up to take on the Scottish society but they had already done their bit for financial stability – Nationwide swallowing Derbyshire and Cheshire, and Yorkshire absorbing Barnsley. Strong as they are, Dunfermline was a step too far.â€

It was a watershed moment. Dunfermline was put into administration and the good assets handed to Nationwide alongside a £68.5m taxpayer bung. In the eyes of the unnamed whistleblower who days later went to Vince Cable, the Liberal Democrat treasury spokesman, the fact that the sector had washed its hands of Dunfermline was proof that “the mutual movement is no longer strong enough to take care of its own problemsâ€.

He warned: “I believe the problems at the Dunfermline will soon be mirrored by similar difficulties at societies... No other society can swallow other bad balance sheets whole, so in future there will be no mergers ... taxpayers will take the strain of ensuring the survival of the building society movement.â€

If it comes to that, the Government seems willing. There is huge political support for the societies. “The Government has a longstanding aim of enabling the mutual sector to grow and serve a wider section of the community,†the Budget Red Book said.

The influential Treasury Select Committee (TSC) last week in its report on the financial crisis went further, calling for new rules to make it easier to create a society or remutualise. “Building societies have generally been shown to have operated a safer business model [than banks],†the report said. “The Government should examine whether any legislative or regulatory changes are required to facilitate building society start-ups and remutualisation.â€

To get there, though, the mutual sector – all £400bn of it – is likely to need short-term support. As one-trick ponies, societies’ mortgage exposure has left them extremely vulnerable to house price falls and unemployment in the recession. They may not have had the banks’ exotic structured instruments but lending has not always been of the cautious calibre expected. Several societies will make a loss this year, eating into precious capital – the reserves that underpin financial strength. Management will not survive unscathed as poor lending practices are exposed. .....

Despite being skewed towards more secure retail deposits, 30pc of the sector’s funding – or around £100bn – comes from institutions, who may think twice following the Moody’s downgrade, and the wholesale markets, which remain effectively closed. Without funding, mortgage lending will dry up. .....

.....

Building Soc In Rescue Talks

Five Building Societies to Fail Within the Year

A leading building society commentator reckons that at least five mutuals will fail within 12 months and 15 will be forced to merge

The Only People Lending are the Banks

......At present about eight or nine major lenders are supplying most mortgages in the UK.

Most experts believe that banks are using the relatively low level of competition in the mortgage market to rebuild their profits, BBC business reporter Brian Milligan said.

But the Council for Mortgage Lenders insisted the risk of customers defaulting on mortgages was much higher now than before the recession.

And it was "also worth noting that the only people lending are banks", Ms Knight added.

"Building societies can't do it due to their business model and they can't get access to funds as easily."

It was also clear that many borrowers were becoming "stuck in chains" when trying to buy somewhere to live, she said, meaning banks were "granting more mortgages than are being taken up".

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It was also clear that many borrowers were becoming "stuck in chains" when trying to buy somewhere to live, she said, meaning banks were "granting more mortgages than are being taken up".

"There's demand out there," Ms Knight added.

ITs demand Jim, but not as we know it.

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Guest happy?
Interesting. IIRC the Chelsea was rescuing some other BS not so long ago. Supposedly one of our strongest mutuals after the Nationwide and Coop ....

Or am I confusing it with something else?

The Chelsea took-over the Catholic BS recently. It had been planned long before the crash - very small/specialist lender.

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On the face of it, the £30-odd million of losses at Chelsea and Stroud & Swindon is dwarfed by the £241 million Nationwide apparently paid via the FSCS levy to bail out the customers of other banks.

Maybe the mutual sector would still have the strength to look after its own, if it hadn't been bled to look after everyone else?

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There won't be any windfalls or consultations with the owners (i.e. the members with savings accounts) before these changes are made. So much for democracy!

No doubt the failed directors will get big payoffs (as happened at West Brom) - over which there will be no say.

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