The question of who is fit to run a bank has once again become a running debate in British media, politics and finance. As a gaggle of U.S. hedge funds pore over the ruins of Co-operative Bank, MPs, regulators and Co-op customers wonder how the board of such an august institution could have been led by a Methodist minister who knew nothing of finance and whose recreational activities involved illegal drugs and rent boys.
Reverend Paul Flowers, a local councillor in the city of Bradford and member of the Labour Party, was appointed chairman of Co-op Bank in 2010, a year after it had expensively taken over another mutual, Britannia Building Society, a lender stuffed with bad property debts. Earlier this year, the Co-op was forced to write off £1-billion ($1.7-billion) and pull out of a mad scheme to buy more than 600 branches of Lloyds Bank. It was then forced to report a £1.5-billion capital shortfall to its members, an ignominious near-collapse of an institution that is a long-standing funder of the Labour Party, financial sponsor of the Opposition finance critic, Ed Balls, and which recently drew the outspoken support of George Osborne, the Chancellor of the Exchequer. He hailed the proposed Lloyds deal, suggesting it would bring a new kind of banking system for Britain.
It was Karl Marx who said that history always repeats itself – the first time is tragedy, the second round is farce. The collapse of Lehman Brothers and the global mayhem that followed could be described as tragic, and the secret filming last week of the Reverend Flowers allegedly purchasing crystal meth and cocaine in the back seat of a car seems to come into the latter category. His apparent predilection for drug-fuelled parties is more entertaining than his appearance days before at a Treasury Select Committee hearing when he revealed scant knowledge of the Co-op's assets, suggesting they were worth £3-billion. The committee chairman had to remind the Methodist minister that the correct figure was £47-billion.
There will be no less than three inquiries into what went wrong and in the meantime, the government and Opposition are running helter-skelter away from an institution that was once the darling of the political class. A non-profit, owned by its customers and depositors, providing "ethical investments" to those with a profound social conscience. They will care deeply about the Reverend Flowers' hidden lifestyle but the naughty minister is a red herring. What is scandalous is that after all the bank failures, subprime mortgage lending and multi-billion-dollar rogue trading losses, we still don't know how to ensure that our financial institutions are led by people who are competent and know what is going on.
The Co-op Group, a 19th-century institution founded by local tradesmen in Rochdale, near Manchester, was especially vulnerable, due to its mutual status and links to the Labour Party. Inevitably, its board, elected by members, would be packed with friendly faces rather than hatchet-faced financiers. What is worrying is that the political class courted this institution, believing as a matter of faith, that those who profess to do good, will do so simply by virtue of their intention.
In the world of finance, incompetence, ignorance and negligence are crimes more terrible than theft or fraud. Bank boards packed with time-servers can be seen to do as much harm as rogue traders and have the potential to do even greater damage. The criminal just steals what he wants; the fool can bring the entire house down.