Page last updated at 16:34 GMT, Monday, 29 September 2008 17:34 UK

Not such a good idea after all?

By Ian Pollock
Personal finance correspondent, BBC News

With the nationalisation of the Bradford & Bingley, the last of the demutualised building societies has lost its independence.

Bradford & Bingley branch
The end of an era for demutualised building societies

Some people have been tempted to argue that this proves that converting from a building society to a bank was always a bad idea.

What looked like a good way of expanding business and becoming a modern, thrusting, go-getting organisation for the modern age (in other words, a bank) became something different - a new and exciting way to lose money.

But John Wriglesworth, an analyst of building societies for the investment bank UBS in the 1990s, and later a senior executive at the Bradford & Bingley, sees things differently.

"The reason the demutualised societies have gone has been due to investors having panic attacks," he said.

"It has been a self-fulfilling, cataclysmic spiral into the abyss."

Way back when

Just 11 years ago, demutualisation among building societies was all the rage.

It has been utterly, unbelievably, astonishing
Adrian Coles, BSA

The year 1997 marked a sea change for a movement of safe and sound financial organisations, most of which had started up in the 1800s.

One after another some of the biggest names jumped ship.

The Abbey National had struck out on its own back in 1989 to become a bank and, overnight, it converted its savers into shareholders.

But with the Cheltenham & Gloucester agreeing to sell itself to Lloyds bank in 1995, the dam burst.

Within the space of twelve months in 1997, the Alliance & Leicester, Halifax, Northern Rock and the Woolwich, all well known mortgage lenders, decided they wanted to be banks as well.

The Bristol & West jumped directly into bed with the Bank of Ireland that year, and two years later the Birmingham Midshires did the same with the Halifax.

By the year 2000 the Bradford & Bingley was the last to join the stock market.

Adrian Coles, of the Building Societies Association (BSA), disapproved of all this at the time, but does not hide his amazement at recent events.

"It has been utterly, unbelievably, astonishing," he said.

"Seeing the swift disappearance of the former societies in the firestorm, which I don't claim to have predicted, has also been astonishing."

No guarantee

In fact the B&B directors campaigned against converting to be a bank, but were defeated after a saver from Northern Ireland, Stephen Major, succeeded in forcing a vote on the issue among members the year before.

There's no guarantee it wouldn't have happened any
Stephen Major

"It's unfortunate but that's the way these things go," he told the BBC regretfully.

"Nine years ago we didn't think about credit crunches or that building societies or banks could go bust.

"There's no guarantee it wouldn't have happened anyway," he added.

According to the BSA, the total value of the payouts in 1997 amounted to 36bn in shares and cash into demutualisation.

The B&B members were simply too keen to cash in on the value of their society, and so it went the same way as the other societies.

Share options

So why did all this happen?

Bradford & Bingley branch
Branch closures and job cuts are now likely

Until the mid 1980s building societies dominated the mortgage lending business, more or less as a cartel.

That changed with the 1986 building societies act, which also paved the way for demutualisation.

The house price boom of the mid and late 1980s alerted the banks to the rich picking to be had in home loans, as well as selling endowment investment policies, house insurance and, so they thought, estate agency.

They also recognised that the quickest way to get a large slice of this profitable business was to buy up an existing lender.

And according to John Wriglesworth, directors of building societies were only too keen to join them.

"They used words like 'freedom to compete' and 'access to capital,' but the main reasons were excessive pay, share options and testosterone".

Investment banks from the City and Wall Street did their best to speed up the process, touring the boardrooms of the larger building societies, convincing their directors that now was the time to break the mould and demutualise.

The fact that these investment banks often made large fees as advisers to the eventual flotations or takeovers was not a coincidence.


For the past decade the banks, building societies and other specialist lenders have all taken part in the biggest house price, and mortgage lending, boom in the UK's history.

There was no reason for the Northern Rock to go down the sub-prime route, or for the Bradford & Bingley to go down the buy-to-let route
John Wriglesworth

One thing that has helped the banks in particular has been their ability to borrow money from other financial institutions, rather than just from savers, to fund their mortgage lending.

Building societies are restricted by law to funding just 50% of their lending this way and the average among societies is much less, at about 30%.

It is this borrowing, and the current difficulty in repaying it, that lies at the heart of the problems that have been experienced by the Northern Rock, Halifax and now the B&B.

"With hindsight they raised more money than they would have done had they stayed as building societies and with the credit crunch that now looks like a mistake," said Adrian Coles.

But John Wriglesworth argues that losing their independence because of this was certainly not inevitable for the former mutuals, especially for the Halifax and the Alliance & Leicester.

"They had a viable comprehensive strategy - their demise is due to the exceptional circumstances, based on fear breeding fear, not their areas," he said.

"There was no reason for the Northern Rock to go down the sub-prime route, or for the Bradford & Bingley to go down the buy-to-let route."

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