From Demutualization to Meltdown: A Tale of Two Wannabe Banks

Abstract

Purpose - This paper examines the influence of neo-liberalist deregulation on the rash of demutualizations of the 1990's. It explores the extent to which the demutualization of two building societies - Northern Rock and Bradford & Bingley - and their subsequent demise in the wake of the credit crunch - exemplify key features of the neo-liberalist experiment, with a particular focus on their post-mutualization business models. Design/methodology/approach - The analysis draws on literature that examines the neo-liberal development of the financial sector and examines the media coverage of the financial crisis of 2007/8 to study the discursive and material conditions of possibility for the development and implosion of the business models used by Northern Rock and Bradford & Bingley. Findings - The paper argues that the demutualization of Northern Rock and Bradford & Bingley was part of a broader neo-liberal movement which had processes of financialization at its centre. By converting into banks, former building societies gained greater access to wholesale borrowing, to new types of investors and to the unrestricted use of financial instruments such as securitization. The collapse of Northern Rock and Bradford & Bingley is interpreted in the light of their access to these new sources of funding and their use of financial instruments which were either unavailable, or antithetical, to the operation of mutual societies. Originality/value - The paper adopts an alternative perspective on the so-called 'sub-prime crisis'. The collapse of Northern Rock and Bradford & Bingley is understood in relation to the expansion, and subsequent crisis, of financialization, in which financial instruments such as Collateralized Debt Obligations and Credit Default Swaps were at its explosive centre, rather than to the expansion of sub-prime lending per se. Demutualization is presented as a symptom of neo-liberalism, a development that, in the UK, is seen to have contributed significantly to the financial meltdown. Limitations - The paper comments on the contemporary features and current effects of the 2007/8 crisis of liquidity whose full long-term consequences are uncertain. Further research and future events may offer confirmation or serve to qualify or correct its central argument. The intent of the paper is to provide a detailed analysis of the conditions and consequences of building society demutualization in the context of the neo-liberal expansion of the financial sector that resulted in a financial meltdown. It is hoped that this study will stimulate more critical analysis of the financial sector, and of the significance of financialization more specifically.