Rodney Baker-Bates explains appointment of Paul Flowers to Treasury select committee, and why he quit over Verde project
The Guardian, Gill Traynor, 
Co-op Bank

The collapse of the Verde deal smashed hopes that an enlarged Co-op Bank would be a major player on the high street. Photograph: John Stillwell/PA

Paul Flowers, the disgraced former chairman of the Co-operative Bank, was appointed to the post because he did better than rival candidates in psychometric tests, the Treasury select committee of MPs was told on Tuesday.

The methodist minister, now facing allegations of buying illegal drugs, was chairman from 2010 until last June just as the scale of the bank’s £1.5bn capital shortfall began to emerge.

The former deputy chairman of the Co-op Bank, Rodney Baker-Bates, told MPs that he lost out to Flowers in becoming chairman and revealed that he eventually quit his boardroom role in protest over the attempt to take control of 631 Lloyds Banking Group branches, codenamed Verde.

Asked by committee chairman Andrew Tyrie MP if the Co-op bank would have continued in its previous form if he had become chairman, Baker-Bates said: “Yes. I think it would … That may be arrogant.”

After a £1.5bn capital shortfall was uncovered by the Prudential Regulation Authority (PRA) arm of the Bank of England, the Co-op was bailed out by bondholders – led by US hedge funds – who now own 70% of the bank. The Co-op Group, the mutual which owns supermarkets and funeral homes, owns the remaining 30% of the bank, which is to be floated on the stock market.

To laughter on the committee, Baker-Bates said he had been told Flowers had been picked as chairman because he had done well in psychometric tests. David Davies, another deputy chairman, said he had been told Flowers – a member of the Co-op Group board – had been chosen for his leadership skills and admitted he had been surprised by the results of the psychometric tests.

The two former deputy co-chairmen – who both voted against the Verde deal – agreed that Flowers did not have the financial expertise to be chairman.

Baker-Bates and Davies were, according to David Ruffley MP, appointed as deputy chairmen to “mind” Flowers. Baker-Bates had been the chairman of Britannia when it was merged with Co-op in 2009, the deal that is now blamed for the bad loan losses at the enlarged bank.

Davies was on the Co-op board at the time of that deal, which took place at the height of the financial crisis.

After hearing the testimony of the two men, Tyrie said it was apparent that the Co-op Group – chaired by Len Wardle who has since quit – rather than the bank had been driving the takeover of the Lloyds branches. “The two deputy-chairmen of the Co-op bank, appointed to guide a chairman with little knowledge of finance, resigned because of their opposition to Verde. Instead of ignoring their advice, alarm bells should have sounded on the main Co-op Group board,” Tyrie said.

Baker-Batessaid he had quit the bank after concluding the attempt to buy the branches was a “giant step too far”. That deal collapsed last year after months of negotiations and smashed hopes that the enlarged bank would be a major player on the high street.

He was concerned whether the Co-op Group had enough “capital and competence” to compete in banking and supermarkets where it was growing quickly after taking over Somerfield.

The two former deputy chairmen said Credit Suisse, acting for Lloyds, had approached the Co-op Group about a potential bid for the Verde branches in spring 2011.

He said that the board was too large – 22 people – and had members from the Co-operative movement without knowledge of banking.

Peter Marks, who was boss of the Co-op Group, led the negotiations and Davies – who stayed on the board despite having voted against Verde – said he was “convinced more and more directors saw the folly” of the deal as time went on.

They both expressed surprise about the deterioration in the Britannia deal. Baker-Bates said that a week before the 2012 financial year-end the PRA had written to the bank asking for a rethink of its provisions for bad debts. They were eventually increased by £300m from £185m.

Davies said he became concerned about a “worrying sub-plot” where the management was being told that Verde was the “least risk option … if we did not do the deal the bank could not survive”.

Davies said he was convinced the PRA was adding additional capital requirements until the bank “broke”. The investigation by the committee is one of seven into the near demise of the bank, which is facing a formal independent investigation.