The strange case of the Presbyterian Mutual Society: an idiot's guide

I turn again to the one significant financial institution in Britain that has gone down the drain as a result of the ‘credit crunch’ - the one that the Scottish Secretary does not appear to have heard of.

I have no particular qualifications for writing - I am not an economist, nor do I work in the financial services industry, nor am I a member of the Presbyterian Church in Ireland, nor am I an investor in the Presbyterian Mutual Society (PMS) - hence it is literally an ‘idiot’s guide.’ If you want something knowledgeable, read William Crawley.

I do, however, think that this is a fascinating and instructive story for Christians. And, to declare an interest, I do have close relatives who were members of the society, and who stand to lose thousands of pounds.

So - what went wrong?

The first problem is simply that people were optimistic. It never seemed to occur to them that the worst would happen. This is true of the savers who invested, of course. It was true of the church members who recommended the society. But it was spectacularly true of the management of the PMS. They invested the funds of societies in schemes that looked fairly solid, and forgot that the value of investments can go down as well as up. Or, to use Presbyterian terminology, “Do not store up for yourselves treasures on earth, where moth and rust destroy, and where thieves break in and steal.” (Matthew 6:19)

The problem was not simply that people were not used to seeing moth and rust destroying their treasures, though that was a large part of it. The problem was also that the activities of the management were not considered to be risky. They were simply considered to be pretty standard practice in the financial services industry. Lots of banks and building societies were doing these things, and if you didn’t do them, you were uncompetitive. And the fact that everyone was doing them made them look, well, safer. Which is a big mistake. As Presbyterians would say, “Wide is the gate and broad is the road that leads to destruction, and many enter through it.” (N.B. Just because every western nation uses fractional reserve banking, does not mean that it is a good idea.)

And then there was the great success of the society. It repeatedly paid good rates of interest. Members who invested were pleased with the return they were getting. They recommended it to others. As a Presbyterian “success story”, it was hard not to talk about it. It would, to be honest, have been pretty surprising if the General Assembly had not commended it. The problem, of course, is that what looks very successful right now, may not look successful at the end of the day. Or, to use Presbyterian-speak “The day shall declare it, because it shall be revealed by fire.” (I Corinthians 3:13)

So there it was - a bit too much optimism, a bit too much going with the financial crowd, a bit too much enthusiasm because something looked successful. And of course there was also the way that some members of the society withdrew £21 million of the Society’s £25 million without, apparently, giving much thought to the effect it was going to have on their fellow members, which is somewhat at variance of the old Presbyterian principle that “Each of you should look not only to your own interests, but also to the interests of others.” (Philippians 2:4)

One of most curious features about the PMS was its relationship to the Presbyterian Church. Legally, it wasn’t part of the Church. The Church, if I understand correctly, had no power to remove the directors. That power was vested in the members of the society - i.e. the people who put their savings in it. The directors reported to them, made no secret about how their money was being invested, and they didn’t ask questions or complain.

And yet, membership was only open to members of the Presbyterian Church. And, more significantly, the General Assembly of the Church passed a resolution (put forward by the Board of Mission) “to congratulate the Directors of the Presbyterian Mutual Society on its continuing success and encourage Congregations and individuals to avail themselves of its services.” With hindsight, that was a horrendous blunder.

Yet this resolution was not passed by a small group, but by the whole General Assembly, with, as far as I know, no dissenting voices. The decision was democratically taken, and represented the mind of the entire denomination, not a group of insiders. Technically, responsibility rests with those who were commissioners at the Assembly, but there is little doubt that the resolution was not seen as contentious, and that pretty well any church member who would have been there would have supported the resolution without giving it much thought.

And that is the heart of the situation. Responsibility for the debacle rests on huge numbers of people. Nobody did anything truly terrible. It is simply that large numbers of small mistakes added up to a major disaster, and large numbers of people didn’t realise that they were doing something very dangerous.

Had I been a member of the General Assembly, I’m sure I would have gone along with the crowd and supported the resolution. And so I would bear part of the blame. Had I been a member of the PMS, I would not have questioned what the directors were doing. And so blame for the debacle would have rested partly on me. It really is one of those “There, but for the grace of God, go I” situations.