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Saturday, 2 June 2012

Vestia struck back at the banks, but is now accused by ABN Amro of perpetrating fraudulent, Paulianic behavior. Conflict between Vestia and ABN Amro is turning into a trench war.

It is already four months ago since the soap opera around Rotterdam, The Netherlands-based, building cooperative Vestia started.

Vestia, a non-government, non-commercial building cooperative had bought Interest Rate Swaps from a number of banks: among others Deutsche Bank (DB)ABN AmroBarclays (BCS-P) and BNP Paribas (BNP). These swaps would protect Vestia from an increasing interest rate, but would cost the building cooperative money if the interest rate remained low. Money that (in theory) would be saved as a consequence of the lower interest payments. As these loans and investments are amounts to the tune of hundreds of millions or even billions of Euro’s, the upward risk of even the slightest change in the interest rate amounts already to millions of Euro’s. These swaps are normally relatively small investments in order to save a multiple amount in risk money. Therefore it is quite normal behavior for a building cooperative to hedge the interest risk on loans and investments.

What wasn’t normal in the Vestia deal, was the amount that Vestia hedged in the interest rate swaps: a mindboggling €20 bln. This was about four times as much as the investments at stake, which were roughly €5 bln. The fact that the interest remained low, instead of having risen what Vestia had expected, made that Vestia had to make a deposit payment of €2.5 bln at the banks. The cooperative itself could only pay €1.0 bln of the deposit money and had to ask other building cooperatives and the Waarborgfonds Sociale Woningbouw (WSW; the guarantee fund social housing) to pony up the missing €1.5 bln. These parties did so in order to keep Vestia, the largest building cooperative in The Netherlands, afloat.

Newspapers and the public prosecution found out that Vestia paid the involved banks about ten times as much in commission fees as in normal transactions; money that was supposedly transfered, via accused strawman Arjen Greeven of Fifa Finance, to CFO Marcel de Vries of Vestia. It also became known that at a number of occasions CFO Marcel de Vries received a VIP-treatment in London, with the finest foods, the most expensive wines and dozens of escort girls, all at the expense of the banks that sold the derivatives to Vestia.

The backgrounds on the Vestia soap can be read in the older episodes of which the hyperlinks are printed below:
A few weeks ago, the Vestia case rose to another level: in an impressive tour de force the new management of the haunted building cooperative put their whole housing base of about 75,000 houses on mortgage with the WSW, minutes before the involved bank syndicate started talks on the Vestia situation. The result of this bold action was that the banks had had it with a possible seizure of Vestia’s housing base.

As the WSW was one of the parties that stood bail for Vestia, it seemed like a fuzzy, but not strictly illegal deal.
ABN Amro, one of the involved banks that delivered the enormous amount of interest rate derivatives and a stateowned bank with the former Dutch Finance Minister Gerrit Zalm as CEO, was not amused.

The bank was so outraged from Vestia’s bold action that it turned the Vestia soap into a trench war: ABN Amro threatened the building cooperative with a large damages claim. The Dutch newspaper NRC Handelsblad ( writes on this developing story. Here are the pertinent snips:

Last week, ABN Amro threatened to hold the directors of building cooperative Vestia and the Waarborgfonds Sociale Woningbouw (WSW; guarantee fund social housing) personally responsible for sustained damages. When the residential real estate of Vestia has been illegally transfered out of grasp of ABN Amro, the bank would knock at the door of Gerard Erents, managing director ad interim of Vestia, and Roland van der Post, managing director of the WSW. This is confirmed to NRC Handelsblad by anonymous sources.

Trigger for the legal threat of ABN AMRO was an urgent action of Vestia and the WSW on Monday, May 21st. At that day Vestia gave WSW the mortgage rights on all of its real estate to the tune of almost €8 bln. This action made it impossible for the banks to claim the real estate, in case Vestia would default. It happened at 12.59 PM, one minute before the eleven (inter)national banks would negotiate with Vestia on the emerged deficits.

After the deed of Vestia and WSW, ABN Amro took the initiative of reflecting with the other ten banks. One day later, on Tuesday May 22, ABN Amro sent letters to Vestia and the WSW. Lawyers of the bank are investigating if Vestia can be accused of ‘Paulianic behavior’, frustrating its creditors. Currently, ABN Amro is said to have withdrawn its threat temporarily. Last Wednesday, Vestia entered into a deal with the banks to freeze up the collateral obligations for a period of two weeks. During this time the banks and Vestia negotiate further on redemption of the derivative contracts.

For the readers that are not familiar with Dutch or Roman law: the Actio Pauliana (Paulian claim) is the authority to stand up against legal actions of a debtor, that frustated its creditors. According to Dutch Wikipedia ( Paulianic behavior is when a debtor, confronted with an imminent risk of default, has sold its property at a very low amount, thus frustrating the possiblity of its creditors to claim the property of the debtor.

The Actio Pauliana is a legal weapon that especially banks use to force legal and natural persons to hand over their collateral and property in case of a default or bankruptcy, when debtors tried to shirk resources and property out of the bankruptcy / default.

In general Paulianic behavior is rather a civil litigation than a criminal proceeding, although in some cases criminal behavior has been proven in the court of law.

Although I’m not a lawyer, I am worried that this particular case could be a reasonably clear case of Paulianic behavior. Vestia handed out mortgage rights to the tune of €8 bln, while WSW has a claim of only €1 bln on Vestia: the amount of deposit money it paid to the banks in order to save Vestia from defaulting.

Even when the Vestia real estate has to be sold completely at an average discount of 75%, the residual amount for WSW would be twice as high as the deposit money that WSW handed over to the banks. However, a fact that speaks to the credit of WSW is that the guarantee fund is a real creditor with a real claim of € 1 bln on Vestia. A fact that cannot be denied by the syndicated banks.

When we look at the moral side of Vestia’s latest trick and the reaction of state bank ABN Amro, it seems a clear case of ‘the pot calling the kettle black’.  To be frank,  as an involved and worried citizen, I applaude Vestia’s action against a group of banks that seemed to have gotten involved into: money laundering, bribing, forging contracts and making fraudulent commission payments.

Of course all these accusations need to be proven in the court of law, but in my humble opinion the banks have the appearances against them.

Like I wrote in my last article (see the last hyperlink in the aforementioned article listing):

What makes this case even more worrisome is that most banks have four-eye or even six-eye controls for transactions of more than €250,000. This means that the Vestia case cannot be a case of just the proverbial ‘rogue trader’ at a further honorable bank.

If the case of Vestia can be proven against (at least one of) these four banks [Deutsche Bank, ABN Amro, Barclays and BNP Paribas – EL], this would mean that the process of putrefaction has entered into the core of these banks.

When proven beyond reasonable doubt (!), these actions of these banks are a cancer in the financial system. If it is not treated, it might kill the whole financial industry.

Therefore I see only one possibility:

  • Investigate if this is a running practice within the suspected banks;
  • Remove the cancer: the people that did this within these banks.Put them in jail, just like what happened in the Enron case;
  • If there are too many people that did so within these banks, subscribe a kind of chemotherapy by putting the bank under legal restraint and subsequently fire and prosecute everybody that is involved. Don’t let the managers and executives escape.
  • If all else fails, withdraw the banking license of the business parts of these banks.
  • If the authorities fail to do so, the next Vestia case might be a matter of years or even months.
 I would say: “if such a fraudulent bank needs government money to survive, it doesn’t deserve to exist. Pull the plugs…”

I still have my hopes on the Dutch Public Prosecution that the Vestia case might also lead to legal prosecution of (representatives of) the banks involved in this case; not only to prosecution of De Vries and Greeven. However, I’m not sure that the desired Actio Pauliana of ABN Amro might not be granted in a civil litigation.
Whatever happens: this dirty case will cost the Dutch taxpayer a lot of money, either way. The taxpayer will either pay for Vestia, or for stateowned bank ABN Amro. That is a sad conclusion.

1 comment:

  1. Most swaps are priced to be at-the-money at inception meaning that the value of the floating rate cash flows is exactly the same as the value of the fixed rate cash flows at the inception of the deal.