Today, Pieter Couwenbergh and Ivo Bökkerink of Het Financieele Dagblad wrote a stunning analysis on how the Rabobank got involved in Libor-gate. This sobering story should be a warning for every bank that wants to do business way outside its league.
Here are the pertinent snips of this must-read article:
Mention the name Alexander von Ungern Sternberg to Sipko Schat and shivers will go through the body of this Rabobank executive.
In the nineties, the German is hired by Rabobank to build up a merchant bank in London. Rabobank wants to play a role on the capital markets, because their customers ask for creative, financial products. And in the process lots of money can be made.
As the cooperative bank doesn’t have any knowledge and hands-on experience, they lure people like Sternberg with aggressive remuneration packages, following the moral in the London City.
Sternberg collects dozens of friends and moves the bank to a large edifice in the financial centre of the city at the Thames river. Rabo works like crazy and moves mountains, with as a climax the membership of the prestigious Libor panel group.
Rabo executives, with in their ranks Sipko Schat who has been working for Rabo International since 1995, look at the German banker with dismay. His working attitude is lightyears removed from their normal, down-to-earth ways of doing business in Utrecht. Sternberg, for instance, even built a luxurious staircase from his office to the trading floor below, in order to aggressively spur his traders to work even harder and make more money. In 1999, Sternberg is fired and the office is London is decimated. The bank gained an illusion and lost many millions.
In spite of this dearly paid lesson in 1999, the bank remains at the capital markets, according to the principle: if you are not in, you don’t get the best conditions for financing. The problem is that the traders are a traveling circus, that hires itself to anybody who needs its services. These people promise you mountains of gold, but they want a considerable share of the profits. Whoever enters the world of derivatives, swaps and other financial wizardry cannot survive without their expertise.
When you hire these people, according to bank executives, a few characteristics are important to know. First, these people are loyal to themselves and their wallets. Second, they are loyal to their brotherhood and only in the last place loyal to the corporation that pays the monthly checks.
One bank executive: ‘See these people as a tribe. They work in changing combinations and help each other’. Add to this that they work with aggressive bonuses and are only focused on winning and you have all the ingredients for an explosive, risk-bearing cocktail. ‘They are highly educated, but that says nothing about their values and moral’, according to an experienced bank commissioner.
Rabobank dearly misses a tradition of stringent audits, of well-trained compliance officers and focused internal auditors. In 1996, the bank hires one person for compliance. After that, the work was done by one lady with a secretary for years. Only halfway the last decade, the department starts to grow. Nevertheless, the interest traders, who are now accused of participating in the Libor-gate affair, could virtually do what they wanted; their department had not been considered to be very risky.
These people had the power to convince other people. The people who were involved in setting the Libor rate, were of a different breed: calculating wizards, who kept the balance sheets in order. ‘The treasury people have been used as doormats’, according to an insider, experienced with benchmarks and fixing.
Rabobank’s compliance office stood by and watched things happen, litterally. Early 2009, the internal auditor of the bank started an investigation into the department that has been setting the Libor-rates. While busy, he receives compromising email exchanges between the traders and the people who set the Libor-rates, but decides not to do anything with it.
After reading this whole must-read story (please make use of the link for the whole article), there are two words that come to mind: mindblowing amateurism! It was like Rabobank stated: “We want to play with the big boys too! Otherwise nobody will take us seriously!”
The adventures of the Rabobank in “Libor Country” were akin to British football club Sheffield United suddenly deciding it wants to play with Bayern Munich, Barcelona and Real Madrid in the Champions League of Football. And for Americans: as if the junior league baseball team from Greenville, South Carolina wants to compete with the Boston Red Sox! Just because they are worth it!
It was an accident waiting to happen and it costs the Rabobank dearly now.
You must know that at the time (in the nineties), the Rabobank was a simple, but financially very solid cooperative bank, originally founded by farmers in the 19th century and traditionally strong in this area. The bank knew everything there was to know about agriculture and agricultural financing, through its network of independent local banks, which were in close touch with the local farmers and cooperations. Due to its local strenght and renownedness, the bank was also very strong in financing local small and medium enterprises and mortgages.
However, at this time the bank wanted to go through a transition: from ‘bank of independent local banks’ into an important player at the international financial markets.
Unfortunately, the bank didn’t know ‘jack sh*t’ about the world of ‘haute-finance’ yet and thus, the bank didn’t have a clue about what kind of world it was going to enter. Still, they got the money and the attitude, so… what the heck!
The bank lacked the experience and street-smartness, lacked the controls, and (you could say) lacked the 'pizazz' to battle in the champions league of banking,… but they did it anyway. With disastrous results.
The lesson that the Rabobank learned from Libor-Gate has been a valuable lesson: for this bank and for any other bank that wants to enter the London City jungle unprepared.
It reminds me of a recurring quote from the hilarious, popular-scientific series “Brainiac: Science Abuse”: ‘We’ll do these experiments, so you don’t have to”.