The last few months have been a wild ride for the banks again.
Excuse me…, for some banks:
The last few months showed the vulnerability of Bankia (BKIA), a Spanish banking
conglomerate that was formed in December, 2010 from a number of local banks or ‘cajas’
(Caja Madrid and Bancaja were the biggest partners, effectively holding 90% of the available shares). These caja's had
fallen into trouble earlier. In hindsight, Bankia was the closest thing to a
black hole on our planet, sucking up billions of Euro’s in private and government
money.
Private investors,
often normal families and people that looked for a safe investment for their life
savings, were lured into buying shares of Bankia to the tune of €3.1 bln. Institutional
investors had earlier passed the poisoned cup, refusing to invest in Bankia.
Therefore a smooth advertising campaign, full of empty promises from the
government and bank management, needed to persuade the local José and Ana to buy
these shares, only to see their savings vanish into open air. On top of that, the doomed bank needed already about €20
bln of government money in emergency loans to stay afloat.
Barclays PLC (BCS), Deutsche
Bank AG (DB), BNP Paribas SA (BNPQY) and ABN Amro were the names that kept popping up in the Vestia
scandal (this link, pointing to the last article in the series, contains links to the older articles): the case concerning the Dutch
building cooperative that bought for €23 bln in speculative interest rate
swaps, while it only needed to hedge €5 bln in investments. The swaps would yield
to Vestia when the LIBOR/EURIBOR interest rate would rise, but would yield to the banks (the counterparty of this deal)
when the interest rate would stay low. Of course, the interest did the latter.
During the investigation, it became clear that Vestia not
only had bought an unprecedented amount of uncovered swap contracts (the
earlier mentioned €23 bln), but it had also paid commission fees that were ten
times higher than the usual fees. The (former) CFO of Vestia received, via a
brokerage firm, large amounts of money in kickbacks from the banks, paid from this
commission money. Also it was disclosed that the CFO of Vestia, Marcel de Vries,
had been taken to London at multiple occasions for VIP-trips: visits to dinner
parties in expensive restaurants and nightclubs with the finest foods, the most
expensive wines and literally dozens of escort ladies to keep him and his
entourage company.
The criminal investigation concerning the Vestia case is
still fully in motion and some of the key players have not been prosecuted yet. Besides
that, it might be hard to prove beyond reasonable doubt the condemnable role of
the banks in this scandal. Still, it is very clear, in my humble opinion, that
the banks involved in the Vestia case have operated very close to the edge, and I
would even say over it.
In one case there seems to be little doubt on the guilt of
the bank involved: Libor-gate. The case of the Libor (London InterBank Offered
Rate) interest rate that had been rigged on multiple occasions by a group of traders from one of the main
banks involved in setting this rate, sent shockwaves through the British
society and the global banking industry. The name of the bank involved sounded
surprisingly familiar:Barclays PLC (BCS).
While the amount of anger and disgust in the British society
was soaring, the defense of former CEO of Barclays, Bob Diamond was the same ol’
same ol’: this was a group of rogue traders that started to make these deals on
their own. And, while Bob Diamond could have and perhaps should have known about
it, he just didn’t! Seriously! Barclays was the best bank in the world with
tens of thousands of honest employees and only 14 rogue traders that spoilt it
for the rest!
Now a parliamentary investigation committee from the House
of Commons will investigate the rate-fixing at Barclays, while the rest of the global
banking industry is shivering from tension and excitement: will Barclays be the
Lonesome Wolf or will Libor-gate just prove to be the proverbial tip of the
iceberg.
My take: if you start to dig deeper, you will find the same
stuff as behind Andy Summers’ camel.
While the fourth story of this article does not at all have
the impact of Libor-gate, the protagonist of it sounds also quite familiar: Goldman Sachs Group Inc (GS).
The Dutch newspaper Het Financieele Dagblad (www.fd.nl) wrote on Saturday, July 7, that the
Dutch pension fund for the transportation industry ‘Vervoer’ filed charges
against Goldman Sachs, for ‘poorly executed property management’. Here are the
pertinent snips of this story:
The pension fund for
the transportation industry claims €250 mln from Goldman Sachs Property
Management for poorly executed property management.
This is confirmed by
Patrick Groenendijk, executive manager property management of the fund.
‘The claim concerns
the mandate that Goldman had until 2010 to invest the pension money’, according
to Groenendijk. Further he does not want to add much information, apart from
the size of the amount which is €250 mln, not £250 mln, like it was written in
the British newspaper The Telegraph. The claim is filed at the High Court in
London.
Goldman Sachs Property
Management states that it has operated cautiously. ‘We have fulfilled our
mandate, and have met our obligations towards the customer. We haven’t seen a
claim yet, but we are of the opinion that such a claim would be unfounded, when
looking at the facts. We would certainly fight such a claim’.
Until April 2010, the pension
fund had their pension capital of €9 bln at the time managed by Goldman Sachs.
The fund left Goldman, after the bank became the talk of the town; it had been charged
by the official American stock exchange watchdog SEC, as the bank had not been
transparant about conflicting interests during trades with mortgage covered bonds.
However, the fund ‘had already been dissatisfied for a longer period with the
results of Goldman’s investments’. For the year 2008, the Pension fund Vervoer had
received 14.1% in negative yields, while GS had promised earlier to beat the
benchmarks. These benchmarks ended at a much higher -/- 8.7% for the same year.
To the objective listener, the case of the pension fund Vervoer
against GS just doesn’t sound like a rockhard case. The sad fact, however, is
that GS is one of those banks that have their reputation working against them.
Just like most of the other banks mentioned in the earlier parts of this
article.
It seems that the banking industry can roughly be divided
into two kinds of banks:
- The first group are the banks that learnt a hard lesson from the credit crisis and changed their life for the better. Perhaps not totally perfect, but trying hard to be fair against both their shareholders and their customers, the government and the taxpayers;
- The second group are the banks that are still pursuing the high yields that are needed to keep their shareholders happy. The banks that are riding close to the edge, driven by the promise of high bonuses. Banks that are willing to take more risk than they should or that are not always operating prudently and in the interest of their customers;
- f.i. by selling their customers products that are too complex and/or poorly balanced out;
- or by selling investment products that supply much more downward risk than the customer can logically anticipate;
- or by charging their customers too much fees for all kinds of futile administrative operations;
- Of course, there are also clearly banks that show upright fraudulent behavior.
I have the (vain) hope that the latest list of scandals and
the enduring credit crisis will finally segregate the bad banks from the good
banks. I hope that the bad banks will not be rescued anymore at the expense of hundreds
of millions of taxpayers and at the expense of the banks that play by the
rules.
There should be much more disclosure to the general public when banks have offended the law or the banking rules and regulations. People must have the choice to look for another bank, when they are well-informed on misbehavior of their own bank.
When a bank misbehaves, its customers should have the right to end their contracts without being charged with extra expenses. When this would happen, something good would have emerged from the
credit crisis.
However, this is probably a vain hope. During the 4-5 years that the
credit crisis already lasts, many banks have walked between the raindrops
without becoming wet. Knowing they had become too big to fail. When they
received a penalty from the (inter)national supervisors, they paid it with an
iron smile and charged it to their customers: openly or stealthly. When they
threatened to fall down, they screamed ‘help’ and then the governments kicked in.
In spite of all brave words about new rules in the banking
world, the scene remains the same. I hope that customers choose with their feet
and their wallets, not only with words. At the other hand, I know that it is
hard: the marriage with your bank is often much more steady and enduring than
the marriage with your wife or husband. Banks know that. Something, however,
has to change…
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