Sigrún Davíðsdóttir's Icelog

The Western banking crisis in the shadow of corrupt practices

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Today, the Spanish Government formally asked for aid to recapitalise its banks – the word “bailout” isn’t mentioned but that’s what this aid is – and no numbers mentioned either. Even €100bn might only offer the briefest relief. Cyprus’ bid today for the same mostly goes unnoticed. Apparently Russia’s aid to the island isn’t enough. Will the EU keep on throwing good money after bad, without digging out the roots of corrupt banking practices?

Do you remember in 2008 when some British, Irish and American banks were below sea-level and people pointed at Spain and Spanish banks as the example to follow? Those were the days – days of Spanish clever accounting, not of their banks’ rude health. That’s a point made in a clear and insightful article, “The EU Smiled While Spanish Banks Cooked Their Books,” by Bloomberg’s Jonathan Weil.

At the core of the Spanish loan debacle are local banks, the cajas, heavily connected to the construction sector and local politicians, just like in Ireland. The Mahon report uncovers the unhealthy relationship in Ireland in the 80s and the 90s between these two elements: the building sector and politics. A relationship that has a lot to do with the escalating debt of the Irish financial sector, which the EU then forced the Irish state to shoulder. The cajas saga seems to mirror the Irish state of things completely, even down to brown envelopes.

Spain now needs billions to save its banks – €65-100bn, depending on the calculation – the official Spanish bid for a bailout today doesn’t come with a number. At the centre of this salvage project is Bankia – a bank created in 2010 out of several of the worst cajas, with – as is now turning out to be the classic way – far too little write-downs. As if pooling together the worst cases would create a bank in brilliant health.

In the best tradition of the marriage between finance and politics, the role of a chairman was given to a politician, Rodrigo Rato. Rato had an apparent merit, having been the director of the IMF 2004-2007. Why did he resign after only three years, before the end of his term? Apparently, he wanted more time with his family. Quite often, when people in power resign to be with their families, it’s because no one else wants them but dares not say it aloud. The Spanish press is overflowing with stories about corrupt lending to political pet projects like airports that have yet to see an airplane and exorbitant salaries of cajas managers.

There are also cajas in Iceland, small local saving banks, originally set up to serve individuals and small enterprises in the local community, based on small is beautiful in a closely-knit community where the directors are pillars of society. Last year, PriceWaterhouseCooper did a report on one of these local institutions in Iceland – the local saving society in the village of Keflavik, on the Reykjanes peninsula, right in the shadow of the now defunct US base. This report has now been leaked – and it provides a grotesquely clear image of small-town corruption with no small money.

The methods aren’t new –it doesn’t come as any surprise that there were plenty of loans with no or weak collaterals – but the methods are really crude. The CEO lent and then wrote-off loans to his son, not to mention the bank’s staff, local politicians and entrepreneurs with the odd bank CEO among favoured borrowers. And as with the banks: what were the accountants doing?

Like in the cajas, this is the story of how the vision of community service turned to the vision of greedy self-service.

SpKef has now been thrown under the wings of the state-owned Landsbanki, as if Landsbanki were the best place to keep toxic waste, no questions asked. That said, the Office of the Special Prosecutor is no doubt looking at the SpKef operations. SpKef managers seem sitting ducks for a criminal case of breach of fiduciary duties, comparable to the Byr case. But so far, the Government isn’t asking any questions and yet it is putting ISK25bn, €197m, to fill the empty SpKef coffers in an unexplained bailout (and in Icelandic terms, the bailout amounts to the budget contribution to the University of Iceland for two years).

But how come that banks, costing governments in the UK, the US, in Ireland, Greece, Portugal, little Cyprus and now in Spain the earth and the sky aren’t being properly investigated? Is it too complicated? Of course it isn’t. It’s a question of picking and choosing the right topics – such as breach of fiduciary duty, possibly market manipulation and in the small local banks corrupt lending.

A recent court case, studied by Matt Taibbi in a Rolling Stones article, uncovers how major US banks, over a decade, have used tried and tested Mafia methods to rig bond auctions by public authorities, universities and other institutions. It’s an article that merits reading more than once just to fathom the banks’ dizzying arrogance and pure will to cheat. The defense argued ia that the rigged price was just as fair as any other price. Yes, why bother with free competition when only monopoly is deemed to assure the satisfying gains?

Banks in the US and the EU are all profiting from abnormally low interest rates though they aren’t lending. How ironic: it was the unwillingness to lend that triggered the credit crunch in 2007, thought at the time to be a tiny naughtiness by the banks. In the UK, the subsidy to banks has been estimated to amount to £220bn over the last few years. Now, this seems more like a good plan to get capital.

And in case you haven’t noticed: the banks are still not lending but hoarding money against the losses they seem to suspect are looming out there. Understandable, in the light of the latest, from the WSJ:

Regulators and investors are concerned that some European banks are artificially boosting a key measure of their financial health, a worry that is further eroding market confidence in the Continent’s banks.

Such concerns have been building up for more than a year. But they have intensified lately, with a parade of banks announcing that they intend to increase their capital ratios—a key gauge of their abilities to absorb future losses—partly by tinkering with the way they assess the riskiness of their assets. Spanish banks, including Banco Santander SA, are among those that have announced plans to boost their capital ratios …

Does it come as a surprise that in spite of repeated stress tests, the banks might actually not be showing their true colours? No, it doesn’t. In an unnamed central bank a stress test was recently being discussed. Some innocent soul asked why the test didn’t test more severe and realistic circumstances. There was a troubled silence before someone muttered: “Because then they would all fail.”

In Iceland – an interesting measure because of the thorough overview of the banks, the SIC report – it’s clear that bank auditors have questions to answer. Some will be answered in court: Glitnir and Landsbanki have sued their auditors, PwC, for misrepresenting the health of these banks. The rapid expansion of Kaupthing is worryingly similar to Santander’s growth.

Modern society undoubtedly needs banks – but we need banks that do not just serve themselves but society as a whole. We are still waiting and it’s costing us all a lot. It’s not just a euro crisis but a crisis of Western banking under the long, dark shadows of corrupt business practices.

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Written by Sigrún Davídsdóttir

June 25th, 2012 at 9:12 pm

Posted in Iceland

3 Responses to 'The Western banking crisis in the shadow of corrupt practices'

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  1. In the fog of economic war your point of view is always enlightening and thank you foe that.
    I have wondered why convicted corrupt official get reelected. Example: our village “maire” got reelected despite being condemned for assault and battery (serious bodily injury)on his wife, a disproportionate income from his functions.
    Indeed the implementation of Basel II (with the mark to market valuation) has increased no end the murkiness of the financial sector and banks balance sheet are dubious. My point is with those two example that it is very difficult to have a clear story understandable by citizens, all those different approaches, necessary complex (financial, economic, politic, ecologic etc)point to a weakening of the democratic process. Lets hope that new technologies (internet) will improve matters. :)

    Goupil

    26 Jun 12 at 8:15 am

  2. Thank you, Sigrún.
    That was a wonderful survey of the mess the banking world has pushed itself – and us – into.
    It won’t be pretty, but the sort of people who cause such disasters will have to be permanently removed from their positions of influence. They are still a danger to the public.

    wardropper

    29 Jun 12 at 12:20 am

  3. […] Icelog has earlier drawn attention to Bankia, the Spanish bank at the heart of the banking crisis in Spain, as an example of the interplay of the financial crisis and corruption. Interestingly, the Spain’s National Court has now opened a criminal investigation against former chairman of Bankia Rodrigo Rato, together with 32 top managers at Bankia. Most of them quit following Bankia’s recent nationalisation. None of them is currently working at Bankia. […]

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