Blowing the Whistle on the Banks

In 2007 Jonathan Sugarman, the Senior Risk Manager at Unicredit Ireland, Europe’s fifth largest bank, notified the Central Bank of Ireland that his bank was not meeting its minimum liquidity requirements. The regulators ignored and silenced the case.

One year later, amid the escalation of the financial crisis, the Irish government announced one of the largest bank guarantees in history, worth 400 billion Euro - more than double Ireland’s GDP at the time. The guarantee covered not only bank deposits, but the banks’ bondholders as well, making the main beneficiaries of the guarantee the creditors of Ireland’s insolvent banks. This led Ireland straight into the arms of the Troika (the IMF, the ECB and EC) in November 2010, seeking a bailout of 85 billion Euro. The accompanying conditions demanded a structural adjustment programme of severe austerity that makes ordinary Irish people pay for the banks’ mess.

Sugarman’s story highlights how the banks persistently broke all rules in the book but, not only did they not suffer any repercussions, they were rewarded. And when someone spoke out against the rule breaking, the authorities silenced his case.

After a brief description of his case are extracts from a 2012 speech Sugarman made in Athens about his experience and the banking and finance industry in general. Giving insights, anecdotes and stories on the crisis from someone with very much an insider’s view, he outlines a variety of banking issues in plain and clear language.

Liquidity is often defined as the blood supply of a bank. Jonathan Sugarman’s job was to make sure the bank had enough liquidity to satisfy the Central Bank’s requirements.

One of the requirements was that the bank would hold ‘liquid’ assets (that could easily be sold) amounting to at least 90% of the bank’s liabilities due to mature over a certain period. Irish law stipulates clearly that the legal consequences for breaching this minimum limit included the bank being fined and the risk manager and managing director of the bank being sentenced to five years in prison.

However, Unicredit’s senior management ignored Sugarman’s concerns that the bank was breaching these requirements, saying the problems arose from glitches in the information system of the bank and thus were not real liquidity breaches. During this time, Sugarman had to fill in daily reports stating that the reasons for missing the targets were technical. Serious doubts about the honesty of this reporting led him to send an official notification of a liquidity breach to the regulator in July 2007 – just over a year before the Irish government announced one of the largest bank guarantees in history.

But despite the law stating that even a breach of liquidity as small as 1% must be reported, the regulators ignored Sugarman’s report, which said that at times Unicredit’s liquidity had been as low as 20% below the minimum required by law. One might assume that when a crime is reported the regulator would start an investigation. In this case the response was that the 20% breach had been noted by the Central Bank but there was no further investigation.

Sugarman resigned from Unicredit Ireland in 2007, when he realised he would be held accountable for continuous breaches of the Central Bank’s liquidity regulations - and could potentially face a prison sentence for it.

At a later meeting with the Central Bank, in May 2011, Sugarman was told that anything he might say could be used against him by the state’s public prosecutor, and so he refused to talk. In February 2012, he met again with Central Bank officials and this time he did disclose what he knew. Although the regulators admitted that there were more irregularities that had been spotted, the case was simply declared closed in August 2012.

Whether legal proceedings against the bank will be possible or not is still unclear. In Sugarman’s words: “the police must first declare a crime has occurred. When the police claim no crime happened, how can you prosecute the criminal? In order to prove that, the state authority itself has buried the evidence”. The story has been picked up around the world, yet the regulators and members of parliament in Ireland have not pursued this issue. Meanwhile, the Irish people are being forced to pay for the bank’s excesses and for debts they did not create.

Liquidity and Risk Management

Jonathan Sugarman: “Liquidity calculation is something that each one of us does, every day. Well maybe not every day if we want to sleep well, but at least once a month. For example, if I were the father of a family of two children. I have a job, I have a house. I owe money on the house. I have a monthly income. It’s coming up to the end of the month and I say: “Ok, what is my liquidity position?” I have money coming in. I have money coming out – food for the children, home insurance, mortgage payments. That is my liquidity forecast: how much money have I got coming in, how much money have I got coming out. How liquid am I?

My job as a risk manager for Unicredit was to look at the bank’s liquidity position at least once a day, sometimes several times in one day, and say: “OK, this is how much money we have coming in today, this is how much money we have to pay back this afternoon, this is how much money we will get back in one week, this is how much money we will get in ten years, this is how much money we owe in fifty years”. That is what we risk managers get paid to do. And we get paid to make sure that the banks do not run dry of liquidity. Because when we operate as a bank we promise when we get our licence that we will keep our liquidity going. Unfortunately, sometimes in some countries, the banks have seemed to run dry. I can think of Ireland, I think actually Greece had a liquidity problem as well. Where are your risk managers? Where are the supervisors for banks in this country?

This is now the audience participation moment. How many of you have a drivers licence? Ok, most of you.

What happens if you drive your car tomorrow morning and run me over in Sytagma square? There is a dead body. The driver gets arrested. Because in your licence it says that if you break the speed limit, or you kill someone, you go to jail. All of your banks are dead. How many people are in jail? Zero.

A crucial point throughout this global financial crisis is that we have been convinced that we don’t understand enough to have an opinion about this crisis. Because unless you have a degree in economics, or three degrees in maths or finance, don’t even to try to understand, My point is very simple: when all of you drivers break the law and run me over, and get brought in front of a judge, does the judge at any stage ask any of you if you understand the physics and chemistry of a four cylinder engine? And what I am saying to you here, this evening, is that a banking license – I can show it to each and every one of you – says very clearly: “If you break the law, you might be facing a term of imprisonment not exceeding five years”. How many bankers are in prison?

The Libor Scandal explained:

Jonathan Sugarman: I’ve been asked to say a few words about what LIBOR is, and what the scandal is about. LIBOR is the London Interbank Offering Rate. We all have to pay interest on our loans and we all hope to receive some interest on our deposits. When the banks have money that ‘rests’, it means they are losing money. So my job at the end of the trading day was to count the money in the box and say: “OK, I’ve got 500 million Euro, I will deposit it for one night. What is the best rate I can get? I call a few banks, this one will give me 2%, this will give me 10%, this will give me nothing”.

What happens in London is that every morning by 11.30 a panel of 18 international banks ranging from UBS, Deutsche Bank, Barclays, HSBC Credit Agricole, Societe General, are asked: “OK how much interest are you willing to pay on overnight deposits, one week deposits, three month deposits? Tell us, and then we, the British Banking Association, will publish an average and say this is the price of money today in London, at lunchtime”. I cannot overstate the significance of this interest rate. Every interest payment that each one of us makes on his card, on his loan, is determined by this rate.

So when you go into a bank and you say: “I want to either give you a hundred thousand Euro”, or: “I want to loan you a million Euro”, the interest rate that you will receive or you will pay is based on LIBOR [or EURIBOR if in Euro].

As a bank’s risk manager, I see everything, I touch nothing. My job at the end of the day is to tell the dealing room: “Right, we have 500 million Euro too much, do something with it”. They will do according to what the rate is. And that is how they will decide whether they will deposit it for one week, one month or a few days.

Why is there a scandal? Because it now turns out that for many years, some say as early as 1991, the banks have been deliberately fixing the rates according to what they want. So, what is the latest estimate of the Greek bailout in billions? 360 billion Euro is the extent of the Greek problem, and that is why the whole world was watching to see what you would do in your elections, to “save the Euro or not save the Euro”, because of 360 billion. The LIBOR scandal affects contracts that amount to $500 trillion. 500 trillion! It involves the biggest banks in Europe and some of the biggest banks in the world. Picking on Greece is much easier than picking a fight with UBS, Deutschebank, HSBC or the other banks that have been making headlines. To date, we know that Barclays has paid £300 million as a fine. That is it.

As far as I know, if this gentleman over here and I go and open a business and we do something criminal, we might go to prison. But, no, apparently, if you are the Royal Bank of Scotland, you negotiate. I’ll pay you £200 million, and I’m fine. And it is crucial that people understand the magnitude of these amounts. You are losing hospitals, schools, essential services for 360 billion. This is a scandal of 500 trillion.

Banks, Regulators and Politicians

Jonathan Sugarman: The last subject I would like to touch upon concerns the very comfortable relationship that exists everywhere in the world between bankers, politicians and regulators. And I will come to this subject from two different perspectives.

Number 1: the bondholders. We all know about the bondholders. The bondholders want the Greek public to pay them the money they owe them back. Now, did we ever get to discover who these bondholders are? Who are these people that you owe the money to? And I would like to quote from an article written in July 2011 by a very good friend of mine, David Malone in the Guardian newspaper. The title is ‘Bankers, bondholders and the double standards over repaying debt’. These are the highlights.

“Gradually the story became less about the banks owing us money and more about owing the bondholders. It seems to me that our governments and their financial advisers from the banks have a double standard when it comes to debt and its repayment; one which greatly benefits the financial world and punishes the taxpayer. On the one hand, the debts of private banks and those who own that debt, the bondholders, are being protected from any losses by the publicly funded bailouts.

“The double standard is creating two different groups with very different financial prospects: one group made of the bankers and their bondholders (the financial class), and it is actually doing rather well these days – doesn’t have to pay back its debts. The other group, the rest of us, find our wealth is disappearing because we are paying off not only our debts but theirs as well. Our welfare, pensions and pay are all being cut in order to appease the bondholders, while the banks and the money they owe us, seems to have almost disappeared from the story altogether.”

So the question is: who are the bondholders? And why are Europe’s banks more concerned with paying them than paying us? Finding out who the bondholders of a bank or a nation is isn’t all that easy. But a few days ago Barclays compiled a chart of the top 40 holders of Greek debt. One name on the list is illuminating. Eurobank EFG is the largest private holder of Greek debt. Only national banks and international lenders such as the ECB hold more.

So who is Eurobank EFG? Well, it is part of a larger group of banks which go under the name of European Financial Group EFG, which is based in Luxembourg. The heart of the group is EFG Bank, a Swiss private bank. Are the owners Swiss?

Not quite. The bank is 40% owned by the Greek Latsis family, whose fortune is managed by Spiro Latsis.

It is very kind of you to be looking after your very own families so kindly.

So when Greek taxpayers have their wages cut, their pensions shrunk and see the assets of the nation sold off, they will be helping to protect the Latsis’ investment in Greek debt. And it’s no accident that Eurobank EFG Bank holds a lot of Greek debt. The bank set up a special fund in 2009, during the crisis, specifically to buy up Greek government debt. All of which becomes more interesting when you step back and realise that EFG is not only a bondholder but also one of the banks being bailed out. EFG’s Greek banking arm, EFG Ergasias, is one of the four Greek banks most reliant on ECB funding for its survival. No wonder the CEO of EFG Bank said that the Greek decision to enforce austerity and avoid default was “necessary”.

You are very kind people. Latsis is a very powerful family.

Nice Work if you can get it

Before Brian Hillary was Unicredit Ireland's chairman, he was an MP for Fianna Fail, the party in power at the time of the bailouts. He left Unicredit in 2008 when he became director of the Central Bank of Ireland!

Unicredit Ireland is the subsidiary of Unicredit, Italy's ;argest bank. The head of the Central Bank of Italy at the time of the scandal was Mario Draghi, who is now the head of the European Central Bank.

More on Sugarman and the cover-up:

Talk in Athens: http://elegr.gr/details.php?id=370

Talk in Thessaloniki http://www.auth.gr/video/15117

Greek state TV: https://www.youtube.com/watch?feature=player_ embedded&v=aaaxIcOkw3E

http://www.ianfraser.org/unicredit-and-irelands-dark-heart-of-finance/

Australian TV:

http://www.abc.net.au/foreign/content/2011/s3367080.htm

Belgian TV: http://www.deredactie.be/cm/vrtnieuws/videozone/programmas/hetverdrietva...