Grand masters of opacity

For a major Czech bank, Investicni a Postovni Banka was deeply untransparent. Bank analysts, auditors and central bankers tried in vain to map the labyrinth controlled by vice-chairman Libor Prochazka. They didn’t much like the bank or its emphatically non-strategic partner Nomura. So, when catastrophe hit IPB in June, the government stepped in heavily and maybe did the wrong thing, for the right reason – or vice versa. Was this the best way for an EU candidate to reform its financial sector? David Shirreff reports

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Sunday June 18 seemed a normal Prague afternoon. Tourists streamed through the castle, down the hill, across Charles Bridge into the Old Town Square. At Stvanice tennis club, Jack Stack, American chairman of local bank Ceska Sporitelna was playing doubles with a journalist, a lawyer and an investment banker. Thomas Münkel, chief of Allianz insurance's local subsidiary, was in the garden with his family, expecting a busy day on Monday. Randall Dillard, Nomura's chief regional investment banker, downed a few jars of Pilsner Urquell, whose famous brewery he'd successfully sold to the South Africans last year.







Dillard: does Nomura have the last laugh?

But there was one thing probably foremost in these men's minds, in fact in the minds of the entire Czech Financial community.
On Friday, special police with sub-machine guns had burst into the country's third biggest bank, Investicni a Postovni banka (IPB) and installed a forced administrator.
The administrator assumed all the powers of both bank boards and its shareholders. That put an end to Five days of panic during which citizens had besieged its branches and withdrawn deposits totalling Kr17 billion ($430 million). Interbank lines were cut. The bank was dumping its equity portfolio to raise cash. IPB appealed to the Czech National Bank on Thursday night for Kr10 billion of liquidity, fearing that without a capital injection it wouldn't open for business on Monday.

The forced administrator came in. The Czech National Bank, backed by the government, gave its guarantee, pumping in a few billion Czech crowns to stabilize IPB. The weekend brought a breathing space.
Dillard, a Miami-born 44-year-old, big build, boyish face, who worked for Merrill Lynch before joining Nomura in 1989, thought he still had a chance of selling the bank to a consortium of Allianz and UniCredito of Italy - Nomura had bought 46% of IPB in 1998 and was seeking an exit. Allianz had agreed with Nomura on exclusive negotiating rights and together with UniCredito was ready to Find a solution for IPB. On Monday they expected to see the details of a tender oVer from the government following the forced administration of the bank.
But at breakfast on Monday, Czech radio broke the news that the bank had already been sold at 6am that day - to IPB's cross-town rival Ceskoslovenska Obchodni Banka (CSOB) for one euro.
The potential buyers were Flabbergasted. Why no competitive tender? Why no negotiation? Why not even a phone call?
The government's main opposition party, the right-wing ODS, was also quick to cry foul.
Its leader, former prime minister Vaclav Klaus, called the action "daylight robbery of a bank." Although the ODS had an "opposition agreement" with the coalition government to cover major national decisions, Klaus had not been warned about the forced administration or the sale. This made the takeover decision look rather political. CSOB chairman Pavel Kavanek was known to be close to Prague's Financial top brass: Finance minister Pavel Mertlik, his deputy Jan Mladek and CNB governor Josef Tosovsky. Wasn't this just a little bit cosy?
Now the other side of the story. There was a run on the bank. After months of wrangling between the bank and its auditors, Ernst&Young, about the depth of the loss - was it Kr20 billion, Kr50 billion or more? - the bank's customers were distinctly nervous. This was the third biggest bank in the country but in terms of its links with Czech industry, municipalities, utilities, the post office - perhaps 30% of the Czech economy - it was the biggest. That surely fulfilled the definition of too big to fail. But there was no early sign that the central bank would intervene. In February, a similar run had been halted by the bank after a couple of days.
IPB had two sets of suitors: Allianz/UniCredito which had been talking since December and CSOB which had been talking seriously since March. Allianz was close to an agreement that it would buy IPB's insurance arm, IPB Pojistovna, and inject some capital into the bank. UniCredito was to buy IPB and was looking for a commitment from the state to help solve the asset problem at the bank.
Allianz and UniCredito had already teamed up in this way to take over Poland's Bank Pekao and Bulgaria's Bulbank.
The other suitor, CSOB, the Czech Republic's most successful bank, had been bought by Belgian group KBC the previous summer. KBC's initial plan was to grow a retail business from CSOB, which is primarily a wholesale bank. But six months into the purchase it was clear this would take years. Meanwhile, IPB, despite its balance-sheet problems, continued to grab market share as the most aggressive and classiest retail operation in the country.
The CSOB-IPB Fit was obvious and had been proposed two years earlier by Nomura's perspicacious Dillard. IPB was perhaps a bigger involvement than KBC might have wanted but CSOB itself was a capital-rich bank with around Kr19 billion to spend. Kavanek had been with CSOB, originally the international department of the former State Bank, since 1972. He had run the bank since 1993. Although the state stepped in twice to relieve it of bad assets, CSOB was reckoned to have the cleanest balance sheet of the big Czech banks and the best credit department. KBC's light touch as owner showed great confidence in Kavanek.
Through March, April and May the battle lines were drawn. Nomura was keen to replace itself with a strategic partner which would recapitalize the bank. It was reluctant to pump in more capital without a subsidy from the state for the bad loans which it argued were endemic to the Czech banking system.
Company workouts were impossible because of poor regulation and the absence of an effective bankruptcy law.
But the Czech National Bank had little sympathy with IPB. It had been investigating the bank since January, suspicious of the structures IPB had used to try to shift non-performing loans and distressed equity off its balance sheet. Nor did it agree with IPB auditor Ernst&Young, which was Fighting for its reputation, having signed off on the 1998 accounts - items of which were rejected by a subsequent CNB audit - and was trying to make sense of the accounts for 1999.
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