It's been four months since news broke about a swaps deal gone awry in Rotterdam which pitted Netherlands-based, building cooperative Vestia against Deutsche Bank
(DB), ABN Amro, Barclays
(BCS), and BNP Paribas
(BNP.PA). Vestia, a non-government, non-commercial building cooperative, bought interest rate swaps from these and other banks to protect itself from any interest rate increases.
Such swaps are normally relatively small upfront investments designed to hedge the interest risk on huge loans and investments. What was unusual in the Vestia deal was the amount that Vestia hedged in the interest rate swaps: A mind-boggling €20 billion. This was about four times as much as the investments at stake, which were roughly €5 billion.
The fact that the interest remained low instead of rising (which Vestia had expected) meant that Vestia had to make a deposit payment of €2.5 billion at the banks. As it had only €1.0 billion, it was forced to reach out to other building cooperatives and the Waarborgfonds Sociale Woningbouw (WSW; the Guarantee Fund Social Housing) for €1.5 billion. These parties contributed in order to keep Vestia, the largest building cooperative in The Netherlands, afloat.
Newspapers investigating the incident found out that Vestia paid some of the involved banks about ten times as much in commission fees as in normal transactions -- money that was supposedly transferred via accused straw man Arjen Greeven of Fifa Finance to CFO Marcel de Vries of Vestia.
It also became known that on a number of occasions CFO Marcel de Vries received VIP-treatment in London, with the finest foods, the most expensive wines, and dozens of escort girls, all at the expense of the banks that sold the derivatives to Vestia.
The background on the Vestia soap opera can be read in the headlines posted below.
A few weeks ago, the Vestia case rose to a new level of drama. In an impressive tour de force, the new management of the building cooperative put its whole housing base of about 75,000 houses on mortgage with the WSW, minutes before the involved bank syndicate started talks on the Vestia situation.
As the WSW was one of the parties that bailed out Vestia, it seemed like a fuzzy -- but not strictly illegal -- deal. It effectively protected Vestia's assets(its housing units) from seizure by the banks. ABN Amro, a state-owned bank with the former Dutch Finance Minister Gerrit Zalm serving as CEO, was not amused.
The bank was so outraged at Vestia’s action that it turned the Vestia soap into a trench war: ABN Amro threatened the building cooperative with large damage claims. The Dutch newspaper NRC Handelsblad
writes on this developing story. Here are the pertinent snips. [Editor's Note: The following excerpts have been roughly translated from the original Dutch.]
ABN Amro Threatens Vestia to Claim Damages on Interest Rate Swap Deal Gone Awry
Last week, ABN Amro threatened to hold the directors of building cooperative Vestia and the Waarborgfonds Sociale Woningbouw (WSW; Guarantee Fund Social Housing) personally responsible for sustained damages. When the residential real estate of Vestia has been illegally transferred out of grasp of ABN Amro, the bank would knock at the door of Gerard Erents, managing director ad interim of Vestia, and Roland van der Post, managing director of the WSW. This is confirmed to NRC Handelsblad by anonymous sources.
[The} trigger for the legal threat of ABN AMRO was an urgent action of Vestia and the WSW on Monday, May 21. At that day, Vestia gave WSW the mortgage rights on all of its real estate to the tune of almost €8 billion. This action made it impossible for the banks to claim the real estate, in case Vestia would default. It happened at 12.59 PM, one minute before the eleven (inter)national banks would negotiate with Vestia on the emerged deficits.
After the deed of Vestia and WSW, ABN Amro took the initiative of reflecting with the other ten banks. One day later, on Tuesday, May 22, ABN Amro sent letters to Vestia and the WSW. Lawyers of the bank are investigating if Vestia can be accused of "Paulianic behavior," ’frustrating its creditors. Currently, ABN Amro is said to have withdrawn its threat temporarily. Last Wednesday, Vestia entered into a deal with the banks to freeze up the collateral obligations for a period of two weeks. During this time, the banks and Vestia negotiate further on redemption of the derivative contracts.
For the readers that are not familiar with Dutch or Roman law, the Actio Pauliana
(Paulian claim) is the authority to stand up against legal actions of a debtor that frustrated its creditors. According to Dutch Wikipedia
: "Paulianic behavior is when a debtor, confronted with an imminent risk of default, has sold its property at a very low amount, thus frustrating the possibility of its creditors to claim the property of the debtor."
In general, Paulianic behavior is civil litigation and not a criminal proceeding, although in some cases criminal behavior has been proven in the court of law.
Although I’m not a lawyer, I am worried that this particular case could be a reasonably clear case of Paulianic behavior. Vestia handed out mortgage rights to the tune of €8 billion, while WSW has a claim of only €1 billion on Vestia, which is the amount of deposit money it paid to the banks in order to save Vestia from defaulting.
Even if the Vestia real estate is sold at an average discount of 75%, the amount going to WSW would be twice as high as the deposit money that it handed over to the banks. However, a fact that speaks to the credit of WSW is that the Guarantee Fund is a real creditor with a real claim of € 1 billion on Vestia. A fact that cannot be denied by the syndicated banks.
When we look at the moral side of Vestia’s latest trick and the reaction of ABN Amro, it seems a clear case of the pot calling the kettle black. To be frank, as an involved and worried citizen, I applaud Vestia’s action against a group of banks that seemed to have gotten into bribing, forging contracts, and making fraudulent commission payments.
Of course, all these accusations need to be proven in the court of law, but in my humble opinion, the banks have appearances against them.
Like I wrote in my last article, Vestia Case Could Show Moral Bankruptcy of Some Business Banks
What makes this case even more worrisome is that most banks have four-eye or even six-eye controls for transactions of more than €250,000. This means that the Vestia case cannot dismissed like a proverbial ‘rogue trader’ at an honorable bank.
If the case of Vestia can be proven against (at least one of) these four banks [Deutsche Bank, ABN Amro, Barclays and BNP Paribas – EL], this would mean that the corruption has reached the core of these banks.
Therefore I see only one possibility:
1. Investigate if this is a running practice within the suspected banks;
2. Remove the cancer -- the people that did this within these banks. Put them in jail, just like what happened in the Enron case;
3. If there are too many people that did so within these banks, start a kind of chemotherapy by putting the bank under legal restraint and subsequently firing and prosecuting everybody that is involved. Don’t let the managers and executives escape.
4. If all else fails, withdraw the banking license of the business parts of these banks.
5. If the authorities fail to do so, the next Vestia case might be a matter of years or even months.
I would say, “If such a fraudulent bank needs government money to survive, it doesn’t deserve to exist. Pull the plugs…”
I still have my hopes on the Dutch Public Prosecution that the Vestia case might also lead to legal prosecution of (representatives of) the banks involved in this case, not only the prosecution of De Vries and Greeven. However, I’m not sure that the desired Actio Pauliana of ABN Amro might not be granted in a civil litigation.
Whatever happens, this dirty case will cost the Dutch taxpayer a lot of money. The taxpayer will either pay for Vestia, or for state-owned bank ABN Amro. That is a sad conclusion.