By George Psyllides
Central Bank (CBC) Governor Panicos Demetriades withheld information from and misled the regulator’s board, signed an agreement that involved conflict of interest, and sided with the interests of a company instead of the CBC, an internal audit has found.
The damning report, seen by the Sunday Mail, concerns Demetriades’ relationship with consultants Alvarez & Marsal (A&M), initially hired to investigate how the island’s two biggest banks, Bank of Cyprus (BoC) and the now defunct Laiki, ended up seeking state assistance.
The firm, with Demetriades’ approval, and apparently without prior authorisation from the board, ended up handling most of the aspects relating to the restructure of the island’s banking sector.
The probe, carried out by the CBC’s audit committee – three non-executive board members – concluded, among others, that Demetriades had withheld information and agreements signed with A&M, misled the board, committed millions that were not budgeted, and without the approval of the board, signed an agreement to pay a success fee after the fact, and awarded jobs to one company without a tender procedure.
In early December 2012 it was decided that the CBC would need the help of experts to evaluate the methodology used by PIMCO to audit the banks’ portfolios to determine their capital needs, to assess the banks’ restructuring plans, to decide whether an asset management company (AMC) was needed to handle non-performing loans, and if one was necessary to evaluate the assets, and finally to assess the disengagement from Greece.
Four firms were short-listed, including A&M, which the board excluded from taking part in evaluating the portfolio audit, the restructuring plans, and the AMC, due to its involvement in the investigation.
The board decided to ask bids from the other three companies, Canaccord/ Genuity Hawkpoint, Lazar Freres, and Bain & Co.
For the disengagement job, senior director Spyros Stavrinakis recommended hiring Nomura investment bank.
The board agreed.
A couple of weeks later, on December 16, board members received an email from Demetriades who said it would be better if bids were also invited from three more firms – Moelis & Co., BlackRock, and A&M, which had been rejected by the board earlier that month.
During the board meeting the next day, members adopted the governor’s suggestion to take bids from all six firms because they were under the impression that the addition of the three only concerned the evaluation of the PIMCO results.
The job eventually went to BlackRock
At the next board meeting, on February 4, Demetriades and Stavrinakis argued that restructuring plans must be evaluated urgently and announced that the job was awarded to A&M for €960,000 plus VAT plus expenses.
The audit report said Demetriades and Stavrinakis had misled the board, bringing before it a fait accompli.
In fact, unbeknown to the board, A&M had been awarded the restructuring and the AMC jobs on December 31, even though it had been excluded on December 3.
“And they cited the urgency of the matter on February 4 … to justify their act,” the report said.
The December 31 agreement came to the attention of the board on August 29, 2013, the day a notification was sent warning of the termination of A&M’s services.
The €3.5 million “secret” agreement was never presented to the board for approval and the money was not budgeted.
The board was asked to approve individual payments without any reference to the agreement and “was ignored by the governor” whenever it asked for information.
“Even though it is prohibited to spend amounts that are not approved by the board, and even though there was a deal that could have been presented to the board for approval, the governor chose to conceal the agreement in question and ask for approval afterwards,” the report said.
On March 16, the Eurogroup decided to impose a levy on all bank deposits in Cyprus to recapitalise Laiki and BoC. This was rejected by parliament.
On March 23, 2013, the governor struck two additional deals with A&M, which were attached to the “secret agreement of December 31, 2012”.
The one was for the restructuring of the Cypriot banking industry, and the other for its recapitalisation.
This was two days before a second Eurogroup decided to close Laiki and seize customer deposits to recapitalise BoC.
Demetriades had effectively authorised A&M — without the board’s permission – to handle the recapitalisation of Cypriot banks and the sale of their Greek operations.
On March 28, Demetriades also agreed to afford A&M a “recapitalisation fee” of 0.10 per cent of the total gross capital benefit into the banking system.
It was backdated March 23, two days before the Eurogroup decision.
“It obliged the CBC to possibly pay a recapitalisation fee of many millions without at least exempting the bail in — as the bank’s external legal adviser had suggested — knowing that it was preceded by the March 25 Eurogroup decision to recapitalise banks through a bail in,” the report said.
The Eurogroup also decided that the Greek operations of the Bank of Cyprus, Laiki and Hellenic, must be sold in a bid to ensure the crisis did not spill over.
They were eventually sold to Pireaus bank for €524 million, a price that many thought was too low.
Soon after, Pireaus said it recorded a negative goodwill of €3.4 billion from the transaction – a gain occurring when the price paid for an acquisition is less than the fair value of its net tangible assets.
“The governor made a deal with a company, which had a huge conflict of interest,” the 58-page report said. “A&M negotiated the sale of branches to Pireaus bank. The lower the sale price, the higher the haircut and the recapitalisation fee claimed by the company.”
The March 28 deal replaced another agreement signed between Demetriades and A&M on March 23.
That agreement spoke of a “success fee” and that it was subject to the approval of the board on March 25, which was never given.
The caveat had been removed from the March 28 deal, the report said, at the behest of A&M Head of Global Asset Risk Hal Hirsch.
“Certainly, if there is an objection at any time at any party, we will have to deal with it then,” Hirsch was quoted as saying in an email to Demetriades.
And “success fee” became “recapitalisation fee.”
Hirsh also confirmed that the recapitalisation agreement was signed after the deposit haircut decision in a September 5 letter.
“At the time the recap fee was proposed, the form of the recapitalisation had not been decided,” Hirsch said, according to the report.
Demetriades claimed he signed the March 28 agreement under duress.
His copy states, in English: “Signed under duress. Mr Hirsch threatened to move the entire Alvarez team out of Cyprus at the peak of the crisis if I did not sign.”
The audit committee report doubts Demetriades had been under duress when he signed.
During two board meetings, April 7 and 8, in Hirsch’s presence, “the board did not notice any problem in their relations.”
Nevertheless, the report said, a national central bank governor, never signs deals under duress.
A&M initially demanded around €11 million but later said it would settle for €4.75 million.
The firm said the €4.75 million “was within the range we were advised by the Governor would be appropriate.”