I entered into no such agreement with Absa – Stals

The man at the centre of the Bankorp storm has told Moneyweb that much of what has been written about the South African Reserve Bank’s (Sarb) assistance to Bankorp under his tenure is based on “misinformation, distorted facts and malicious political objectives”.

The Sarb’s assistance has recently come under the spotlight for the umpteenth time based on the leaked provisional report by the Public Protector last Friday.

The article written by the Mail and Guardian states “In building her report, Mkwebane refers to evidence provided by the former Reserve Bank governor, Dr Chris Stals, who placed responsibility at Absa’s door for repaying the Bankorp bailout.”

This simple statement has since taken on many varying interpretations, some of which have included that Stals was “breaking ranks” and coming forward with the truth that Absa had agreed in writing in 1995 to repay the gains it had enjoyed as a result of the assistance provided by the Sarb to Bankorp over a number of years.

In response to our questions, Dr Stals stated the following:

“I have no knowledge of any agreement I was supposed to have entered into with Absa in 1995 on the repayment by Absa of any “benefits” that “accrued” to it.

I will be greatly disappointed if the former Public Protector should have made such an insinuation. As a matter of fact, in my interview with her I went out of my way to explain to her that the facts can prove that at the time of the takeover of Bankorp by Absa what remained of the Bankorp “Bad Book” was held in a separate company called Banbol, that all the interest earned on the investment in Government Bonds and on any other part of the package invested with the Reserve Bank had to go to Banbol to absorb a ring-fenced selection of  bad loans carried forward in the books of the Bankorp Group from  the 1980s and that Absa and its shareholders never benefited a single cent from the Reserve Bank loan assistance.”

Of course, this issue has been investigated extensively before, the most comprehensive of which was the study by the Davis Panel of Experts into the matter, which was commissioned by the Reserve Bank itself, in 2000, at the behest of the new governor, Tito Mboweni.

Why did the Reserve Bank commission a study (despite two previous inquiries)?

In its preamble, the report stated “the assistance to Bankorp/Absa has been the topic of media speculation over many years and had been investigated previously, the Panel found no definitive findings emanating from these previous enquiries.”

While the panel was to look into the governance of the Sarb, in 2001 the terms of reference were expanded to include a fifth point. In the event the panel found that the Sarb had acted beyond its powers (i.e illegally), it would consider whether restitution can be claimed, and if so, the manner thereof.

By one account the panel was the government’s response to the CIEX report. The government led by President Thabo Mbeki was weary of trusting at face value everything a British spy with an enormous personal incentive told them in a report, and they decided to use the organs of state to investigate the allegations made, all of which was done publicly.

What did the assistance comprise of?

While the assistance in 1985 and 1986 was structured on the basis of a low interest loan, the assistance provided in 1990 and 1991, which utilised simulated transactions, was deemed to be ultra vires or beyond the scope and authority of the bank.

A simulated transaction, according to the ENS Africa website is “one that is deliberately disguised to conceal its true nature”. The loans, from our reading of the panel’s report, were hiding the true nature of the assistance, which could be defined as a donation.

The assistance provided came in the form of a loan from the Sarb totalling R1.5 billion at a rate of 1% per annum, which was then invested by a company called Banbol (50% owned by Bancorp), which in turn placed R400 million on deposit with the Sarb and the balance invested in government bonds (R1.5 billion), both of which yielded 16% per annum.

So what is all the controversy about?

The assistance was unlike any other accepted central bank practices at the time, although the Sarb had dispensed the same assistance on a much smaller scale to other banks that had experienced difficulties.

Accepted ways of dealing with a bank in trouble include creating a special purpose entity in which to transfer Bankorp’s bad loans, thereby removing them from the balance sheet of the bank. Or, the Sarb could have instructed Bankorp to merge with another bank, thereby broadening the capital base and in effect diluting the size of the bad loans.

The Sarb also didn’t take an equity stake in the bank in exchange for its capital contribution, which would have been a safeguard for taxpayers by providing it with a claim on future profits that would flow as a result of its assistance.

The length of the assistance was also unprecedented. Starting in 1985 and only concluding in 1995, a period of a decade in which the Sarb ensured the bank survived asks questions about why it did so over such an extended period.

The secrecy with which the Sarb undertook the programme was a big problem. It was kept off the books of Bankorp and the Sarb itself, in contravention of reporting standards, and long after the threat of systemic risk had passed.

The nature of the assistance provided meant that shareholders in Bankorp benefitted. The involvement of a central bank pays little heed to the fate of shareholders, assistance is given almost exclusively to protect the depositors of a bank. These benefits, according to the panel, extended to the policy holders of Sanlam and the minority shareholders of Bankorp.

So why was Bankorp such a special case, and why did the Sarb go to such unusual lengths?

There was a patent conflict of interest. The Minister of Finance, BJ du Plessis, who was consulted in 1990 by Stals on the matter, was the brother of AS du Plessis, a director of Sankorp (a subsidiary of Bankorp). The Minister should have recused himself from any participation, but did not.

Sanlam and the depositors of Bankorp (itself an amalgamation of Afrikaans banks), were mainly white Afrikaans middle class citizens. Was the National Party really going to let it die?

The Ruperts controlled Sanlam at the time, and what appears to have been lost in the crossfire is that Sanlam as the dominant shareholder (owning approximately 80% of the outstanding shares of Bankorp by the time it was sold to Absa) were forced by the Sarb at various times to put money into Bankorp by way of rights issues and low interest loans.

In summary then?

The panel found that the financial assistance provided to Bankorp was justified in the interest of protecting the stability of the domestic banking system. But, “its form and structure were seriously flawed”.

What it did make clear, was that Absa, when purchasing Bankorp in 1992, could not be regarded as a beneficiary of the Reserve Bank assistance, as it had paid fair value for Bankorp. This meant they entered the transaction aware of the assistance, and paid a price that took this into account.

These are the documents the bank has invited the Public Protector to inspect at its offices, hopefully before the publication of the final version of the report is released.

-Brought to you by Moneyweb