European Bank's Response To Margin Calls: Just Break The Law And Make It Up
While it will hardly come as a surprise to many, the bitter truth that bankers are to blame for much of the inexorable plunge that Europe faces (and for that matter the rest of the Western/Keynesian world) has once again been dragged front-and-center. In an interview on Australian TV, a former Unicredit senior banker, Jonathan Sugarman, discusses (along with no less than everyone's favorite roulette player - Nick Leeson) how rules are broken (not bent) and the 'rotten culture encourages excessive risk taking'. The former head of risk management resigned after being forced to break the law - specifically by dramatically under-reserving (or over-leveraging). These figures were not reported which means that, in Mr. Sugarman's words, he was "100 per cent certain that Unicredit broke the law while he was working there". The rot goes deeper though, as the interview describes, when he turned himself over to the regulators (blood-dripping knife in hand), they simply said "Fine, just don't do it again". Reflecting on the twenty years since Barings, Leeson remarks: “The weakness is in those risk management compliance and control areas. Always has been, still is and probably always will be”. Comforting?
And the story:
A former senior executive at Italy's largest bank says the European debt crisis is the result of a rotten culture that encourages excessive risk taking.
In his first interview since leaving the bank, the former head of risk management at the Dublin office of Italy's Unicredit bank, Jonathan Sugarman, told the ABC's Foreign Correspondent program that he was forced to resign after his chief executive consistently asked him to break the law.
In 2007, all the biggest banks in Europe had moved their headquarters to the Irish Financial Services Centre, lured by the lowest corporate tax rates in the English speaking world.
The New York Times dubbed Dublin the wild west of European finance.
Foreign banks found something else attractive about the place; it had developed a reputation for light-touch regulation.
Mr Sugarman was working for a German bank in Dublin when he was head hunted to run risk management at Unicredit's Dublin office.
The Italian bank had a $50 billion operation in Ireland.
Risk managers are required by law to keep assets and cash in reserve equivalent to 90 per cent of the bank's liabilities.
The rules are clear; the bank could, on occasion, drop to 89 per cent, but any lower than that and a report must be filed with the regulator.
But within months of his arrival, Mr Sugarman noticed that Unicredit Dublin was operating with cover of just 70 per cent, 20 times less than allowed.
For six weeks, his chief executive kept telling him not to worry.
But he was worried, so he resigned.
"We were breaking the law and it was my name on the reports day in day out," Mr Sugarman said.
"Under the eyes of the law, I'm the person responsible to make sure that we kept within our speed limit and we went way beyond our speed limit.
"And the law was very clear; I could face five years in prison for doing that and I just didn't want to go to prison."
Mr Sugarman says he was 100 per cent certain that Unicredit broke the law while he was working there.
"That is why I brought in this London-based IT company," he said.
"Whereas the permissible deviation was 1 per cent, they rang me up one evening, soon after they tied in to our systems, linked in to our systems, and said your breach is actually 40 per cent."
Twelve months after Jonathan Sugarman told the regulator that his bank in Dublin was running low on cash, the entire Irish banking system was on its knees begging for a bailout.
Five banks asked for 50 billion euros just to keep their doors open.
Last year, Irish MP David Norris raised the Unicredit matter in Ireland's parliament.
"This is a grossly serious matter and has been reported to the financial regulator," he said.
"A man has lost his job as a result - he honourably resigned - and the degree of breach was 40 times the accepted margin. This is a disaster."
Even after this, the regulator failed to act.
In a letter to the ABC, Ireland's central bank said it was still examining allegations first brought by Mr Sugarman four years ago.
"I left the bank's offices, I walked down to the regulator's office; I wasn't going to leave it to anyone to deliver it but myself, and nothing happens," Mr Sugarman said.
"That is like walking in to a police station with a knife with blood on it and say 'I've just killed someone' and you expect the police to say: 'Well, where's the body? Where's the person? What have you done?'
"And they just say: 'Fine, just don't do it again'. And that left me dumbfounded."
Unicredit posted a record third quarter loss overnight of $15 billion.
The Italian government's debt problems are weighing heavily on the country's biggest bank.