Financial disaster Hypo Alpe Adria

Much has been written about the largest bank failure in Austrian history. So much in fact, that it was and still is difficult for observers to find to find the red / black / blue thread within the jumble of material. What proved hepful, was the lecture by Prof. Univ Josef Aff at the Vienna Business School in Floridsdorf. Sometimes amusing, and sometimes shocking and outrageous, Aff reappraises the failings of those involved in the disaster, garnished with many stories surrounding the lawsuits and the HAA committee. In particular, the close involvement between politics and economics, the royal demeanor of some politicians (Aff repeatedly compared Haider with Louis XIV.), and widespread ignorance of the precarious situation can be linked as the causes for this failure.

From local bank to sixth largest in Austria

Over many decades, the Carinthian State Mortgage Institution (Kärtner Landes-Hypothekenanstalt) founded in 1896, was a manageable local bank. It became a universal bank in 1982, and Hypo-Alpe-Adria-Bank International AG in 1991. This transformation to a corporation falls in the first term of office of Jörg Haider as governor of Carinthia. He and his colleagues had big plans with the HAA, especially in the Balkan region, where Haider and his environment maintained good contacts. From 1992 to 2008, the total assets of 1.9 billion increased to 43.3 billion euros, the number of employees grew from 300 to 8100 in all Balkans, as well as Bulgaria and Italy. The numerous fields of business were split between different companies – leases, for instance, were handled separately, and many obscure investments gathered in the asset resolution holding (see below).

This rapid growth (especially in the 2000s when Haider returned as provincial governor) was only possible through equally rapidly rising national liabilities (18-20Mrd in case of Carinthia), since for mortgage banks in particular, due to the structure, a good part of the risk is carried by state institutions today. This should change by 2017, owing to an EU directive. One such venture had however already been tried by the EU in 2003 by means of an informal letter requesting of Austria to end the country’s adhesion by April 1st 2007. This requirement was simply ignored by Haider & Co, on the contrary, during this period the amount of liability for Carinthia exploded from 10,8 billion to 24,7 billion. The fact that, according to EU law expert Stefan Griller, this country liability was contradicting EU law did not interest anybody.

In addition to the country guarantees, the more than dubious demeanor of HAA in the Balkans was a “profit guarantor” for the rapid rise. By 1992, all domestic banks were already active in Croatia, the market was more or less saturated. Anyone not granted a loan with these banks, simply turned to the HAA – which gave credit to anybody who wanted it without much examination. It was known among all the competitors. Via a branch in Liechtenstein money from dubious sources was regularly laundered by means of cash transports. Especially in Croatia the money reassignment trick was used to excess with the aid of local politicians: Grassland by the sea was acquired, then reclassified as building ground as part of a hotel project. The resulting profits were distributed to the participants. Whenever such a project, for which the HAA had given out the loans, of course, was struggling, the threat of payment default was not adjusted for value, as would happen in orderly accounting. No, the project was just redesignated as another share and incorporated into the abovementioned asset resolution subsidiary – without any impairment. Croatian personalities who were involved in these machinations, including former Croatian Prime Minister Ivo Sanader, were invited to amorous weekends in the HAA-owned castle Freyenthurn as a reward.

Domagoj Margetic, a Croatian journalist who has uncovered many machinations of that time and was consequently sued by the HAA for breach of banking secrecy, called the bank “the largest criminal business operating in Croatia” in 2004.

A magnificent building for a large bank
A magnificent building for a large bank

Supervisory bodies – ignored and ignorant

The HAA is the most audited bank in Austria – even before 2010. Between 2010 and 2015, a test volume of 200 million euros accumulated. The internal audit of HAA wrote a total of 111 reports with long lists of deficiencies between 2006 and 2009  – neither the Supervisory Board (appointed by Jörg Haider), nor the board took an interest. External auditing firms (including well-known companies such as PWC, Deloitte and KPMG) regularly awarded the unreserved notice of confirmation after their inspections. There were no spot tests as to whether the hotels, ships e.g. that had accumulated in the possession of the HAA, were actually to be found on site. In audits of this magnitude this should actually be a given.

The fact that the Carinthian country controls did not work, may not seem strange considering the conglomeration of crony capitalism in the ‘Haider biotope’. But why did the Ministry of Finance, the FMA and the Federal Reserve not object to the business operations of the HAA, which would have led to far-reaching consequences? Here, according to Prof. Aff one must again consider the peculiarities of the political landscape in Austria. The Financial Market Authority was founded in 2002 by Karl-Heinz Grasser as a competitor for the Austrian National Bank, which he considered as too powerful – starting, by the way, with zero employees. While chronically understaffed they still managed to post one or another critical report over the years. As in 2006, when the FMA Executives refused to give the audit note of confirmation and demanded the resignation of Kulterer since he “misposted” 300 Million Euros in losses from highly speculative swap transactions. In reaction, Jörg Haider personally wrote a letter to Grasser on May 26th, suggesting he should not believe everything the FMA tells him, and demanding the dismissal of the FMA staff concerned. Even so, the FMA was able to prevail in this case. Yet Kulterer stayed with the HAA and changed to the Supervisory Board as its chairman at Haider’s behest – severely violating any and all corporate governance guidelines and changing the association’s statutes several times.

Just why Wolfgang Schüssel’s ÖVP stood idly by, can be explained from the situation in the Federation, where the FPÖ was coalition partner to the ÖVP and Schüssel understood how important a good humored Haider as local governor for Carinthia was to this structure.

2008, when due to the equity situation of the HAA a capital increase was necessary, Bavaria (by now the owners, see below) demanded a payment of 900 million Euros from Austria. In response, ÖNB boss Klaus Liebscher had a report issued in a cloak-and-dagger-operation, determining whether the Hypo was “sound” (healthy) or “distressed” (in serious trouble). Yet again, concerning the report, a typically Austrian solution was found through the invention of a new state: the HAA was “not distressed”. Thereupon the FinBAG transferred the money. Asked his opinion about the report in front of the investigative committee, Liebscher said that he had not even been in the email distributor and therefore never actually read it. Should he not have shown interest as ANL-chief, Werner Kogler asked. The succinct answer: “One can be interested in many things in life.” Also, him blaming Hypo’s demise solely on the financial economic crisis and not the manifold failures inside and outside the bank, does not reflect well on the image of one of the most important bankers in Austria.

Why did Bavaria buy the Hypo?

The Bavarian federal bank  (BLB) had been trying to take a credit institution whose central activity area is Eastern Europe for some time, because they themselves did not cater to these – at the time – very lucrative markets. After failing to take over BAWAG, who went to an American investor, vehement attempts to score with the HAA were made in 2007, bearing fruit in May. Tilo Berlin was appointed Director-General. Jörg Haider had the ORF put him straight through to the ZIB2 of May 19th 2007, to celebrate the sale with the words: “Carinthia will be rich. Carinthia is, and remains to be, on track for the future.” The voices of critics and nay-sayers, he claims to be nothing but envy speaking. What Haider failed to mention, was the fact that even after the sale, Carinthia was still liable for 23 billion euros.

Overall, Haider is the central figure in the entire time of the rise and decline of the HAA. Many “side businesses” large and small ran through him. A call by the Regional Governor was all it took and already Patrick Friesacher had a loan of € 500,000 for his entry into Formula One. The following career is negligible (11 starts), but at least a Carinthian had managed to get into Formula One. For the construction of the Wörthersee Stadium – Haider’s prestige project for the ‘Euro 2008’ – which is now hardly used, Haider received 2.5 million euros by the BLB backhandedly. The rather odd Birnbacher certificate from 2008 (remember the Patriot discount) whose 6 million fee was used for covert party financing, should also be mentioned here. For the insane liabilities, starting from 1998, Carinthia regularly took a guarantee commission, in 2007 even an advance payment of all commissions up to 2010.

(APA) (v.L.n.R.) - The Chairman of the board of the Carinthian Regional Holding-Josef Martinz, Regional governor Joerg Haider, BayernLB-Chairman Werner Schmidt, Hypo-Chairman Tilo Berlin und Former-Hypo-Chef Wolfgang Kulterer (October 9th 2007) - all except Haider convicted meanwhile.
(APA) (v.L.n.R.) – The Chairman of the board of the Carinthian Regional Holding-Josef Martinz, Regional governor Joerg Haider, BayernLB-Chairman Werner Schmidt, Hypo-Chairman Tilo Berlin und Former-Hypo-Chef Wolfgang Kulterer (October 9th 2007) – all except Haider convicted meanwhile.

Emergency nationalization yes or no?

To start off with: Aff considers the nationalization as the right step at the time, because Europe was just at the peak of the financial and banking crisis and even the president of the EU Commission specially called Vienna to convince Austria of a rescue in order to prevent a domino effect, which was very likely at that juncture. Furthermore, there was no banking law neither at European nor at national level.

The nationalization in December 2009, says Aff, could not have been done from necessity, because at least since 2007, the problems of HAA were known. The negotiations that led to the nationalization, can only be described as completely amateurish from the perspective of a citizen. Bavaria showed up with an armada of lawyers and economists and four possible scenarios in their luggage. On the other side, Minister of Finance Josef Pröll and State Secretary Andreas Schieder, the two Austrian negotiators, did not even have one elaborate scenario in store. Moreover, during a visit to Bavaria in August 2009, Pröll had already announced that the HAA would not be allowed to go bankrupt under any circumstances – and weakened Austria’s negotiating position dramatically with this pauper’s oath. To this day, hardly anyone can explain why Austria completely released Bavaria from all liability in the nocturnal negotiations of Dec 14th 2009 – except with poor preparation or ignorance. Nevertheless, this performance certainly did not bring about any damage to the two – Schieder is club chairman of the SPÖ in the National Council today. Pröll received a lucrative post in the Raiffeisen Group.

Since 2010, the EU has offered Austria their support several times. The EBRD wanted to participate in various subsidiaries of the HAA, respectively to find buyers and create favorable refinancing criteria through a common umbrella organization. The EBRD also repeatedly referred to the fact that the HAA’s balance sheets “had problems”. For reasons not quite clarified, no collaboration took place. The idea of the ‘bad bank’ was brought into play by the EU in 2010, yet the Austrian Government was not responsive. The reason? A ‘bad bank’ would have driven up the budget deficit by several percentage points and thus would have breached the Maastricht criteria, reflecting badly on the government. The fact that it would have saved the tax payers billions (even counting the rather unlikely fines for violating Maastricht), unfortunately, was not a decision criterion. It was not before 2014, that the ‘bad bank’ solution was implemented under Finance Minister Spindelegger, after which the HAA lost its banking license.

In 2013 the Austrian division of the HAA was sold to a British-Indian investor. The Balkan group was sold to a consortium partly owned by the EBRD, effective in late 2014. Yet, the Republic of Austria remains liable for 2 billion Euros. To date, the Italian subsidiary could no more be sold than the Bulgarian.

HETA and the era Schelling:

Under the new Finance Minister Schelling (whom Aff calls a lucky strike for Austria – after a long series of personalities with little “vocation for this office”), a legally controversial step was announced in March 2015: the Hypo would discontinue to service any more debt for the time being. Time was to be made till May 2016, to determine a repayment rate. It was announced a few weeks ago, at 46 percent. The debt cut of 54 percent, however, is not acceptable to the creditors (mainly German banks). What is to happen with this part – at least 11 billion euros – will have to be clarified via trials. How long these will take, how the EU will judge this haircut and what actually constitutes Carinthian assets, with which these debts could be settled, remains to be seen in the coming years. While the creditors expect one to two years of trial time, Schelling (not without tactical scheme) assumes five to ten years. Since creditors want to apply a default interest of six per cent, the debt sum may grow further.

Federalism the Austria way:

To date, a necessary standardization of accounting and countries bankruptcy law is rejected in the nine provinces. Brakemen, like so often, are the governors. It’s just more convenient to be able to rely on the federal government in the event of payment difficulties, as is happening in Carinthia. But Carinthia is not an isolated case: many states have state banks whose liabilities exceed the country’s budget manifold (in Vorarlberg e.g. fivefold). Overall, the countries are responsible for about 50 billion euros. Why it is, that the federal government can not prevail in this important question can only be explained by saying that the true power in Austria emanates from the provincial governors. The government, to Aff (and probably not only him), is merely the executing agency of the Local Governors’ Conference.

At the end Prof. Aff holds a flaming appeal for more political and economic education in Austrian schools and the expansion of economics in business schools and universities. This, I can only concur with completely.