| NICOSIA, April 2
NICOSIA, April 2 On the evening of the last
Wednesday in March, the directors of Laiki bank, the second
largest in Cyprus, gathered in their sixth floor board room for
the last time.
With the portraits of chairmen past staring down at them,
they all resigned, something that had become inevitable earlier
in the week when each director received a letter from the
Central Bank of Cyprus telling them a special administrator had
been appointed to run their bank and the board was suspended.
After less than an hour, the board broke up for the last
time, its members accepting that their 112-year-old institution
was no more. "It was like a funeral," one director said.
The death of Laiki, also known as Cyprus Popular Bank
, was brutal. Board members said they had fought to the
bitter end, imploring political leaders not to accept the bank's
closure as part of a 10 billion euro ($13 billion) bailout deal
last week to save the country from bankruptcy.
The bank the directors were fighting to save lost 1.8
billion euros before tax in the first nine months of 2012 and
another 4.1 billion euros the year before, as a gamble on Greek
bonds ended badly, and bad lending decisions took their toll.
"Laiki Bank was a very good bank for many, many years," said
Afxentis Afxentiou, a former governor of Cyprus' central bank.
"Unfortunately, they were the victim of too many things.
First, the haircut on the Greek sovereign debt which caused a
loss of about 2.5 billion euros, secondly its exposure to Greece
in loans given to Greece, and thirdly the world economy crisis
which hit the company."
A government-ordered inquiry into Cyprus' banking and
economic crisis prompted the country's finance minister Michael
Sarris, a former Laiki chairman, to resign on Tuesday.
Reuters spoke to five of Laiki's 11 recently-departed
directors; all requested anonymity as they wanted to be able to
speak more freely about sensitive issues
Laiki's first major blow came in 2011 when Europe agreed to
an unprecedented restructuring of Greece's sovereign bonds.
Laiki was holding 3.1 billion euros of the bonds and ultimately
suffered losses of 2.3 billion euros.
After merging with Greek bank Marfin in 2007 and coming
under Greek management, Laiki in 2009 built up a large position
in Greek bonds, which offered attractive interest rates.
The eventual losses were a devastating hit for a bank which
began 2011 with total equity of just 3.6 billion euros, but it
was almost a year later before Laiki was rescued after flunking
the European Banking Authority's 2011 stress tests and failing
to attract private capital.
In June 2012, Laiki got a 1.8 billion euro bailout from the
state, giving the Cyprus government an 84 percent shareholding.
Seven new directors were appointed by the finance minister, and
the board was charged with drawing up a business plan that would
convince the European Union the bank could be viable again.
The new directors knew of the bank's Greek bond tragedy, and
had also seen accounts of questionable lending practices.
A Greek parliamentary enquiry had called attention to
"serious conflicts of interest" in Laiki's Greek operation. It
had loaned money to a community of Greek monks involved in land
deals, and to others who used the money to support a share sale
by Marfin Investment Group, a company linked to Laiki through a
shared chairman, Andreas Vgenopoulos, until November 2011.
Vgenopoulos denied any wrongdoing.
The board were taken aback by size of the problem at Laiki.
"I found what I did not expect to find," said one board source,
describing how the bank was already relying on the Cyprus
central bank for more than 9 billion euros of emergency funding
that had to be renewed fortnightly.
The priority was to appoint advisers to help create a plan
for Laiki to cut costs, sell assets, recapitalize and "ring
fence" its Greek operations so any shocks in its 11.8 billion
euros Greek loan book wouldn't hurt the Cypriot parent.
At the end of June, they appointed KPMG, which drew up a
plan that called for selling assets, cutting costs and putting
bad loans into an asset management company.
Laiki was also prepared force losses on people who had
bought "senior" bonds, a traditionally safe investment that has
so far avoided taking any hits in the banking crisis. Imposing
losses on depositors, the strategy controversially included in
Cyprus' bailout plan, was not considered. "No-one would have the
view that we could impact depositors," said one director.
At the end of August, the plan was submitted to the
authorities. Around the same time, the bank's chief executive
Christos Stylianides, a long-time Laiki staffer who had mainly
worked in the UK and Cyprus before taking the top job in
December 2011, went on sick leave.
As a stand-in, the board chose Takis Phidias, then head of
Laiki's life insurance arm. About 500 staff were laid off in
Greece, another 120 in Cyprus, salaries were cut, mobile phone
use was restricted, and the bank renegotiated its rents.
Asset sales began, as did talks on selling Laiki's 50
percent stake in Russia's Rossiysky Promyishlenny Bank.
When they started, they were prepared to sell at a 9 percent
discount, targeting loans in Serbia and Ukraine, and part of a 2
billion euro shipping loan portfolio in Greece, but it was not
enough and they began selling at a 15 percent discount in early
Stylianides, back after sick leave, clashed with the board,
which wanted him to quit so the bank could have a fresh start.
THE SANDS SHIFT
Outside the bank, the sands had been shifting since October.
Aside from concerns about the efficiency of a bad bank,
the troika - the European Union, the International Monetary Fund
and the European Central Bank - also worried whether Cyprus
could foot the bill for a bad bank.
A bad bank was however a critical part of the KPMG plan, so
Laiki moved to Plan B. Its idea was to put the "healthy" Cyprus
bank into a new subsidiary that could be sold once it was freed
from the long shadow cast by Greece, which was to remain in the
bank's main holding company.
"It wasn't a good bank and a bad bank plan," said one board
source. "We were going to focus on restructuring."
In December 2012 Laiki hired consultants Alvarez and Marsal,
who were working with the central bank; Laiki believed hiring
the same consultants would boost the plan's chance of success.
As Plan B was pushed forward, Laiki was facing growing
difficulties. News reports of possible haircuts for depositors
were already prompting people to pull their cash out.
That left Laiki ever more dependent on the central bank's
emergency liquidity assistance (ELA).
"ELA was a continuous struggle, every fortnight they were
asking us for more assets (as collateral)," said one bank
source. The bank pledged every building it owned, along with
batches of loans and bonds.
The 1.8 billion euro bailout from June did little to help,
since it was done with a government bond that was not accepted
by the central bank, which needed approval from the European
Central Bank. The ECB declined to comment.
As Laiki sought new collateral, the value of assets it had
already used fell further. "You could see the overall amount
falling as non performing loans got worse," a bank source said.
Laiki ultimately pledged about 20 billion euros of
collateral to draw down 9.95 billion euros of central bank cash.
Cyprus' elections in February were a turning point. Before
that, the ECB had seen Laiki's growing vulnerability but had
continued to allow it to draw down ELA. Now with a new
government in place the ECB wanted action, fast.
THE FINAL ACT
On Friday March 15, finance minister Michael Sarris went to
Brussels to negotiate a bailout deal for the stricken island.
The agreement that emerged in the early hours of March 16
was a shock. Cyprus was to raise 5.8 billion euros of the money
it needed by levying a tax on deposits, including a 6.75 percent
tax on small savings which were explicitly guaranteed.
Laiki's board began to meet almost daily, an intensification
even for a body that had met about 100 times since June.
The next bombshell came quickly. On Monday March 18, four
Laiki representatives were summoned to the Central Bank.
They were joined by representatives from Cyprus' two other
major banks, Bank of Cyprus and Hellenic.
The banks were given a two and a half page document, seen by
Reuters, detailing the terms of the sale of their Greek
operations to an as yet unknown Greek bank.
They were asked to take it to their boards for approval, but
immediately protested at the vagueness of the terms, and the
lack of board involvement and due diligence.
The document asked the Laiki board to confirm that the
agreement had been reached "without coercion". When the bank's
representatives voiced concerns, Central Bank Governor Panicos
Demetriades told Laiki that its shareholder, the government,
would expect the board to sign.
The directors believed the deal meant Laiki Greece, which a
central bank-commissioned review predicted would lose 7.4
billion euros between June 2012 and June 2015, had to be
recapitalized with about 2.8 billion euros before being sold.
"The board was surprised and disappointed, the deal was
obviously very adverse to the bank," said one director. The
board believed they would have gotten a better deal had the
branches been sold in the normal way, with competitive bids.
Laiki refused to sign, so Demetriades signed for them. The
Central Bank did not respond to queries on the issue.
Selling the Greek branches shrunk Laiki and removed the risk
of any further Greek loan losses, but the board believed the
bank's position had been materially worsened by the deal.
Board meetings now sometimes lasted until midnight.
Emissaries were sent to talk to Russia about a takeover deal,
On the evening of Thursday March 21, Laiki workers began
protesting in Nicosia after hearing that the bank was to be put
into a "resolution" regime that would see it split into a "good"
bank with healthy loans and small deposits, and a "bad" bank
that would be wound down. Some directors only heard the news on
local TV stations.
"No-one ever explained to us why we had to go into
resolution," said one Laiki source.
Now Cyprus had just three days to formulate a bank
restructuring plan that would win troika approval, secure a
sovereign bailout, and prevent the ECB from making good on their
threat of cutting off the country's banks' from emergency funds.
The plan, as ultimately agreed, will see all the good parts
of Laiki bundled into Bank of Cyprus, the island's
largest lender, while deposits above 100,000 euros and troubled
loans are run down under a special administrator.
The Laiki brand will likely be consigned to the scrap heap,
and the bank's 8,400 workers face an uncertain future. As one
director put it: "Everyone knew the bank had problems, but
no-one thought it would come to this."