By Chris Gillibrand
The Brussels Journal
April 4, 2006
A major banking scandal is rocking the Austrian political elites left and right. A bank owned by the Socialist trade union (which is close to the Socialist Party SPÖ, currently in opposition) loses billions in shady hedge deals while the union strike fund evaporates in the Caribbean and the bank gets implicated in a corruption case in Israel. Meanwhile the bank is financed by the European Investment Bank (EIB), and an Austrian Finance Ministry official (married to the Socialist ex-chief of the bank) ignores a crucial report and is appointed to the Executive Board of the European Central Bank (ECB). The Conservative Finance Minister claims to know nothing after just having sold the Government-owned Post Office Savings Bank (PSK) to the socialist bank. Welcome to Austria, presently presiding the European Union council of ministers.
Let me introduce!
The Bank für Arbeit und Wirtschaft AG, BAWAG or in English, Bank for Employment and Commerce was founded in 1922 by the Socialist Chancellor Karl Renner. Up until now the majority stakeholder in the Bank has been the Austrian Trades Union Federation, the ÖGB. With the repurchase of the shares of the Bayerische Landesbank in 2004, it is now wholly-owned by the ÖGB. The banks original intent, from which it has strayed far, was to extend cheap credits to the needy.
Almost all of the members of the BAWAG Supervisory Board are fully paid up socialists and trade unionists. The two exceptions are Albert Hochleitner, the ex-CEO of Siemens Austria, and Leo Wallner, the chairman of the state-owned monopoly, Casinos Austria. Günter Weninger, chairman of the Supervisory Board, who has now been forced to resign, also has a day job as the Finance Chief of the ÖGB. He started professional life as an electrician which has given rise to suggestions in the Austrian press that he might have to return to his original trade. The Managing Board has eight members, four of whom have now resigned. The CEO, Johann Zwettler had already resigned in October 2005. He and his predecessor, Helmut Elsner, are now under police investigation.
BAWAG opened up operations in the Caribbean in 1995 under the direction of Wolfgang Flöttl, the son of the then CEO, Walter Flöttl. The idea was that these investments should hedge risk. When it was made public that the son received $2 billion from BAWAG without the father seeking the formal approval of the Supervisory Board, the Caribbean business got closed after a year. The extent of Supervisory Board knowledge is still questioned.
After the departure of Flöttl Senior, the business was then reopened by Flöttls successor, Helmut Elsner, with Supervisory Board approval after only one year. Elsner was already known as Flöttls man for big business. Living well, he enjoyed a service penthouse provided on the top of the BAWAG offices in Vienna as had his predecessor, Flöttl. Also provided with a penthouse was the head of the socialist trade union ÖGB, Fritz Verzetnitsch.
This time around, Flöttl Junior invested in high-risk funds and the business clocked up a massive loss of almost 1 billion which threatened the solvency of BAWAG in 2000. The Bank was only saved by a guarantee from the ÖGB (trade union dues amount to 1% of members salaries, so they have accumulated quite a lot of money to play with). The losses themselves were systematically covered up in offshore accounts in the Caribbean and accounts at a US futures broker called REFCO. The union strike fund went walkabouts as collateral in the Caribbean and disappeared.
On 1 December 2000, the Finance Minister (then and now) Karl-Heinz Grasser (from the ÖVP, the conservative Austrian Peoples Party) commissioned the National Bank of Austria to do an audit of BAWAG. It was highlighted in the report that the banking system and national banking laws had been violated. There was neither mention of the losses in the Caribbean nor of the ÖGB guarantee. BAWAG received a copy together with the banking oversight authorities in the Finance Ministry. Grasser claims never to have seen a copy of this report.
Why were the Finance Ministry reluctant to expose themselves on this issue highlighted in this report? This could be explained by the fact that BAWAG were finally given clearance by the European Commission to acquire the Austrian Post Office Savings Bank (PSK) from the Austrian Government in November 2000. Not only did this acquisition give BAWAG a new client base (previously many of its banking products had been sold through the network of trade union branches and membership has been declining) but it gave BAWAG a needed liquidity at that time. The Austrian Government (consisting of the Peoples Party ÖVP and Jörg Haiders party) pocketed the money from the privatisation and all were happy behind the scenes. A total merger was finally achieved in 2004.
However, the ignorance and inaction of the Finance Ministry is astounding given that there are two State Commissioners nominated to oversee the affairs of the BAWAG Group; for BAWAG, none other than the Chef de Cabinet of the Finance Ministry and for PSK, the Head of Directorate General III in the Federal Chancery.
No more audits were performed on BAWAG in the following years. Neither the Governor of the National Bank of Austria, Klaus Liebscher who is near to the Austrian Peoples Party nor his Deputy, Gertrude Tumpel-Gugerell, who was responsible for financial market oversight thought them necessary. A separate Financial Market Oversight Authority (FMA) was set up in 2002. Finance Ministry staff were transferred to the FMA but not the incriminating report.
Gertrude Tumpel-Gugerell is herself near to the Socialist Party; so near in fact that her husband is Herbert Tumpel, President of the Chamber of Workers. Herr Tumpel has a past-life as Chairman of the Supervisory Board of BAWAG when the Flöttls were undertaking transactions under the codeword Special Business.
Frau Tumpel was Executive Director responsible for financial markets in the National Bank of Austria from 1997 to 2003 and was appointed Deputy-Governor in 1998. In 2002, she became a member of the Supervisory Board of the FMA on its establishment and Chair of the Banking Advisory Committee of the European Union. Already, a Member of the Banking Supervision Committee of the European Central Bank in 1999, she gave up all these posts to be a Member of the Executive Board of the ECB from 2003 onwards. She and five other members are responsible for the day-to-day running of the Eurozone, reporting to the Governing Council (the Executive Board plus the Governors of the National Central Banks). Why has no sound been heard from this direction?
The scandal breaks
BAWAG Caribbean ventures avoided the news until October 2005 when its former partner REFCO filed for bankruptcy. The 2004 Annual Report of BAWAG records: The successful cooperation with the REFCO Group will be continued without an equity stake, so that the BAWAG PSK Group will continue to benefit from this access route to international customers in the future.
In the event, what this really meant was a personal loan of $410 million to the CEO of REFCO, Phillip Bennett, only hours before the company went bankrupt. The collateral for the loan was REFCO shares which became instantly worthless. A warrant has been issued in Austria for Bennetts arrest. Curiously, an arrest warrant for Flöttl Junior has just been withdrawn by an Austrian judge.
When the extent of the exposure to the Caribbean business was made known in late March 2006 the Supervisory Board Chairman, Weninger resigned. At this stage the use of the strike funds as collateral was also discovered and trade union leader Fritz Verzetnitsch instantly resigned both as ÖGB Chairman and Member of Parliament.
BAWAG itself is so public minded that it has a representative on the Technical Expert Group of the EUs European Financial Reporting Advisory Group. As the Bible says, you should not ignore the plank in your own eye when trying to remove the specks in other peoples eyes.
BAWAG always had the reputation of being a cutting-edge bank. Via REFCO, they were involved in the PIPE (Private Investment in Public Equity) market which was often used as finance of last resort for near bankrupt companies. They were the first bank in Europe to offer loans over the internet. While, over the years BAWAG showed considerable reluctance to enter the markets of Central Europe, outside the immediate scandal some of their strategic moves, have been what might be called interesting not to say opportunistic.
In Israel, there has been an extraordinary investment (among others) in a casino in Jericho, jointly funded by among others, the Palestine Authority, Casinos Austria and BAWAG. This was burned out during the Intifada but there appear to have been plans for another casino with the same ownership line-up in Southern Gaza! BAWAG is heavily involved in the still open corruption allegations against members of Sharons family.
Stranger still, BAWAG opened a representative office in a hotel in Libya in October 2005, a strange enthusiasm even given the improving relations with the EU and the large number of other countries where BAWAG is not yet represented. The launch was attended by a delegation of twenty-five from Austria including none other than Ewald Nowotny, former socialist politician and vice-President of the European Investment Bank (EIB) from 1999 until 2003. He is now Honorary vice-President of the EIB. At the age of 29, he was appointed Chairman of the Board of Directors of the Austrian Post Office Savings Bank (PSK), a post he held until 1978.
The EIB is the EUs financing institution. It was created by the Treaty of Rome. The members of the EIB are the EU Member States of the European Union, who have all subscribed to the Banks capital. In the EIBs own words:
· The EIB enjoys its own legal personality and financial autonomy within the Community system. The EIB's mission is to further the objectives of the European Union by providing long-term finance for specific capital projects in keeping with strict banking practice.
· It thereby contributes towards building a closer-knit Europe, particularly in terms of economic integration and greater economic and social cohesion.
· As an institution of the Union, the EIB continuously adapts its activity to developments in Community policies.
· As a Bank, it works in close collaboration with the banking community both when borrowing on the capital markets and when financing capital projects.
· The EIB grants loans mainly from the proceeds of its borrowings, which, together with "own funds" (paid-in capital and reserves), constitute its "own resources".
· Outside the European Union, EIB financing operations are conducted principally from the Bank's own resources but also, under mandate, from Union or Member States' budgetary resources.
The EIB has been extremely active in providing loans to BAWAG and to BAWAG/PSK.
It may be a coincidence but at the time of writing this article, records of the above loans have disappeared from the EIB website.
Of great curiosity value are what seems like two loans signed on 6 October 2005, just a few days before the REFCO scandal broke for 180 million the first for 100 million for a global loan focusing on projects of limited scale in the fields of environmental protection and improvement as well as infrastructure, energy, health, education and SMEs situated to more than 70% in regional development areas and the second for 80 million for financing for small and medium scale ventures. It maybe that the second sum is included in the first.
Another loan for 20 million was signed on 17 March 2006 also for financing for small and medium scale ventures. It maybe that this loan is also the final tranche of the initial loan. Loans, therefore, of at least 100 million and possibly 200 million were made (depending on how one interprets the descriptions and dates of the transactions.)
A further line of credit for 100 million for the financing of projects of limited scale in the fields of infrastructure, environmental protection and improvement, rational use of energy, health and education located in regional development areas was published on 6 March 2006 as being under consideration.
Why such big loans so recently? On what basis did the EIB approve this financing? Did they not ask the Austrian Finance Ministry about the state of BAWAGs finances? Why did not the Finance Ministry inform them? Surely even just the business in Israel and first news of the Caribbean scandal should have sounded alarm bells.
It can, therefore, be of no surprise that the new Chief Executive of BAWAG is going to be Ewald Nowotny who declared on 23 March 2006 that the banks balance sheet was now clean and solid. He assures everyone that there are no more dead bodies in the cellar.
So cosy are the political relationships in Austria even after the partial collapse of the notorious proporz system that ex-Peoples Party politician, Christoph Leitl, now the Head of the Austrian Chamber of Economics and President of Eurochambres declared that he had respect for trade union leader Verzetnitsch on his resignation. Short of a complete meltdown of BAWAG, it would have been in his interest to say this if any of his members are owing money to this socialist bank. Here they are together at a Dialogue of the Social Partners event organised by the Diocese of Linz in February.
Leitl and Verzetnitsch
Leitl has now praised the crisis management of the ÖGB und BAWAG! Needless to say, when questioned, he does not support the resignation of Tumpel from the Chamber of Workers.
Cosy indeed; the Austrian President, Prime Minister, Leitl himself and even the left-leaning Bishop of Linz were honoured guests among the 500 people who attended Verzetnitschs 60th birthday party in May 2005 (entitled 60 years for the Socialist Movement!). The Social Partners collected 72000 for the newly established Verzetnitsch Education Fund for Young People by the end of the evening. Given the fate of the strike funds, one can only hope that this money is in safe keeping but it was a BAWAG account. As their advertising runs, BAWAG saving is safe, easy and lucrative. Another advert more believably urges Jet Set with Friends.
Now the scandal has broken, the Socialist Party SPÖ is distancing itself from its old friends in the fly-by-night banking world. It has have been quick to support the sale of BAWAG, as it is a major embarrassment in the upcoming elections, which it had been predicted to win even under Alfred Gusenbauer, a leader who occupies a charisma free-zone all of his own. After all, if you run a Bank for your own interests and not those of your customers, you will treat the country and her voters in the same way.
Austria in truth has never recovered from the shock of the artillery bombardment of the Karl-Marx-Hof at the centre of Red Vienna in 1934 by the Christian Social conservative predecessors of the Austrian Peoples Party. The elites now justify to themselves that they have to do everything to avoid such a crisis ever again, but a high price has to be paid in terms of corruption (or at least a good appearance of it) and contempt for a normal democratic process with an effective opposition. And the Austrian state presently has other threats than communists within. The time of the unbreakable Social Partnership of the Chamber of Workers (represented by Tumpel), the Trade Unions Federations (represented by Verzetnitsch) and the Chamber of Economics (represented by Leitl) should be long gone. Ironically, it is self-serving and no longer serves the interests of society or of ordinary Austrians outside the elites.
We are Europe
If the BAWAG affair comes to be seen as business as usual in Austria, Vienna could loose its place in banking as the mini-Frankfurt-on-the-Danube. Even as the BAWAG scandal broke, it was revealed that the Hypo Adria Alpe Bank has run up 328 million in losses in a mere two weeks of foreign exchange trading, prompting descriptions in the Austrian press of third-world standards. Surely this Austria is not the same country as the one holding the Presidency of the EU!
With the slogan Youth
cant wait We are Europe, the ÖGB Youth Movement demonstrated outside
the recent EU Youth Ministers Meeting in Bad Ischl. You bet the Socialists
cant wait after all Verzetnitsch started his climb to penthouse life within
this same youth movement. In reality, Austria is an all too accurate mirror of the
social partnership model that is also practiced by the European institutions.
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