Bawag Admits Closer Links to Refco

The Financial Times
April 28, 2006

The clouds over Bawag thickened on Friday after Austria's trade union federation, which owns the bank, revealed it had maintained much closer links to failed futures broker Refco than previously admitted.

Rudolf Hundstorfer, interim boss of the OGB union federation, said at a hastily convened news conference that his organisation had been involved with Refco through an obscure, Liechtenstein-based investment vehicle.

The admission marked a further severe blow to the credibility of Bawag's union owners, and could impede their attempts to sell the embattled bank. This month, the OGB hired Morgan Stanley to advise on a disposal, with hopes for a swift sale to minimise the political fall-out ahead of general elections in the autumn.

The admission marked the second big blow for Bawag in as many days and followed revelations this week that the bank had proposed an out-of-court settlement to Refco's US creditors.

Ewald Nowotny, brought in as chief executive last November to clean up Bawag, admitted the bank had proposed a deal to US creditors who this week claimed $1.3bn damages from Bawag on alleged complicity in Refco's deception. Mr Nowotny, a former banker and politician, had argued the creditors' case was without merit and maintained that his bank – which lent money to Refco and to Phillip Bennett, its disgraced former head – was a victim, rather than a perpetrator.

But the admission that the bank, whose US assets were this week frozen by a New York judge, had attempted to settle out of court has seriously weakened Bawag's hand. Mr Nowonty stressed the offer implied no admission of guilt, but the size of the proposed settlement – $300-400m according to Austrian media reports – has hit the bank's credibility.

The trade union link to Refco started in 2002, when an OGB controlled vehicle, the Desana foundation, made loans through an intermediary. The credits were secured by a 27 per cent stake in the broker. Mr Hundstorfer said the deal was purely a loan, which had been subsequently repaid, and that Desana had been liquidated in early 2005.

Mr Hundstorfer said Desana had been created by Günter Weninger, the former ÖGB finance director and Bawag supervisory board president. Mr Weninger was forced to resign last month after admitting to having covered up years of losses at the bank from an ostensibly separate string of disastrous derivates trades.

Mr Hundstorfer, appointed last month to replace Fritz Verzetnitisch, the previous OGB boss and another casualty of the Bawag affair, said nobody but Mr Weninger knew about the foundation. He agreed the latest twist would impede selling Bawag, and indicated the unions' earlier preference for a domestic buyer had now been waived in the interest of speed.

Sources in Vienna named Citigroup as a potential suitor: the US bank declined to comment. Meanwhile, concern about a run on the bank prompted Klaus Liebscher, governor of the Austrian National Bank, to reaffirm the latter's willingness to provide liquidity if needed.

Mr Liebscher appealed to depositors to remain calm and said Bawag was not in danger of collapse. He also implored politicians not to exploit the affair – a day after Austria's chancellor Wolfgang Schüssel, until recently trailing in opinion polls, said Bawag was a legitimate campaign issue.

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