Trust us. We are the bank

In much of the stuff we read about in newspapers, it’s the unique cases of human frailty, vanity, and even utter stupidity that often serve as the exemplars of the society we live in. The zany world briefs and court reports on petty thieves and benefit frauds, and the silly things politicians say and their prejudices, are what get people to stop to consider human nature. They reflect the society we live in. They are synecdoches: only small parts of who we are, but they describe the whole of society.

So when the financial crisis in 2008 brought us the American stories of bank foreclosures, it accurately reflected the state of a country. The lost homes required no great deal of financial acumen: by way of synecdoche, this was a very sick economy.

The same could surely not be said of the people I met in the past weeks who have lost their monies and savings in the Bank of Valletta multi-manager property fund. They seem to be the only losers in a year in which BOV posted €98 million in pre-tax profits, a tribute to the solidity of this great bank.

For the unlucky 259 whose savings perished in a property fund that lost €50 million, there is little more than BOV chairman Roderick Chalmer’s “great regret”. For the rest of us, a cautionary tale.

In its 2009 annual report, the Malta Financial Services Authority’s consumer complaints unit noted how property funds had been sold to “the general retail public rather than actual experienced investors” – investors who truly understand the risks of such products – even “via retail bank branches, hardly the place for sophisticated investors to visit but certainly a captive environment for retail customers.”

At this, Roderick Chalmers had little to say last week when questioned by PBS’s Reno Bugeja during the presentation of the bank’s financials why it had sold average people such a complex financial instrument: “The term ‘experienced investor’ is so defined by the MFSA… in over 90% of the cases, the paperwork required was duly signed by the investors,” Chalmers said.

This paperwork, a single sheet, carries the signature of depositors and investors who declared themselves to be ‘experienced investors’ before agreeing to invest their cash in the property fund: cash that the bank then invested in other funds, to be used for high-end real estate development. At one time valued at over €80 million, the La Vallette Sicav’s property fund fell to just below €30 million when the Belgravia funds – where over 40% of the cash was – went belly-up in 2008, and then into liquidation and also criminal investigation by the Jersey police.

The Luqa couple I speak to are hardly ‘experienced’. The husband apologetically tells me, “I’m illiterate… I can’t read nor write.”

“I had Lm10,000 come my way some time in 2007, and I mentioned it to the bank clerk while I was depositing my pension cheque,” the man, a retired civil servant, says. “I was then taken into a small room and I was suggested to put the cash in the property fund. I hardly knew what this was. I can’t even read. My wife came to finalise everything at the bank and that was it.”

“Will the bank give me any trouble… I’d rather you don’t get my name,” he says, much like everyone I spoke to, everyday sorts who have enough on their minds already to be bothered about hanging their lost savings in public.

Not so Paul and Mary Ann Spiteri, whose frankness reveals the implicit trust many have in banks. “We had a summer residence we sold, and had some Lm40,000 (€100,000). We went to BOV, asked about investing the money, and a young lady spoke to us. We said, ‘we don’t know what to do with the cash.’ We wanted guidance.

“We were told we couldn’t go wrong with the fund. After all it was property. How could you go wrong? We weren’t that interested in the interest rates. We just wanted our capital to be guaranteed,” Paul, 63, says.

His father-in-law, 87, had also been enticed to invest the minimal amount, Lm8,000, in the fund. “It’s obscene,” he says, angrily. “He knew nothing of investments. We’re not professional investors. But the clerk he dealt with was nice, he trusted him. But that’s how everything works. I have nothing against the clerk who suggested we invest in the fund. That was our mistake, and you know… other people are just ‘ignorant’ like us on these matters.”

Another Zurrieq woman, widowed with four children, invested €48,000 in the fund. I ask her if she knows what perpetuals and subordinate bonds are, but she draws a blank just like anyone else.

When her husband died in 2005, her youngest was six. She looked towards the 6% return on her capital to bring up her family. “I didn’t always know what they were. It was in the hands of those who suggested me where to put my cash. When you trust someone, you just go ahead and do as you are told.”

Another single mother from Naxxar, separated from her husband, invested a Lm50,000 settlement in government bonds and then spread the cash into the fund on recommendation of the bank. “I had to live off the interest, so I couldn’t put them in a simple account. Every now and then, the bank manager would call me and encourage me to spread the money. I don’t understand these things… the fact that La Vallette was the bank’s company encourage me. I lost the Lehman investments as well. That was enough to induce a heart attack. Today I no longer afford the rent, and I am living in my daughter’s apartment.”

Stories like these illustrate what the MFSA warned about in its complains report. Products that are ‘hardly easy to understand’, being promoted as alternatives to traditional investments to the “mainstream retail investing public”.

The MFSA seemed to chide the public in its backhanded warning to the banks and stockbrokers: “This speaks volumes about the perception that ‘anything goes’ for the Maltese investors as long as they are offered promising returns, whatever the risk.”

Fair enough. Enticed by the lucrative interest of bonds and other investments, many were those who thought putting their money in a real estate fund was a solid bet.

But the mover behind the recent judicial protests against the bank, Paul Bonello of Finco Trust Management, claims the property fund was promoted as ‘a low-risk fund with low volatility’, giving good returns even when bonds or equities do badly. Additionally, the fund was licensed as a Professional Investors Fund (PIF), to be targeted solely to ‘experienced investors’ as per PIF rules.

That leaves little room for reprieve however: the MFSA tells prospective investors that even if the bank or investment firm tells investors they don’t have the necessary knowledge and experience, it’s the investors who must accept the risk of going ahead with the transaction.

After all, this is not a matter of moral justice, no matter the umbrage of the investors. What will be determined by the MFSA’s investigation of the property fund seems to centre around “gearing”, or in crude terms, whether the funds BOV invested in had too many loans. Brace yourself for the mathematics.

According to the property fund’s rules, investments could only be made in real estate funds with enough property to back up the loans taken out, just in case the value of the real estate goes down. BOV’s La Vallette Sicav said it would restrict itself to funds exposed to a gearing ratio of not more than 100%.

So by way of example: if the fund had €100,000 in property, and €50,000 in loans, then the net asset value was of €50,000 – a net value equal to the loans, or 100% gearing. Had the loans been €80,000, leaving a net asset value of €20,000, the gearing would be 400% (divide loans by net value, and multiply by 100).

But what happens when the price of property falls, and how does this affect funds with a high gearing?

Say the value of property went down from €100,000 to €80,000. With loans of €50,000, that leaves a net asset value of €30,000. That €20,000 loss cost 40% of the net asset value. On the other hand, in the 400% gearing situation, with loans of €80,000 such a downturn would have wiped out the entire net asset value.

This is what effectively sent the property fund belly-up, according to Finco. The Belgravia European fund had a 208% gearing when BOV was investing money in it, but this was a fact only made public in January 2008, when Belgravia published its 2006 accounts – a full seven months before BOV decided to suspend trading in the property fund in August 2008.

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It’s all Greek to a Hamrun pensioner whose savings from a little factory he owned with his brother, have disappeared in the RBS, Lehman and the La Valletta property fund downturns. A heart patient, he says he “survived a call from the bank at 5:15pm a few days after the Lehman crash, to sell off my RBS investment. They wanted to sell them just before the London Stock Exchange closes at 5:30pm. They told me, ‘we don’t want you to think that we didn’t warn you…’ If that isn’t a sign of panic, I don’t know what is…”

He never authorised the sale of the equity, then valued at a paltry 18p. Today it’s back up to 65p, but a far cry from the £1 the shares had been purchased at.

“To think that the rest of my savings in the property fund were reduced to just a quarter of what they were, makes me so anxious… I am just afraid of banks. I really trusted them.”

At 12, he left school – he says, almost apologetically – which is why everything he did when he authorised investments was “only due to my trust in the bank… now I am withdrawing everything I have slowly, slowly. I am only going to use the bank to withdraw my pension.”

It’s all about trust. No wonder then, that Chalmers set much store last week in decrying the ‘mischievous and malicious’ insinuation in the press that some 14 million redemptions (16% of the €84 million invested) from the property fund might have taken place by investors who knew the reality of the fund's health. “Grossly offensive,” he called it, that someone could insinuate such a “breach of trust”.

Be that as it may, Finco calls the level of redemptions “abnormal”, given that all the other funds under the La Vallette umbrella did not have the same level of redemptions. Additionally, when the bank realised things had gone awry in January 2008 when Belgravia posted its 2006 accounts, BOV tried to redeem the investments in March. And yet, it still continued to accept deposits into the fund right until it suspended redemptions on 7 August, 2008.

Much as this gets Chalmers’ dander up, even veteran economists like Karm Farrugia have publicly expressed indignation at the lack of information on these ‘early’ redemptions. “At this rate, had I been among the privileged, more than my original investment of €20,000 would have been recovered,” Farrugia wrote in The Times back in September. “But, of course, that would have been at the expense of those remaining unredeemed – the under-privileged whose trust in BOV stayed solid.”