March 25th, 2013
In May 2007, a large French bank approached me with an emailed proposition:
“Bank of Cyprus plans to organize a pensions conference in Cyprus…as a long-standing partner of Bank of Cyprus, XYZ Bank is invited to participate to the conference and discuss about the benefits of non-traditional investment strategies to enhance pension fund positions…we were thinking that it would be great to have you participating to the conference and present your views on what you see in Europe and the potential benefits of structured solutions”.
It wasn’t hard to read between the lines and work out XYZ Bank’s agenda. ‘Structured solutions’ is a code word for selling derivatives, something the French bank was very successful at. The bank’s salespeople thought that having an unaffiliated journalist talking about derivatives would add credibility to their marketing campaign. And why not, I thought? I knew about the subject and I was curious to see Cyprus.
So I cobbled together a presentation summing up what I knew about pension funds using derivatives. All I knew about Cyprus was that it was half an island that identified itself as Greek. Just before my trip, I gained some insights into Greece. I wrote a story about how four Greek pension funds got into a fight with JP Morgan over some structured products that turned out to be worth substantially less than the price they paid for them.
Having written this story, my attitude towards pension funds buying structured products changed. It was only a year before I started writing The Devil’s Derivatives, and I was beginning to understand that most structured products existed because banks worked out how to arbitrage a client, a rating agency or regulator for profit. By the time I delivered my presentation in Nicosia, I was quite negative about pension funds buying ‘structured solutions’ and the French bankers in the audience looked at me with glum faces.
After my talk, I chatted to people from the Bank of Cyprus and other local firms. I had assumed that these would be the same kind of unsophisticated investors I had met in Athens. I quickly realised my mistake. The Cypriots seemed to view their mainland cousins as endearing hayseeds who were more comfortable with a donkey than a Mercedes. These particular Cypriots weren’t interested in buying structured products themselves. What they did want to do was earn commissions selling them to retired Greeks, Russians, British and other wealthy foreigners flocking to Cyprus.
My next encounter with Cyprus happened in June 2011. A non-governmental organisation approached me with what at first seemed an bizarre request. They were holding a conference in London on reunifying Cyprus. Would I be interested delivering a presentation on asset-backed securities?
Unlike the first Cyprus invitation, this time I was clueless. I protested that I knew very little about the tortured history of the divided island – and even if I did, why were ABS relevant? Don’t worry, the organisers said, sending me a briefing note for me to prepare from.
The NGO document explained how plans to reunify the island had foundered on the question of how to compensate Turks or Greeks who had lost land during the partition of the island 40 years ago, without evicting the current occupants of their property. One idea being floated was for certificates to be given to the original owners of the land, linked to their revenues and value. These certificates could be bundled together and securitised, raising cash from investors which could be used to develop the land for tourism. By financial alchemy, that would boost the value of the certificates enough to persuade both sides to sign up to a deal.
Then I understood why the NGO had approached me. They want to bring about the reunification of Cyprus using a structured product. I was privately doubtful about the viability of the idea, coming at a time when securitisation of even American mortgage loans was only possible with US government support. But I was touched by the motivation of reunifying a divided island, so I agreed to speak. At the conference itself, my presentation was received politely by the mix of Greek and Turkish Cypriot leaders present.
But it was the aside from a board member of a big Cyprus bank (I don’t remember which one) that stayed with me. If Greece defaults, he said, our banking sector will need a bailout of 30 percent of our country’s GDP – or about €6 billion based on the 2010 figures being used at the conference. That was nine months before Greece did default on its private sector-owned debt, and eighteen months before the crisis in Cyprus came to a head. Today we know that even a €10 billion EU bailout – 40 percent of 2011 GDP – isn’t enough to save the country’s banks and their uninsured creditors.
As I followed last week’s attempts by the Cypriots to prevent the reckoning now taking place, there was a mention some kind of repackaging and pledging of natural gas reserves lurking miles below the Mediterranean. Could it be pledged to the Russians? The ECB? After my 2007 and 2011 encounters, it seemed familiar. Another Cyprus structured product.