Firms search for next bailout

ALVAREZ and Marsal, BlackRock, Oliver Wyman, Pimco: The names mean nothing to the average European.

But the financial consultancies have played a central role in all the eurozone bailouts and have so far invoiced taxpayers in Cyprus, Greece, Ireland, Portugal, and Spain over €80m.

Their independent expertise is used by the troika to decide how much countries or banks need to prevent a default. They are often hired without a public tender, posing questions on transparency and accountability. They are sometimes hired despite potential conflicts of interest, which arise from links to investment funds and other financial service providers.

The consultancies also hire subcontractors, posing extra questions on who has access to inside information and how they use it.

Aside from local law firms, the subcontractors almost always include one or more of the “Big Four” accountancy companies — Deloitte, Ernst & Young, KPMG, and PriceWaterhouseCoopers (PwC).

The end result is a “golden circle” of a dozen or so large firms with a de facto monopoly on handling EU bailouts.

Take Alvarez and Marsal. The New York-based consultancy earned €2m for setting up and managing Spain’s “bad bank” in 2012. In a typical model, it brought in a Spanish law firm called Cuatrecasas, a Japanese financial services company called Nomura, and PwC to help do the job.

It has also earned €6.6m for its work on the Cypriot bailout. But its work in Cyprus caused a scandal which brought the questions to light.

According to an internal audit by the Cyprus central bank board, it got the money despite being ineligible for part of the work.

The audit document — seen by EUobserver — shows it got €1.1m plus Vat for evaluating Bank of Cyprus, the island’s main lender, up to Dec 2012. It also got a service extension fee of €250,000 for continuing the work in 2013.

In Dec 2012, with Cyprus struggling to secure a bailout from fellow eurozone states, central bank chief Panicos Demetriades shortlisted Alvarez and Marsal for several new contracts.

He did it despite the fact the board had “ruled out” the consultancy due to “potential perceived conflicts of interest” related to its Bank of Cyprus evaluation. He then gave Alvarez and Marsal two of the new contracts despite the board’s concerns.

In early 2013, it got €960,000 plus Vat and expenses of up to €270,000 for analysing the recapitalisation plans of Cypriot banks. It also got €2.7m plus Vat and expenses of up to €540,000 for helping to restructure Bank of Cyprus itself and Laiki bank.

Perceived conflicts of interest was the tip of the iceberg, however. The scandal erupted in October this year, when Cypriot media reported that Demetriades awarded Alvarez and Marsal another, whopping, fee of €15m without the board’s knowledge.

The bonus amounts to 0.1% of the total worth of the recapitalisation cost of Cypriot banks (€15.7bn).

According to internal correspondence and draft contracts dating back to March, the consultancy’s executive director, Hal Hirsch, and Demetriades, in principle agreed to payment of the fee “by whatever means” the recapitalisation was to be carried out.

Following messy talks in Brussels, the final bailout agreement included the seizing of private savers’ deposits over €100,000.

The secret bonus begs the question: How objective was Alvarez and Marsal’s evaluation of Cypriot banks when it stood to get a cut of the bailout?

The scandal also shows what can happen when contracts are awarded behind closed doors.

Demetriades in a written note in October claimed he agreed to the fee under pressure from the US firm. The central bank audit document quotes him as saying the fee agreement was: “Signed under duress. Mr Hirsch threatened to move the entire Alvarez team out of Cyprus at the peak of the crisis if I did not sign.”

In September, after the central bank terminated its contract with the consultancy, it insisted the whole amount — €15m — be paid. When the board rebelled, protesting that it had no knowledge of the deal, the US firm offered to take less. “We will agree to a recapitalisation fee equal to €4.75m. This is a very considerable and voluntary reduction and should not be subject to further negotiations,” Hirsch wrote in a letter to the central bank on Sept 19.

Alvarez and Marsal is not the only consultancy to get troika-related contracts without public tenders.

In Jan 2011, the Irish Central Bank hired BlackRock Solutions, shortly after the then government filed for an €85bn bailout. BlackRock Solutions is a small advisory unit within BlackRock, a US-based firm, which has, in recent years, become the world’s largest asset management fund, overseeing €3tn of its clients’ wealth.

It was hired to forecast how much Irish banks risk losing and to carry out a “stress test” on worst case scenarios for the Irish banking system. It got €30m for the job. It shared the task with subcontractors, including another US-based firm, Boston Consulting Group, and Barclays Capital, a British investment bank.

The first hiccup came when BlackRock Solutions got its bank profit forecast wrong. The Central Bank, based on the consultancy’s figures, expected bank profits to amount to €1.9bn in 2011-13 even in the worst case scenario. But by Jun 2012, the banks only managed to make €400m.

Politicians admitted the selection procedure for BlackRock Solutions was not ideal. Speaking in the Dáil in 2011, Finance Minister Michael Noonan said he eschewed a public tender due to troika pressure. Central Bank governor Patrick Honohan said the selection procedure was rushed.

BlackRock Solutions had intimate knowledge of the situation inside Irish banks not just from its Jan 2011 contract. The Central Bank also hired the US firm to assist in the completion of the 2012 and 2013 reviews of the banks’ capital needs.

At the same time, its parent firm, BlackRock, had, according to a company statement from Apr 2012, “client business in Ireland” worth “over €5bn” and “assets domiciled in Ireland” worth €162bn.

Pressed by TDs earlier this year to reveal the extent of BlackRock’s acquisitions in Ireland since 2011, Mr Noonan said the Central Bank “does not have the information requested” and noted that, in any case, “they [Blackrock] observe EU and Irish procurement legislation/requirements”.

Seven months later, BlackRock announced it would buy 3% of the Bank of Ireland — one of the banks which its subsidiary, BlackRock Solutions, “stress-tested” in 2011.

Tom McDonnell, an economist with the Dublin-based thinktank Tasc, says there is no proof BlackRock used insider knowledge. But he said the set-up is “problematic” in terms of public perception.

Greece also gave BlackRock Solutions a similar contract worth €12.3m. It included subcontracting to the Big Four audit firms.

According to a New York Times report in 2012, the troika and anything linked to it had become so hated in Greece that BlackRock Solutions used a fake name (“Solar”) and recruited 18 armed security guards to do its work.

The Spanish government was more wary than its Irish and Greek counterparts. BlackRock Solutions also pitched for a contract to stress test local banks as part of troika requirements for Spain’s €41bn bank bailout.

But Spanish economy minister Luis de Guindos said in May 2012 that BlackRock Solutions risked conflict of interest with BlackRock’s investment activities. BlackRock’s business in Spain is estimated to be worth €5.1bn. The same club still got the Spanish taxpayers’ money, however.

Spain awarded the €10.3m contract to Oliver Wyman, another US consultancy, and Roland Berger, a German firm. It also hired Deloitte (€1.8m), Ernst & Young (€7.2m), KPMG (€5m), and PwC (€5.3m), to carry out audits.

Portugal, like Spain, hired Oliver Wyman to assess the recapitalisation of the local banking system under its troika programme. It got €1m for 44 days of work. PwC, the US bank Citi, and McKinsey, another US consultancy, did subcontracting.

Last September, the ECB followed suit. It hired Oliver Wyman to assess the balance sheets of the 130 largest banks in the eurozone.

Constantin Gurdgiev, a finance lecturer at Trinity College Dublin, says lack of expertise in central banks is one reason these firms keep on being hired. He told EUobserver that “during the pre-crisis boom in credit creation, national central banks of countries with rapid credit expansion lost core personnel competencies and skills to staff migration to the private financial services providers”.

He added that the remaining staff “often performed mechanical tasks of collating and repackaging” data submitted by banks, but “lost the key skills to actively investigate banks’ balance sheets or draw up business performance models”.

The “external validation” of the US firms gave the banking loss estimates a “perceived objectivity” which markets could live with, Mr Gurdgiev said.

Richard Boyd Barrett, a left-wing TD who tabled several parliamentary questions on BlackRock Solutions, is more cynical. He said the major consultancies and auditors are “part of the same golden circle of bankers and government officials that caused the financial crisis in the first place”.

* Valentina Pop writes for EUobserver. This analysis is part of a cross-border investigation on the troika of international lenders. It includes journalists from Belgium, Cyprus, Germany, Greece, Portugal, and the UK. It was partly facilitated by the German Heinrich Boell Foundation.

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