Things have lurched from bad to worse at the Japanese outpost of KBC. But with bosses in the Brussels HQ of Belgium’s third-largest bank fighting far bigger fires, the folks in Tokyo are floating rudderless as their chief executive jumps ship to a cushy job at Deutsche Securities and angry employees fight a potentially troublesome law suit.
To recap, after several government bail-outs amounting to more than $41bn for KBC, the bank’s clients in Europe have threatened legal action against the bank and its UK-based securities arm, KBC Financial Products, while employees in the Japan office have filed suit against the bank’s broking arm, KBC Financial Products.
To make matters worse for KBC’s beleagured bosses, a New York Times article on June 30 highlighted what it claimed was an “anything goes” culture amid a lack of managerial oversight and lax internal controls. Here’s just a small sample:Since October [2008], KBC Bank has had to seek government relief three times. In all, it has received $41.5bn in financing and guarantees to recover from disastrous mortgage bets that its financial engineers and traders made when times were good. For a bank with a balance sheet of just $425bn, it is an astounding sum, exceeding the bailout of the Royal Bank of Scotland.
The financial products team leaders, Darren Carter and Thomas Korossy, came to KBC in 1999 when the bank bought the equity derivatives business from DE Shaw, an American hedge fund.
The atmosphere was loose and geared toward risk-taking. Employees would come to meetings dressed in shorts and flip-flops, and if a business proposal did not meet the internal standard of a 22 percent return, it was discarded, former executives say.
Angry investors claim the unit was unsupervised. They point to the bank’s unusual practice of combining the roles of chief financial and chief risk officer, a policy that is in stark contrast to the most basic of corporate governance standards. In an interview, Mr Carter said the bank’s collateralized debt obligations were of the highest quality, and were insured by the bond insurer MBIA.
When the mortgage market collapsed in late 2007, KBC, which had one of the highest ratios of collateralized debt obligations to bank capital of any institution in Europe, soon found itself close to insolvency. In October 2008 and again this January, KBC received 7 billion euros in public funds.
In May, André Bergen, the chief executive, turned to the government again, this time for a bailout of 22.5 billion euros. The week before the latest infusion was announced, Mr Bergen, 60, was rushed to the hospital for open-heart surgery.
Needless to say, this kind of publicity has hardly thrilled investors and KBC’s clients.
Darren Carter, CEO of KBC Financial Products, was forced to put out a statement in response to the NYT article, followed by a rather perfunctory KBC press release that merely stated that the NYT revealed “nothing new” and “misrepresents a number of things”. However, no hard facts were supplied to contradict the NYT allegations and some of the bank’s European clients - represented by Belgian law firm Modrikamem - are preparing a legal case.
So with the flames licking at their doors, KBC bosses in Brussels unsurprisingly have been rather hands-off about the bank’s increasingly troubled Tokyo operations.
In a post more than a year ago, FT Alphaville examined the growing problems at KBC Securities Japan over its attempts to dismiss employees. The man in charge was KBC Japan CEO Brandon Ginsberg, who could not be contacted for comment back then. In fact, nobody at KBC Japan could be contacted because the press department chief had mysteriously disappeared amid some brutal downsizing moves.
In the latest twist, Ginsberg - a long-time Japan hand and former co-head of equities at Nikko Citigroup - earlier this month signed on with Deutsche Securities, and the company’s branch manager also resigned.
Now rudderless and leaderless, a somewhat dazed and demoralised Tokyo office is being run - sort of - by the heads of research and sales, who are standing in as joint-CEOs of KBC Japan. Meanwhile, a group of employees fighting KBC’s efforts to dismiss them has filed a lawsuit against KBC Financial Products - KBC Bank’s UK arm - in the Tokyo District Court. The next hearing of the case takes place in September.
Now, observers predict that KBC Securities Japan will either fragment into small groups that attempt to sell themselves as teams to other brokers, leaving KBC a shell; or before it gets to that, KBC will sell the entity to a rival bank, with Standard Chartered mentioned as a possible buyer.
Meanwhile, back in Brussels, KBC earlier this month finally said it would split the role of chief financial officer and chief risk officer, and that CEO Bergen would step down permanently, to be replaced by interim chief Jan Vanhevel Another crucial player, Guido Segers, resigned as the head of merchant banking amid growing internal recriminations, and traders and bankers have left as part of the inevitable downsizing. Still, noted the NYT, “the executives behind the CDO strategy remain in charge”.
For now, anyway, the last word should go to Karl Lannoo, who heads the think tank Center for European Policy Studies in Brussels and told the NYT that the KBC saga “has the feel of a Magritte painting“. “This is Belgium’s third-largest bank,” he said of KBC, “and it has had three successive rounds of aid, and they still can’t target the problem.”
Related links:
Bank woes deepening in Europe - NYT
Hollowing out, KBC Japan-style (2) - FT Alphaville
Statement by Darren Carter, CEO of KBC FP - KBC
KBC Bank - Wikipedia
