Under new ownership

New Ownership Sign

After I published this review of the recent recapitalisation of the four Greek systemic banks (among other things), a couple of people asked me who the foreign investors are who struck such a bargain and what we might expect from them. I repeat my disclaimer that I am not a banking insider and I also think it is somewhat premature for informed comment – but I’m going to stick my neck out with a few generic observations anyway. More about the identity of the investors will no doubt be announced once the process is completed over the next few weeks – but here is what I have been able to find so far.

A partial list of investors participating in the “book building” process was published by CNBC based on interviews with Greek banking sources. They include Capital Group, Pimco, WLR Recovery Fund (Wilbur Ross), Wellington, Fairfax, Brookfield Capital Partners and Highfields Capital Management. Several of these also invested in the April 2014 recapitalisation of Eurobank. That group comprised Fairfax, Capital Group, Wilbur Ross, Fidelity, Mackenzie and Brookfield. So, four of these players (Capital Group, Fairfax, Wilbur Ross and Brookfield Partners) are already invested in Eurobank and are presumably increasing their stakes (or rather replenishing them, since their existing holdings will have otherwise been diluted by the new deal – a strategy some argue it would have been wise of the Greek government to follow).

It should be clear from my previous post that I believe that this was a very bad deal for the Greek taxpayer, not because I believe that state ownership would be the best thing for a banking sector which has already shown itself all to eager to jump into bed with political parties, but because the public purse lost a lot of money in the transaction. But regardless of whether those responsible should be subjected to an investigation, tarred and feathered, or hung, drawn and quartered in Syntagma Square, those losses have been booked. We should go into the future with our eyes wide open.

The populist line on our new foreign investors, one that the present government repeated ad nauseam when in opposition and one their critics have now turned against them, is that they are “vultures”. There is disappointment that they are not “institutional grade” investors, as if that somehow lowers the tone of the neighbourhood. Even intelligent commentators get carried away with this language. Now, I don’t normally consider myself an apologist for capitalism, but I do get irritated by lazy populist name-calling, so I wanted to inject a dose of pragmatism into the current dialogue. So let’s start by rephrasing the argument so that it makes more sense. There is perhaps a legitimate concern that the banks have fallen into the hands of speculators who are not interested in long-term involvement, but have bought at deep discount and will turn around and sell as soon as their investment appreciates.

How legitimate is this concern? First of all, buying low and selling high is not such as shocking concept, it is the number one principle of investing. Timing is a potential issue, but how much of a concern is it? Secondly, is “vultures” the correct term of abuse? Are these guys really interested in stripping the dead flesh off the bones of a carcass? Let’s take a couple of examples. Highfields Capital describes itself on its website as a “value oriented investment management firm” that “pursues a fundamental value investment approach”. All this really means is “buy low, sell high”. The best-known value investor of our time is Warren Buffett, whose strategy consists of doing a lot of very boring research into companies, buying the ones he believes in, and holding onto them. The principle behind value investing is identifying companies that no one else sees the worth in but you believe have the potential to appreciate; they may have valuable assets but poor management, or they may be in financial trouble but have experienced management. It’s not unlike buying a house that everyone else calls a ruin and fixing it up – hence they are also known as “turnaround” specialists. When the company is in really deep trouble, this is known as a “contrarian” investment.

Value investing differs fundamentally from “asset stripping”, which is the behaviour that most literally resembles a vulture. Whereas an asset stripper or “corporate raider” is interested in breaking a company up and selling its assets (which is more like buying an old banger to strip it for parts), value investing only makes sense if you get the company into such good shape that you can live off the dividends; or, if you sell, you leave the company in better shape (therefore worth more) than you found it in – very much a living organism. The controlling investor in Fairfax is known as “the Warren Buffet of Canada” for his ability to find hidden investment opportunities – his investment in Eurobank was his third in Greece. When Fairfax and Wilbur Ross (who has been called a “vulture” on occasion) acquired their stake in Eurobank in 2014 they committed to stay in invested for six months (i.e. not very long but not overnight either) and said they intended to participate in the bank’s management.

There is a very recent and relevant precedent for Wilbur Ross’s involvement in a distressed bank. In 2011, he participated in the rescue of Bank of Ireland (BoI), having made his name investing in steel and textiles in the United States when those industries were at their lowest ebb. He sold his stake in BoI after three years, having tripled its value. Bank of Ireland has become a Business School case study so there is a lot of material available on the internet for those interested in following up in more detail. The approach taken to the BoI was clearly not to drive the bank into the ground in order to strip it of its assets, but rather to manage it through a recovery – though you can bet your bottom cent that the investors will have structured the deal so that if it did fail they didn’t lose their shirts completely. This is the scenario where things could get messy for the banks’ borrowers in particular – but then they would be the case anyway. But let’s go back to what actually happened in Ireland.

Wilbur Ross described the investment in BoI as a bet on the Irish recovery, because in his judgement the bank would return to profitability when the Irish economy started to recover. He has described his (slightly more guarded) approach to Greece in an older BBC interview here and his general investment philosophy (including why he is a fan of surrealist art) here. The experience of restructuring that often comes with such deals can be a bruising one for employees and management in certain circumstances (some past cautionary tales – not necessarily directly applicable to the present situation in my opinion – are summed up in this critical appraisal). However the outcome in this case seems to have been positive: there was a temporary dip in the BoI’s share price when Wilbur Ross eventually sold off in 2014, but by that time the bank had returned to profitability and the Irish state also turned a profit, both directly from the appreciation of their own shares and indirectly from levies and taxes imposed on the investors. That, then, is the positive scenario, but of course recovery is not in the hands of the banks or their shareholders, and not everyone would share in it equally.

I put this information out there not because I have any interest in defending these firms – I am certainly not in their pay (but if anyone asks I’m more of a homemade spanakopita girl).  I am not privy to their specific strategy with respect to the Greek banks, I do not know their intentions and I certainly wouldn’t want to give rise to rose-tinted expectations. They did get a shockingly good deal, and they may well make out like bandits in a recovery. If the Greek public don’t, that is because no-one seems to have been looking out for their interests: losses will have been socialised and gains privatised. There are several elements of the Greek deal and the one-sided way in which it was structured that suggest it won’t be a success story for the Greek taxpayer but this does not necessarily mean catastrophe for the banks and their customers. These investors may not stick around for ever – but if they contribute to turning the banks around, if have a positive impact on their governance, is that such a big concern? If they are following the same strategy as they did in Ireland, they are betting on a Greek recovery, so their interests are aligned in this respect with the national interest. Since the government did not fight for the right to participate in the capital injection, it does not say much about their confidence in a recovery (or their understanding of the link between the health of the banks and the health of the economy). I do wonder also, how much worse these investors’ behaviour can be, compared to that of the “high grade” European banking institutions that took stakes in the Greek banks in the boom years, only to divest with as much of their principal as they could extract when the going got tough?

But there I go, being contrarian! Anything for a ray of hope…







Under new ownership

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