Toxic Swaps

I hope the fallout from the toxic swap scandal will be wide-ranging and highly personal.

Managers of public sector companies, with little knowledge of management in most cases, do the rounds depending on the political flavour of the month. Thus the public transport companies are starved of any real managers, in what is already a difficult business where they are expected to balance spending public funds with providing an adequate service.

The one thing these Directors can count on is that they must make strategic contacts so as to stay on the merry-go-round.

Enter the banks. Any manager needs them. Unfortunately they are often not to be trusted, especially when they are getting squeezed from all sides because of the consequences of lending to politically correct companies that, everybody knows and always knew, have little chance of repaying the loans but have the implicit State "guarantee". And in another department somewhere, an analyst has made a bet on commodities which needs to be hedged. What better than to sell it on to unsuspection State companies?

That's not to mention the political appointees leading many of the banks. I have had the opportunity to meet many of them and I will only say that the political appointees obviously had no clue of what was going on, while those who have been there for many years and often have a personal or family stake in the business are much more on the ball.

One of the idiots was on TV today. Engº Faria de Oliveira stated that selling swaps to companies based on commodity prices or indexes that have nothing to to with their business is "a perfectly normal part of banking". Strangely, the banks are prohibited from selling such products to individuals, under european banking regulations, but companies are considered professional investors, even when their Directors are really only professional ass-kissers. That said, I have taken Caixa Geral de Depósitos to task for trying to sell complex products to my father-in-law - not that it was the branch manager's fault. He didn't have access to the documentation I pulled off the internet, in English, and handed him. Who was running the CGD at the time? You guessed it - Faria de Oliveira. But naturally, he had no knowledge of this mis-selling. A bank that big is run at a lower level. Doesn't get him off the hook though, as the Chairman and CEO, if it happened on his watch.

Another bank, one of the better run ones, once tried to sell me, as an FD, credit default swaps on various Portuguese companies, arguing that they would provide insurance against increases in interest rates. But surely, in interest rates rise, the chance of defualt also increases! They backed off once I pointed that out! Once again, the account manager didn't understand the product. Fortunately I have studied these beasts.

So the banks were pushing these products out to companies where the FD has no idea what they are because he is a political appointee with no experience of anything and needs to keep the banks happy. And he and his fellow Directors sign away the company's future. Who is to blame?

The bank is guilty of misrepresentation and will have to take a haircut.

As for the Directors, they are jointly and severally liable for negligent and ruinous mismanagement. So let them pick up the rest of the losses, personally. Maybe that would signal to the rest of the political community that incompetence cannot be tolerated, nor people who are incapable of admitting that they don't know what they are doing. Get rid of these guys and make room for people who do understand business and how to run a company. On the other hand, as the shareholder who would have to sue these individuals is the State, I can't see that hapenning.

So the taxpayer will pick up the bill, again...