Former minister of finance Lajos Bokros calls “conflicting” and “suspicious” information coming from government sources and people implicated in the brokerage scandals.

Hungary’s general prosecutor’s office and the central bank are conducting official investigations into the Buda-Cash, Hungaria Securities and Quaestor brokerage scandals.  The central bank is doing so in its capacity as the regulatory and supervisory agency not only for the banking sector but also for insurance and capital markets.

Bokros says all three brokerage houses went bankrupt as a result of malfeasance or criminal activities and that regulatory officials should have started their investigation long ago.  He says Hungary’s financial organizations regulatory and supervisory agency “should have performed regular investigations and audits every year.”

He says it is “suspicious” that the government is talking about “fictitious bond issues” when it is “next to impossible in a situation where each and every specific issue of any kind of security must be individually approved by the regulatory and supervisory agency.”

Also suspicious for Bokros is the fact that on the very first day of its investigation in the collapse of Quaestor, the deputy chairman of the central bank was able to announce that the problem had been ongoing for fifteen years and that he was able to declare that HUF 150 billion was missing.

“If this is the first day of the investigation, how did you know?  And if you had known, why on earth didn’t you start investigating much earlier?” asks the former finance minister.

Government failure

“What we have here is not only market failure but also government failure,” says Bokros, who headed the Budapest Bank and worked for the World Bank for a number of years. “Capital markets are among the most regulated areas of business life everywhere, including Hungary. It seems they were asleep at the wheel.”

“Fictive bonds” a fiction

Bokros says there is no way for a brokerage house to issue “fictitious bonds.”

When a brokerage company or a bank wants to issue securities to the general public, it has to put together a long prospectus that should contain all relevant information, including how much will be collected by way of the new issue, what is the face value of each individual piece of paper, which is not printed . . . but appears as a printed code in a central depository agency.   Whenever you make a transaction, including selling one piece of a bond, then it has to be recorded and reported to the authorities and to the general depository organization immediately.  So there is no such a thing as a”‘fictitious bond”.

He says it is a different question altogether what the “purpose of the bond is and how the proceeds will be invested.”  Bokros suspects there was wrongdoing.  “We don’t know whether this money was applied according to what was in the prospectus.”

Three problems

Bokros identifies three main problems.

State-owned companies deposited government securities with a private brokerage firm

Bokros says government fiscal agencies such as ministries cannot keep money on hand.  “This is the number one rule of the treasury management system established 20 years ago.  The Ministry of Foreign Affairs does not have money.  It only has appropriations.  It will end up having money only if it has obligations to pay outside of the treasury management system.  So they cannot invest anywhere.”  Bokros says state-owned companies “can have provisionally superfluous funds which they can invest only into government securities.”  He says they can carry out this investment either through the treasury or through individual brokerages, but the real question is “why on earth did they choose Quaestor while there was a free of charge service offered by the treasury management system?”

He speculates that the government wanted to generate profit for certain brokerage companies that were “close to [Hungarian Prime Minister Viktor] Orbán’s heart.”

Doing business with Quaestor was a conflict of interest for the government

“We should not forget that Quaestor brokerage company was managing even the visa issuance office in Moscow, which is an outright conflict of interest.”  Bokros says the visa issue is important because it shows that “the government did not think it important to keep members of the business community at arm’s length.”

“One of the most important rules of prudent governance is that you do not mix fiscal issues with business issues.  It looks like it’s not only the visa issuance office which has some dubious activities as a consequence of being under the management of a profit maximizing brokerage company, but the very fact that there is a 100% state-owned company, the Hungarian national trade house, which is under the new jurisdiction of the renamed Ministry of Foreign Affairs and Trade, and this company has put its money into Quaestor instead of buying government securities as it is obliged to do from the treasury management system.  So this is yet another channel where taxpayer money might have leaked out to business agents, which is contrary to the law.”

Criminal acts on the part of public officials

Insider trading

Bokros says the third important issue was whether there was any insider trading taking place “as a consequence of the Prime Minister proudly and publicly declaring that he was the one who notified some of the ministries and some of the other organizations of the state, including state-owned companies, that they should withdraw their funds from Quaestor before it was too late.”

Bokros points out that Quaestor owner and CEO Csaba Tarsoly filed for bankruptcy on March 9th but, according to the former minister, “deliberately failed to put together the documentation in the proper way because this was exactly the day the prime minister according to his own words was notifying some of the state organs.”  He says state organs were able to withdraw their own money because Tarsoly, as an owner of the brokerage company, did not countersign the application he submitted as CEO.  The result, according to Bokros, was that the state had ten days to withdraw its own money “because there was a second attempt of filing which succeeded on the 19 March” adding that “in the meantime, a good number of organizations were able to withdraw money, and that was the thing the prime minister was very proud about.”

Asset stripping

“At the same time when the small investors were gathering in front of the closed doors of Quaestor, they were told that the company was under bankruptcy protection and consequently could not get their money.  So there was a clear distinction to be made between small investors and state organs, and if that was truly what was happening, then it was not only an insider trading type of criminal offense but also asset stripping.

“Stripping assets out of a bankrupt company in order to minimize the losses of one type of investor while at the same time as a consequence increasing the losses of another type of investor.  Not only small investors but also state organizations lost a fortune because the Prime Minister notified only some groups of state organizations, some ministries, but not others, and deliberately not the local governments.  Many local governments lost their money.  Local governments are part of the state.”