Hungarian National Bank receives "A+" for panic-mongering in wake of broker scandals

March 18, 2015

Queues of disappointed customers flood offices of Quaestor at the Eastern Hungarian town of Debrecen / Photo:

Translation of an article by Ágnes Gyenis, “Fascinating stories” (“Lebilincselő történetek”) published in weekly print HVG on 14 March 2015. pp. 64-67.

Inner battles within the governing Fidesz party seem to have shaken domestic financial markets in Hungary. The series of broker-company bankruptcies would be turned into a virtue by the National Bank Governor, but it might also cause the downfall of the minister of foreign affairs and trade, while hundreds of billions of forints in customer savings could vanish.

The Hungarian National Bank received an A+ for panic-mongering in the past two-weeks: so far, the balance sheet consists of the failure of two broker companies and one bond-handler, and revelations of a grandiose economic crime causing more than 300 million forints in debt, over many years. The resulting deficit is about 1% of the GDP, and this is already a cirtical mass in the Hungarian financial environment.  It potentially undermines customer trust, shakes the market, and rearranges the power structures. And this time it is not “foreign predatory capital” that is on the losing side, as all the failed companies are in Hungarian hands.

The whole thing however offers an excellent terrain for political bullfights, and the debate is about whether it is the responsibility of the left of the right that financial activities in effect became an organized crime scene in the heart of Europe. In the meantime, broker companies Buda Cash Brokerház, Quaestor and Hungária Értékpapir Zrt., so far luring in scores of customers with promises of exceptionally high interest rates on savings, now face desperate small-investors who are being denied basic information, such as whether they still have their money or not.

Money night was the first time in Hungary’s post 1989 brokerage history, that the customers of  mega-bond provider Quaestor Financial Hrurira could not expect any institutional protection. “If buyers of Quaestor bonds placed them at a brokerage or a capital fund manager as a deposit, even if the official paper were lost, or didn’t exist, the Investor Protection Fund (Beva) would compensate them up to HUF 6 million per person based on market value. But the single fact that such a bond-provider that is not even a member of Beva, is unable to pay, the responsibility of compensation rests entirely with the fund manager” Beva executive Péter Farkas informed us about the disappointing facts.

All this was complemented by a shocking comment on behalf of László Windisch, vice-governor of the National Bank, saying that Quaestor was significantly exceeding the HUF 70 billion threshold on bond-issuing last year, selling HUF 150 billion worth of bonds to customers illegally. If this is true, than Quaestor committed such a shameless, unprecedented security fraud so as to render virtually insignificant the 2003 “broker-gate” case involving Attila Kulcsár. The deputy governor’s duty in such a situation would have been to provide fact-based accurate assurances to the public instead of sensational statements.  Instead, the vice deputy governor was boasting of the Central Bank’s exceptional ability investigating financial crimes, without providing any evidence of his claims. Furthermore, he did not address the issue of how such a crime could have happened at a company whose activities were constantly supervised and licensed by the state.

In a strange way, it did not occur to the National Bank before that Quaestor used new bond-issues to pay for the expiring bonds (this is what supposedly what happened on 18 March as well), and did not used the incomes of their widespread investments that were supposed to be the target of the tens of billions of forints they received from customers. Their only excuse could be that information sheets provide a passage that is mostly only understandable for those really paying attention according to which that their securities are extremely risky. A few could grasp that.  In effect, Csaba Tarsoly was running Quaestor as a family business, collecting investment money without any banking guarantees whatsoever, yet presenting the company as a financial institution itself. He then used the money he gained in an extremely complicated risk-capital manager, investing in oblique opportunities in almost every sector, from healthcare to trade, communications, tourism, football, the motion picture industry to visa issuing.

The National Bank, however, was able to rule out Quaestor’s excuse that the present bankruptcy was not their fault but the result of a panic triggered by the Buda Cash scandal, as too many customers were rushing to withdraw their money, in a single stroke. The pay-out moratorium effective as of last Tuesday morning, and a central bank suspension of Quaestor as a company, and a appointment of a financial supervisor did not only cause harm to those planning to sell their bonds after that time, but also those placing sell orders before the announcement of bankruptcy.

One point of Quaestor’s application for bankruptcy that helps shed light on the background of the processes is precisely the one asking for immediate state intervention. The wealth of the holding would cover the losses – Tarsoly argues – but it cannot be sold on the market during the 120 days of the bankruptcy process. The real estate wealth of the company, said by the owner to amount for HUF 50 billion (including the Duna City project, one of his unfinished dreams), are probably worth half of that price if sold in the market on this day to compensate the customers. Sources told HVG that a viable solution would be if the state would buy the Győr ETO football club with its stadium and additional facilities. This version is rendered less realistic, however, by the fact that the HUF 30 billion Győr ETO investment includes a loan of HUF 18 billion forints provided by the Hungarian Development Bank, therefore selling the facilities would leave only HUF 10 billion for compensation purposes.

According to HVG sources, not long ago, Tarsoly was in such a confidential relationship with Péter Szijjártó, Minister of Foreign Affairs and Trade, that the minister told then Eximbank-leader Roland Nátrán not to entrust to foreign banks the bank’s bond issuance, but rather to  entrust it to the Ministry and to Quaestor. These  plans have never been realized. It is not known if this was the reason why Nátrán had to leave his position at Eximbank.

This case, however, probably exacerbated an already existing tension between National Bank governor György Matolcsy apprentice Nátrán and Szijjártó. The Quaestor case is especially unpleasant for the minister, as the Ministry had quite a number of joint ventures with the company and its principle owners, including the state trading outpost in Moscow, and its visa center. This case was already problematic for Szijjártó when the police arrested Szilárd Kiss, the former diplomat responisble for financial matters in Moscow under the second Orbán-government. Kiss’s Russian wife financed the centre, together with a company owned by Tersely.  And  they appeared together at a ribbon cutting ceremony of the Moscow centre.

At thse same time, the rapidly decreasing popularity of the Orbán Government could decrease further by the fact that their main objective is to enhance the “cleansing” of the financial market resulted in quite a number of small-scale enterprises, and middle class private investors, losing all their savings in the process. Brutal, and badly communicated procedures could be much stronger than the joy of putting fraudsters behind bars, a expectation that has clearly been articulated by prime minister Viktor Orbán in a radio interview. Those close to the Buda Cash scandal do not understand why the National Bank, that at this point also has exclusive rights for reorganization, did not choose to to sell the customer base of DRB Banks to one of the state-owned financial institutions with a strong background. This is even less understandable considering the fact that the deficit of the banks in question was the same when they received licenses to become banks as opposed to their previous status as mutual savings institutions. And even if these DRB banks had HUF 70 billion in deficit, every party could have been better off with a painless reorganization process than with having to bail out the National Savings Insurance Fund, that will not even be able to compensate most of the losses. “What is this if not a political alchemist’s lab?” one of the HVG sources asked.

Even though the National Bank is constantly denying allegations about not doing its job properly by really controlling the companies recently gone bankrupt, facts present a different picture. CEOs of Buda Cash, who have recently been taken into custody, and who were questioned by police on Monday, will not provide detailed testimony until all documentation seized by the police is returned, attorney Péter Zamecsnik told HVG. The executives otherwise admitted that Buda Cash has a rolling loss that they have constantly made disappear ever since the 1998 Russian financial crisis. This deficit has grown to HUF 70 billion with the the crash of the Swiss franc in January.

This situation could have no longer been handled within the company, this is why the executives decided to turn themselves in. First, they contaced an unnamed minister, but he refused to be an arbitrator, why is why they walked in to the National Bank, before they would have sought them out. Vice-governor Windisch announced the hundred-billion forints deficit of Buda Cash based solely on the information provided by the CEOs the next day. At that time, controllers had only been working at the company for two hours, so they could not have any credit in uncovering the fraud. The uncertainity of state authorities could be illustrated by the fact that on Monday they only accused Buda Cash executives with a 60 billion fraud against DRB Banks that has happened in 2014-15, basically ignoring that their dubious activities were going on for the past 17 years.