In mid-2007, the Central Bank of Montenegro decided that First Bank, the bank controlled by the family of long time President and Prime Minister Milo Djukanovic, could fail. Internal documents from the Central Bank used words like “needs improvement” in describing the bank’s condition then replaced them with “urgent” and “critical state.” The bank, privatized only months before, was growing too fast and its practices were very risky, the nation’s banking regulator noted.
An analysis of eight Central Bank reports shows that the Central Bank was concerned enough about the health of one of Montenegro’s largest banks that it decided to act. After all, the bank’s deposits of public money including municipal, governmental and state company funds, had grown from €23 million in November 2006 when the Prime Minister’s brother privatized the bank, to €127 million within a year. The bank’s explosive growth and ties to a number of the country’s biggest projects made failure a dangerous possibility with implications that could undermine the whole banking sector. Central Bank documents show that the regulator hoped to avoid such a collapse through strong guidance and by having the owners put up more money.
But bank owners and members of the government did little to correct the problems regulators pointed out. Government officials only acted forcefully to save the bank when the Central Bank’s fears came true. At that point they adjusted laws, bailed out the bank with taxpayer money, didn’t prosecute criminal actions at the bank and ultimately sold the state energy company and put large amounts of money into First Bank – all of which kept the bank going.
The story is all told in a thousand pages of internal bank documents obtained by the Organized Crime and Corruption Reporting Project, which spent six months looking into the first family’s bank. The documents, never before released, expose corruption, greed and incompetence. They prove that First Bank was a business out of control – that it lied to regulators and that it benefited from powerful owners who protected it from real regulation.
The bank became the personal ATM of the country’s top. It was a bank that was not allowed to fail.
In 2007, Central Bank examiners worried mostly about First Bank’s loan practices, which they feared would lead to liquidity problems. The bank gave out loans liberally, often at very good terms for their important clients. Many involved the loan payoff coming in the form of a lump sum payment years down the road. No monthly payment was necessary. The terms also allowed for grace periods where no interest payments would be made for months or years. And while they paid no principal or interest, their cash deposits in the bank earned exorbitant interest rates of 8 to 10 percent. Many loans were not backed by enough collateral, or any at all. Sometimes loans started out backed by collateral, but it was removed later. Others loans were secured with cash that was earning more interest than then loan itself, meaning the bank was losing money on the deal.
Deals were made with business partners, officials from the ruling DPS party and important businessmen, but also with money launderers, drug dealers, cigarette smugglers and other questionable people
Many of these loans were for coastal property and developments including hotels and apartments. By 2006 when the first family took over the bank, the Montenegrin real estate boom was in full swing. Russian money of dubious origin poured into the region. Prices skyrocketed.
It was the perfect system – free money, booming real estate, a sympathetic government. How could anyone lose?
Central Bank examiners, however, saw a fundamental flaw. Too many of the bank’s loans involved lump sum payments and long grace periods. These loans are favored by developers who invest heavily in a construction project and then sell the project for a profit. Or by property flippers who in a hot market buy up choice real estate and then sell it a year or two later when prices were higher. Either way, a bank with too many of these loans doesn’t have enough cash on hand to do daily transactions. Regulators say a bank in such a condition is not liquid. That’s exactly what the Central Bank warned First Bank about.
The warning was prescient.
As the economy faltered, the bank faced a perfect storm: real estate prices fell, depositors took out money, loans became hard to get and Russian and other international investors shelved projects.
Suddenly, First Bank VIPs who had sunk proceeds of their loans into coastal property couldn’t pay their loans if they came due and were forced to sit on property. While the cost to them was low because of generous loan terms, it was devastating to First Bank. The institution had no money and no income for loans. Defaults increased in 2008. Veselin Barovic, a First Bank shareholder and friend of Milo Djukanovic, was one of the bank’s largest customers with €23 million in loans in connected companies but in 2008 and 2009 he could not pay his debt. The bank would have to liquidate some of his assets. The Central Bank said the bank had broken the law by overexposing itself to Barovic.
But often, the bank handled such problems by offering loan extensions.
The Central Bank ordered First Bank in November of 2008 not to give out loans. But even at its nadir, First Bank made loans to some VIPs. In 2010 the former husband of Ana Kolarevic, Milo Djukanovic’s sister, got a loan.
Many depositors went through the frustration of being unable to access or transfer their money starting in the summer of 2008. Things got worse as fall and winter approached. Even then, the concerns of VIPs were more important. A $7.5 million payment for a Madonna concert came due during the same time the bank was not honoring the money transfer requests from more than 200 depositors. The day of the concert, the bank had a backlog of €14 million in client payment transfer requests it could not honor, Central Bank examiners found.
Things got really bad at the end of 2008 when Lehman brothers failed and international markets locked up in a capital crunch of epidemic proportions. The bad time actually helped First Bank, which had been in trouble well before the crisis. The government took extraordinary measures and First Bank got €28 million from the government in loan paybacks and €44 million in taxpayer bailout money.
At this point, the Central Bank and First Bank clashed.
First Bank refused or ignored the regulator when it asked for records. Some documents mysteriously were lost. Documentation that was turned over to regulators was incomplete.
To the Central Bank, on the eve of the bailout, prudent banking practices dictated that First Bank should be taken over. However, a new government law that guaranteed 100 percent of all deposits in Montenegrin banks made a bankruptcy of First Bank too expensive.
“The collapse of the bank could cause network effects and create difficulties for other banks and the economy,” said Milenko Popovic, a professor at the Montenegro Business School, “but it is not a justification for the way the crisis was resolved. In this way you would award someone who caused it and save him instead of regulating it in a different way.” If the bank failed, a lot of the Djukanovics’ assets would be wiped out. Their bank stock, once worth €150 million could be worth nothing.
“One of the easiest ways to regulate was for the state to intervene, but in the way it was done in England, for example. Money put in was treated as recapitalization. That would be much fairer, even though it would not be sufficiently fair and would not punish sufficiently those who caused all that,” Popovic said. But that would also mean shareholders like the Djukanovic family would see their ownership diluted.
The decision was made to just give First Bank a large taxpayer loan.
There were still problems. The estimate was that it would take €78 million plus to bail out the bank. The money only temporarily solved the liquidity crisis at the bank and the bank had to pay it back in three months.
The Central Bank knew the collateral on loans was incomplete or missing. A draft of a special audit of the bank done by PriceWaterhouseCoopers in late 2009 and early 2010 said the bank could be exaggerating the value of its assets and its best estimate was that it would need €110 million to be liquid. The report was never released, in part because First Bank wouldn’t provide enough documentation to complete it. Even while requesting a bailout, First Bank’s own board of directors admitted they were not sure about the condition of the bank because of poor documentation.
Three months after the bailout, an assessment by the Central Bank showed that the ailing bank was actually worse off after the bailout. It still had no money, faced immediate debts and was not covering customers’ claims. The Central Bank urged a seizure. The government resisted.
The government and First Bank worked out a payback system even though the bank remained in a difficult situation. Repayment of the bailout has never been investigated despite the Central Bank’s requests that prosecutors do so, and despite questions about the plan.
The payback scheme involved wiring money to the government and the government wiring the same money back to another account in the same bank. There was no payback. At the start of one payment of €11 million, First Bank only had €19,000 in its account. When the money was wired back into the account of the regional water works, the debt switched from the government to the government water agency.
For all such trickery, the bank remained in trouble.
After frenzied negotiations between Djukanovic and Silvio Berlusconi, the president of Italy, the Montenegrin government announced in October 2009 that it had sold one its crown jewels – the state electric company. Electricity companies are sure money makers, and Elektropriveda controlled the Montenegrin market. The government agreed to a deal which involved A2A investing money – €100 million that was deposited in First Bank. The bank also earned money from the deal. A2A would take over a share of Elektropriveda.
The money saved the bank and just in time.
But the people of Montenegro lost. It wasn’t long before energy prices began rising.
The government wasn’t done. It passed a law on the Central Bank but added a legal manipulation ousting the governor of the Central Bank. This despite the fact that the Central Bank is supposed to be an independent body and the government should not be able to fire the governor. The procedure gutted independence of the office.
As proof of that new dependence, the new governor appointed was the former director of First Bank who has asked for the first government bailout.
“I thought at the time that this is a law in which, instead of the governor of the Central Bank, we will get a governess of First Bank,” said Popovic, the business professor.
Ljubisa Krgovic, the former governor and president of the Board of the Central Bank of Montenegro, refused to comment on the documents OCCRP obtained, his ousting or a law that prohibits him from disclosing information.
He provided a single sentence statement: “Montenegro needs an independent Central Bank which will not adjust its whole system and its basic policies (supervisory, regulatory and obligatory reserve policy) to a single bank.”
The European Union agreed. In the Montenegro Progress Report from Oct. 2011, the European Commission wrote: “The law also has to safeguard institutional and personal independence, especially regarding the case of the Governor of the Central Bank.”