Stinging criticisms fly in BES/Novo Banco inquiry

The author of a secret report has laid bare damning findings into the way the Bank of Portugal failed to act decisively to avert the collapse of Banco Espírito Santo in 2014 and ensure assets at Novo Banco, which was created from its ashes that same year, were not sold off on the cheap.

João Costa Pinto, an economist and former vice-governor of the Bank of Portugal, opened a series of parliamentary hearings which will be part of a public enquiry into alleged malpractice, mismanagement and supervisory failings by several entities concerning Banco Espírito Santo and Novo Banco.
The hearing this week, resulted in several criticisms from Costa Pinto of different entities involved in the whole process from the collapse of BES in 2014 to date.
This included criticisms of the Bank of Portugal as it was led by Carlos Costa, other regulators, the Government, and even the management of Novo Banco itself, accused of making “disastrous sales”.

Bank of Portugal – “slow and without energy”

On the Bank of Portugal, Costa Pinto said that its supervision was slow and lacked vitality in dealing with events at BES. He gave two examples: two warnings from the central bank’s technical experts had been issued about BES’ non-financial exposure (2008) and about the overly complex structure of the Espírito Santo Group (GES) which made it difficult to supervise (2011), well before it was wound up, and claimed events were not closely followed by the supervisory authorities.
“The supervisor did not act soon enough or with the energy with which it should have acted before the collapse of BES,” said Costa Pinto, adding that had it acted with “more vigour” it could have “avoided or minimised problems”.
Costa Pinto also said that his report, which is “an autopsy” on BES and allegorical patient’s clinical case notes of the ills of Novo Banco, should have been made public by the Bank of Portugal “a long time ago.”

Flash sales

Costa Pinto also criticised the terms of sale of the GES insurance company Tranquilidade in 2014/2015 to Apollo Global Management, and the sale of problematic assets by Novo Banco after its sale to Lone Star in 2017.
He pointed to what he called “a lightning shift from a perspective of continuous management and (prudent) taking advantage of an asset’s value as much as possible, to a settlement perspective that explains a large part of losses and capital calls,” in other words “flash sales”.
The flash sales “change everything, the losses of value are immediate. And when you decide to mix garlic with bells, chalk with cheese, good and bad, it is a recipe for disaster,” he said, levelling criticisms at bank’s management presided over by António Ramalho regarding its accelerated sale of toxic assets.

Removal of Ricardo Salgado

Costa Pinto also said that the Bank of Portugal had the legal powers to remove the former chairman of BES, Ricardo Salgado – who once bragged that he was “master of the whole lot” — much earlier, yet did not do so.
Costa Pinto also regretted that that the report which made a critical analysis of the supervision of BES had “not been discussed” and instead had been “shelved for years”.

CMVM roasted

The other supervisor, the Portuguese capital markets regulator CMVM, was also roasted by the author of the report at a time when it was presided over by Carlos Tavares and which had either failed to work together with the Bank of Portugal on the BES matter, or if it did, did so ineffectively.
In this he was referring to financial schemes that were used to finance the group by the issuance of ESI (Espírito Santo International) commercial paper or short-term unsecured promissory notes that were sold to bank customers at branches which resulted in thousands of small-time investors losing money, including some that lost their savings.
The problems that cropped up at ESI almost had a “domino effect”. “If ESI had become insolvent, this would have meant that the shareholders would have lost control over BES itself,” said Costa Pinto.
The report suggests that neither the Bank of Portugal nor the CMVM acted in a timely or adequate fashion and did not coordinate their response or supervision in time.

Governments blamed

In relation to the way political power acted, Costa Pinto said that twice, but not for the same reasons, Portugal had caved in to “European bureaucracy” whereby they took the decisions and we footed the bill”.