KYC – Know your customer, not just your commission

Which customers are good customers and how you acquire them is a hot topic. There are some very nice private bankers from St. Gallen who failed to head their own advice and are now feeling the full force of the US Attorney General. The quest for a fast buck coupled with cursory due diligence is not new. This week’s post has some real Hollywood action and takes place in locations familiar to readers of Robert Ludlum novels. Unlike the adventures of Jason Bourne, this is all true.

Summer 1990. It’s a warm sunny Friday afternoon in Zurich. I’m in the office, at least in body. My thoughts are on the weekend and that in a couple of days I’ll be in London to catch up with my girlfriend who has been on a bit of a world tour. My reverie is interrupted by a phone ringing. “Olaf, Glynn from London here. I need you to help me with something.” Glynn works in Client Service for Goldman Sachs in London. We know one another, but we don’t have much interaction. He looks after the operations side of the client business we have in the Zurich branch, I do settlements for the local Swiss entity. Normally, two different worlds. He starts to explain why he needs some local support.

Sometime in the Spring of 1990, a Luxembourg based holding company has called one of the private bankers at Goldman Sachs & Co.’s Zurich Branch, looking to borrow some Swiss francs. Goldman does indeed lend money but only against collateral. What the Americans call a margin loan. “What collateral would you have?” asks the eager banker, proverbially seeing dollar signs from the generous sales commission for lending money to clients. “Shares in a listed Swiss company”, says the client. “What could be better, 200 over LIBOR and we’ll give you 50 cents on the dollar”, which in layman’s terms meant that for 100 francs worth of shares Goldman would lend 50 francs and charge a rate of 2% over the current interbank rate. “Done” said the client. Shares came in, money want out. Simples. A few weeks later, the phone rings again; “Those Swiss francs were awfully good, would you be willing to lend us some more of them please? We have some more of those shares as collateral” asked the client. “Certainly sir,” replied the banker, mentally totting up his commission once more. “Same as before, 200 over, 50 cents on the dollar”. Shares come in, money goes out. So far, this was nothing special for the Operations side of Goldman Sachs. A couple of weeks later, the price of the shares has dropped and Glynn has had to get involved for the first time, asking the client for more collateral. The best the client has been able to offer are some bonds issued by the listed Swiss company. Well, if it comes to the worst, bonds are better than shares, so Glynn has taken in the bonds. By now the client has borrowed over 10 million Swiss francs. The share price though continues to drop and Glynn has to ask for more collateral. Offers of either shares or bonds associated with the “Swiss listed company” were politely declined. Faced with Goldman’s demands, and unable to repay the loan, the Luxembourg holding company, played its last card: shares in a second tier Spanish public company. Registered shares at that. Ever eager to secure its interest in this additional collateral, Goldman sends off the share transfer form to Madrid. Back then registered share settlement was generally a slow process and in Spain it was slower than most. So, Glynn was not expecting instant results, but a few weeks later, Glynn calls to check on the agent bank in Madrid to check on progress. He is surprised to hear that the shares have not been transferred, because the wrong signatures are on the transfer document. He starts to investigate in order to find out whose signatures would be valid and quickly discovers that the authorised signatories are all officers of the Swiss listed company and that the Luxembourg holding company is the major shareholder in the Swiss listed company. The share price of the Swiss listed company is still heading South.

These are worrying signs, red flags, and on consulting with the European Head of Operations, Glynn decides that he needs to get himself some local Swiss help. Me. Hitherto, blissfully ignorant of these goings on. Glynn asks me if I can get myself to Geneva, where the Swiss listed company has its headquarters and see to it that I get valid signatories on a share transfer form. I say I will help, put down the phone and start to contemplate the logistics of this. The phone rings again. it is the Head of Operations, Peter Friend. A venerable gentleman and old school operations guy. “Olaf, I gather you are going to be helping Glynn with this problem. I want you to drop what you are doing and do whatever it takes to get this done. I want those shares transferred. Do I make myself clear?” This was clearly one of those career defining moments where the only tolerable answer is yes, or at last it is when you are a junior oik and need to pay the rent. So I sorted out the travel, even renting a car so I could have a mobile phone. Company Blackberry’s were not a feature in 1990. I then wandered over to see the banker responsible for the account to get his help in making some appointments, getting to see the right folk and getting what I needed. I was dismissed in manner that a feudal lord in the middle ages would dismiss his horrid serf. The “Masters of the Universe” attitude, whilst not typical of Goldman Sachs, was still pretty common at the time. Adolf, a typical banker down to his wing-tip shoes and the designer duelling scar, barked at me: “Me, help with this. Absolutely not. This is an operations problem. I don’t trouble myself with such trivia. You are operations, it is your job to sort it out”. No help at all, but mental notes were being made and scores were being kept. “I won’t be in Monday, ” I told my boss. “Mission from god!” I joked, just telling him I had to help out the Ops guys in London by commandment from on high.

Monday morning found me on the plane to Geneva, renting the car in order to get a mobile phone, one of those beige brick Motorola numbers with the charger that was as big as two bricks. Without the aid of a SatNav, I found my way to the headquarters building and waited for the doors to open. Although my intended arrival had been advised by telex, nobody was expecting me. After a lot of waiting and twiddling of fingers, I managed to be meet a General Manager, who told me that he would track down the signatories and I should return after lunch. After relaying news of this modest progress to London, I went in search of lunch and also checked in with the Zurich office. “What are you doing?” they asked. “In Geneva, but can’t tell you exactly, top secret, mission from god”. “Well, you need to call your girlfriend, because she just called from Hawaii and asked where you were!”. Urgently, I dialled the number where my girlfriend was staying. She had been very pedantic about meeting up in London and all the more so, because the firm had cancelled a previous break I tried to take. “Where exactly are you?” she demanded. “In Geneva”. *Doing what exactly?” “Can’t tell you, mission from god”. “You will be at Gatwick to pick me up at nine on Wednesday won’t you? Goldman is not going to mess up your holiday again are they? If you are not there, I am getting straight back on the plane to Hawaii”. “Don’t worry, nothing will get in the way, all will be fine. Fly on to New York and i’lll talk to you tomorrow!” With disaster averted, it was back to business and back to see the General Manager. He told me that one signatory was there, but Mr. Parretti the other one I would need, was in Los Angeles. Sensing a bit of the old run around treatment, I said that was fine, we had an office in LA. Just tell me where we can find him. I was made to wait some more and then told that in fact, a Mr. Fiorini would give me the other signature, but he was in Paris. Remembering the command from on high to do whatever it takes, I managed to get a fax copy of the signature and an agreement that I could collect an original in Paris the next day. Well, this was turning out to be fun; Geneva, Paris, rental car, mobile phone, sitting in the park like a spy calling in.

The next day found me in Paris and killing time in Goldman’s local office, waiting to meet the elusive Mr. Fiorini. The phone rang. It was Peter Friend, calling from New York, to check on my progress. “Good work. When you have the second form, I want you to get on plane to Madrid adn stand there until this thing is done, ok!”. Now this was getting tricky, as not only was I due to be in London, but the girlfriend, so enamoured of Hawaii, had firmly declared her intention to return there if the firm once more messed up my holiday. Taking a deep breath, I said “Peter, no, I can’t do that. You know Alexandra, my girlfriend. I have to meet her tomorrow in London, or else”. “Fine, call Larry in London, get him to have somebody meet you and go on to Madrid.” By now this was taking on the shape of a Robert Ludlum novel, but was becoming more irritating than fun as my personal life came under threat. I called Larry in London and asked for help. As we talked he told me he’d been on the phone to Zurich and heard my girlfriend calling. My office mates had told her I was not there and in Paris. She apparently had thought it was a wind up. Breaking off momentarily from the firm’s business, I rushed to sort out my own. Tracking down my girlfriend in New York, explaining away being in Paris and swearing blind I would be at Gatwick at nine the next morning and that I understood she meant it when she said she would go straight back to Hawaii if the firm messed things up for me again. And no, I couldn’t tell her what I was doing in Paris. Personal disaster contained, I jumped in a cab to Charles de Gaulle for the flight to London. At Heathrow, I was met by another Goldman staffer, who was booked onto three different flights into Madrid the next morning. I handed over the package and went on my way. An amusing couple of days, but now I had better things to focus on. There was no drama at Gatwick, my girlfriend arrived and put the thing out of mind.

At the beginning of September, this story came back to haunt me. Once more on a Friday afternoon, Glynn called from London fot my help. The Spanish shares had indeed been transferred, but the share price was continuing to slide. Goldman had called the loan in and agreed a re-payment schedule with the client. That agreement had fallen over at the first hurdle, with no payment being made for the end of August. So, back on the plane, back to the car rental company to get a car and a phone. More waiting around on a park bench, mobile phone in hand. There was no pretense any more, we were dealing directly with the folks from the Swiss listed company. “Don’t you trust us?” they asked of me, as I stood there asking them to meet the payment. It took a lot of phone calls, but eventually I was able to confirm receipt of some Swiss francs. The money apparently came via the Rotterdam branch of Credit Lyonnais. Now you do not need to be a forensic scientist to see that some thing is not quite right when the Swiss francs you lent to a Luxembourg holding company are coming back from that unrelated a source. Never mind all that though-, my turning up and nagging meant we had the money. In the meantime, this was becoming a celebrated case internally and the subject of some gossip. Our local office manager pointed out how Giancarlo Parretti was now buying MGM in circumstances that one might describe as dubious. Sure enough, the September repayment was not on time and sure enough, the phone rang with Glynn once more conscripting my services. Now this was getting a little tedious, in fact it was pretty obvious to my mind that if this had not been Goldman Sachs, I would have been enlisting the help of some big guys with baseball bats and broken some bones. On this occasion, I was shown into the office of the president of the Swiss listed company. Once again he tried the “why don’t you trust us?” angle, which I told him was lost on me. As the delaying and dissembling went on, I became more and more frustrated, so I asked if I could use his Reuters terminal and his phone. “Why?” he asked. “Well I need to check your share price. If I have it right, I think we could dump your stock and would cover the loan at 25% of where the price is now”. “You wouldn’t do that would you?” he demanded. well truth be know, I couldn’t do it, as I had no authority to, but it sounded good. Well, a few more delays, another nice lunch in Geneva, some more sitting on a park bench with mobile in hand and sure enough we had the next tranche of the Swiss francs back. Again, courtesy of Credit Lyonnais in Rotterdam. By now Goldman had a lot of collateral, which forced the borrower to repay.

It took a couple more trips down to Geneva to get the last of the money back. Internally at Goldman Sachs, amongst those in the know, I was quite the hero. It did trouble though that the private banker had been paid for this yet not offered an iota of help. On a trip to New York, I brought this up with two of the senior folks in Equities Administation. David Darst and Bob Castrignano, both of whom are text book examples of the truly great characters in our industry. Neither was happy and Bob saw to it personally that every penny in commission was taken away from the banker.David went on to great things at Morgan Stanley and on CNBC, whilst Bob found a calling in retirement when he jumped in to help the decimated Sandler O’Neill rise from the 9/11 Ashes. Great guys both and the anti-thesis of all the bad characters in the banking world today.

Just a few months after we had the last of the money back, the Swiss listed company went bankrupt. The sum involved was about CHF 5 billion, the biggest public company bankruptcy up to that point. That company was Sasea. The two principals found their way to the courts and in the case of Florio Fiorini, to jail. The MGM escapade brought down Credit Lyonnais. It turned out that Sasea was financed by, those two stalwarts of honest and upright morally correct behaviour, the Vatican Bank and Banco Ambrosiano. As the stories emerged, I was shocked; I had been out there on my own fighting the good fight, doing Goldman’s work and all on my own. And this was before Lloyd Blankfein announced that Goldman does God’s work

For more on the shenanigans of Mssrs Parretti and Fiorini, Fortune has two authoritative articles:

Lessons Learned: Really know your customer and just because it is a simple margin loan does not excuse your checking the collateral and its relaltion to the person borrowing the money.

Epilogue: Not long after my own involvement in the grubby case I recounted above, Goldman Sachs found itself very publicly involved in the affairs of Sir Robert Maxwell, or Cap’n Bob as he was known on Fleet Street. Then suddenly, Cap’n Bob was found dead, floating in the Mediterranean near his yacht. During an Operations Management call, one of the managers asked the partner in charge of Ops, Rick Adam, if there was any comment he would make on the incident. Rick, an ex Marine, was obviously constrained by the fact that lawyers were involved and things were all sub judice, but he offered the following comment: “There is little that I am allowed to say, however there one thing I want to make clear and that is that those who borrow money from the firm should either pay it back or learn to swim.” Priceless.

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