by Peter Kysel
It was exhilarating to work in a new financial market where it was possible to obtain quick and helpful answers from the government. I picked up the phone to discuss the issue with the Ministry of Finance. The response was simple.
“Put the request in writing, with a justification to reassure the investors. Attach your wording, for a government decree on property rights.” I did that and two days later the decree was passed and incorporated into the bond prospectus. It guaranteed all investors full ownership rights.
Foreign investors bought their first domestic Czech bonds in fifty-five years. As a result of the decree, financial institutions could issue bonds and mortgages. The wheels of finance began to stimulate economic activity.
“Yes,” I punched the air childishly when the bonds had sold out.
“We have hammered another nail into the coffin of their slump economy.”
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Nation’s Stockbrokers
The Czech population loved voucher privatisation. The second wave of mass privatisation was launched in October 1993. Overnight, Czechs became the highest shareholding nation in the world. Shares of 1849 privatised companies and 550 privatisation funds were publicly traded in 1994.
Our team had the task of ensuring that 8.5 million people, who had participated in privatisation, could trade their shares. Many of them were keen either to add to, or to sell, their holdings. We had to provide them with timely advice and an easy way of trading.
In response, we appointed three bankers from within each KB’s branch, as investor advisors. Colleagues in our office coordinated their work and handled all dealing. I mused
Six month ago, these dealers didn’t know what a stock exchange was.
Our stockbroking team, including advisors at the various branches, increased to twelve hundred people. I was anxious about their professional knowledge and work ethic. We supplied trainers and circulated periodic briefing notes and procedures to prepare staff for the expected flood of stock trading. This was not enough. We needed to communicate the importance of the task in hand.
I called all our advisors to Prague to stress the significance of their jobs and to provide training. KB hired the ČEZ Praha conference centre in Vysočany.
This company was previously known as ČEZ Stalingrad. I had worked there on a drilling machine, during my re-education sentence. I had made my first public speech in this conference hall, as a nineteen-year-old student.
I had a vivid memory of that speech and its rejection by the ČSM (Czechoslovak Union of Youth) congress. I was ejected from the hall for my insubordination to the Communist Party. I could still see the faces of the delegates and a thousand eyes watching me in silence as I walked the path of shame between the rows of seats.
I had no one with whom I could share these emotional memories thirty years later. I was trembling as I climbed the platform to welcome a thousand of colleagues from all branches of the bank. This time my speech received applause. The subsequent presentations went well, we split up the delegates into smaller groups to train them and followed up with training programmes in country districts.
“The bank branches are ready to deal on the stock exchange,” reported Mr Ptáček confidentially. I looked at him in total surprise. Ptáček was supposed to lead the red wolves’ charge for us to fail. Has he joined the winning side?
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First Stock Market Listing
Our next challenge was the preparation of KB’s shares for official listing on the newly opened Prague stock exchange. The team was noticeably positive, encouraged by the success of the ČEZ bond issue. Preparations went without a hitch. IBD was getting national exposure. The media led the news with the story of the introduction of KB shares for trading on the stock exchange.
KB became the first Czech listed company in living memory. It was a clear signal that the socialist economy was being cast aside. The listing went ahead at the nominal price of Kč 1000 per share. As the price rose, the media went ballistic. Most of the employees were shareholders and were making good profits. The investment banking staff were beginning to enjoy their high profile within the bank.
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Computers Crashed
Our stock market dealings were multiplying from one month to another. We began to run into computer capacity constraints. In early November it became apparent, that our software programmes, which linked KB branches to our central dealers in Prague, were having problems with the volume of trade.
The British software supplier, Logica, was slow to respond to finding a solution. They bungled the job and our software problems became progressively worse. Our dealing system crashed on St Nicholas day in December. Branches had to place the dealing orders by phone in the evening, on transactions for the following day. Dealers had to work through the night to cope, but the volume of trade kept rising.
IBD became the largest stockbroker in the country. We handled a third of the total daily volume of the stock exchange. The reputation of KB was at its peak. The British Euromoney magazine gave us the award for the ‘Best Securities Firm in the Czech Republic in 1993’.
Internally though, we faced a crisis.
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Motivation
We were let down by Logica – their software fix failed. Our dealing system had to either be upgraded or replaced. Logica offered to deliver an upgraded system within four months. It would take a further couple of months to implement. Another supplier would take at least as long. It was all bad news. KB branches would have to refer clients to our competitors. I called a meeting of the KB’s programmers to try to find a solution.
“The Titanic has hit an iceberg. Logica misled us” said Mr Ptáček. There was silence. Then the head programmer rose.
“We’ll have to upgrade the system ourselves.”
We looked at him in disbelief.
“How long will that take?” I asked.
“If we cancel our Christmas holidays, we could do it in less than a month. We’ll design the system to be more robust and scalable.” I listened to his offer astonished. These were the people who used to vanish from their offices at lunchtime on Fridays. I asked him for confirmation.
“Why do you think you can deliver? Why are you prepared to sacrifice your family holidays for this project?” The head programmer coughed and said,
“IBD has taken on both Czech and foreign banks and beaten them. Our investment bankers are the elite team of the bank. We programmers want to be part of this success.” I was at a loss for anything to say. At that point a dealer rushed into my office
“The stock exchange computers have crashed. All dealings have been suspended. They don’t expect to reopen for trading until the middle of January.” There was audible relief and laud applause.
“Well that gives us a bit more time. God is on our side. We will deliver,” exclaimed the head programmer. His team echoed his words. These guys did not report directly to me. I had to trust them, and I took the risk.
“OK, let’s go for the internal solution,” the head dealer joined in.
“We’ll work directly with the programmers over the holidays, to make sure that the dealing system works.” In response I called Mrs Fisher.
“A bottle of ‘Becherovka’ and canapes for the team please. Let’s propose a toast to our new software. We’ll call it project Phoenix.”
The programmers and the dealers delivered Phoenix on time. When the stock exchange began trading in the third week in January, our software smoothly linked in. It all worked without a hitch and we coped with the accelerating volumes of business.
I was moved by my colleagues’ motivation and proud of their achievement. KB maintained market leadership. The Phoenix software raised our brokers’ productivity and the programmers became part of the bank’s elite.
Driving to the airport I remembered my chat with Pavel after our tennis game.
Pavel was right. My colleagues are educated and bright. When motivated, they can take on anyone. If they keep on performin
g like this, jobs from the rest of Europe will migrate to the Czech Republic. This country will be prosperous again.
On my flight to London, I mulled it all over. The Phoenix achievement was the perfect antidote to my agonising about the red wolves. Fears that my patriotic commitment was all just a romantic mistake began to fade away.
One day the red wolves will be a footnote in history. Happy now, I dozed off.
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First Rights Issue
The bank’s business was expanding. Following the successful privatisation, people and companies found the confidence to invest and KB needed more capital. In February 1994 the board agreed to issue more KB’s shares and IBD was asked to do this.
We called an extraordinary shareholders’ meeting in early March to approve the rights issue. KB was offering one new share for every four shares held at two thousand crowns. This was at a discount to the market price of forty-three hundred crowns. The bank wanted to issue 4 million new shares and raise 8 billion crowns.
The venue was again the ČKD Praha conference centre in Vysočany. It was packed with 4000 people. I climbed onto the speaker’s platform, without trembling.
It seems that I am getting used to making speeches here.
I explained the process of asking the assembled shareholders for more of their money for the bank, in exchange for new KB shares. The media were present. This was the first public experience of shareholders’ democracy in action. They listened without interruptions. The KB shareholders were polite, but not yet persuaded to put their hands into their wallets to finance the bank. I sensed that they were too intimidated by the formal setting to ask any questions.
With a handheld microphone I descended from the speakers’ platform to walk among the shareholders in the hall to explain. After some initial hesitancy, the shareholders, encouraged by my informal approach, began to ask questions. The sole critical comment was made by a man, who felt that the shares should be sold at a higher price, to enhance KB’s prestige.
The EBRD (European Bank for Reconstruction and Development), wished to participate in the issue, but had to be turned down due to an overwhelming demand from the existing shareholders. The offer was oversubscribed in April 1994. The first rights issue in the history of the Czech financial market was a success.
The red wolves are still holding back. When will they strike?
Reviewing the results with the IBD’s team, I was jubilant. Two months later we successfully placed KB’s bonds of a $130 million. Euromoney gave us an award for ‘Best Lead Manager of Equity and Bond Issues in Central and Eastern Europe’.
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Self-Esteem
The investment banking division remained untainted by scandal, despite the helter-skelter conditions of the emerging financial markets. This was a source of pride to its staff. Previously ignorant, lackadaisical and meek, they acquired expertise and developed a strong work ethic. They beamed with confidence and produced great results. Other banks noticed and set out to headhunt them. Jan Pokora a charming, tall, lanky 25-year-old dealer, came to see me.
“Mr supreme director, I should like your advice. Citibank has approached me to work for them as their head dealer at double my present salary.” I was completely taken aback by Jan’s forthright manner and raised my arms.
“Jan, I can influence your bonus, but not your salary. That’s fixed by the bank. I will perfectly understand if you decide to leave us for more money.” Jan sat down opposite me and put his hands on the table. He looked at them for a while, formulating his response
“I am proud of being a Czech, who works for the best investment bank in this country. Foreign banks, despite their expertise and resources, envy our track record. If I join them, I will have to obey patronising Americans who won’t treat me as their equal. They’ll promote their own, not me.” I looked at Jan, surprised. Jan must have thought about this a lot. Work is not just money for him. Is it possible that he might stay?
“Jan, I came to give something back to this country. When you build up enough expertise, you’ll take over from people like me,” I said, and Jan sighed
“There is something else. Our team is motivated, because we are not ruled by the red wolves, and foreigners don’t patronise us. I would like to know how long you are going to stay at KB. After you, the wrong people will take over. When you leave, I’ll leave.”
“I’ll stay till the end of my contract in August.”
“That’s good enough for me. I’ll also stay and will tell others. We were wondering how long you were prepared to put up with the backstabbing. It must be tough, dealing with Exco and their informers.”
“It’s great that you have decided to stay Jan. I appreciate it. We’ll be in touch should anything change, ok?”
“Many thanks,” said Jan, got up and went to decline Citibank’s job offer.
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Pseudo-Meetings
The executive committee of KB co-opted supreme directors, in charge of operating divisions, to their monthly meetings. The official purpose of this arrangement was to review performance and to map out the bank’s strategy. Parts of the bank, particularly the commercial division, had been hidden to anyone outside the five members of Exco. I initially welcomed this spirit of glasnost from the red wolves, to learn about the bank’s activities and to question them in these combined directors’ meetings.
The IBD had its own process of reporting, which allowed us to review details of performance and profitability within a week of the end of the month. I presented them at the first combined directors’ meeting. Other divisions delivered general summaries, with apologies for not having prepared detailed analysis. The least informative was the report by the commercial division. I had requested information about three companies tipped-off by Čapek. The deputy CEO assured us that these clients enjoyed the highest credit ratings, but no evidence was produced.
These combined meetings were set up to exercise financial control of the bank. I therefore requested that all the divisions should submit monthly management accounts in as much detail as the IBD. This never materialised. It became apparent that Exco designed these combined meetings to divert their responsibilities for KB operations.
The meetings became contentious. I refused to approve performance reports from the other divisions on the grounds that they did not provide sufficient detail. Corporate governance requests were met with an icy silence.
In a spirit of cooperation, I proposed that the combined meetings should focus on strategic issues. Specifically, I recommended that the bank should reduce its lending risks, by reorienting its portfolio towards the retail market. These proposals were not rejected, but they were not implemented either. The fact that they failed to gain traction, carried a clear message.
Exco manages the bank for their accomplices. The red wolves’ networks benefit from the lending policies of the bank. It doesn’t suit them to diversify the bank’s business, or to make it more transparent.
Our combined meetings staggered on, downgraded to deal with amusing irrelevancies. Car theft was elevated to the top of our agenda. KB imported six BMWs in the distinct red metallic colour of the bank. They were unique. Despite round the clock watch by armed security guards, one of these expensive cars was stolen from the private parking spaces outside the head office. The heads of the property division and human resources explained that the car theft had occurred when the security guards coincidentally all needed to answer the call of nature at the same time. The security companies were owned by former StB agents. It was obvious that our security guards were brazenly making extra money.
The directors sniggered, reminding me of the famous scene from ‘the Good Soldier Schweik’, in which Schweik had stolen a dog for his boss by tempting it with a sausage! The following month we were told that the insurance company had paid out for the car theft and the guards all kept their jobs. Two months later, another BMW was stolen and then the third in identical circumstances and with the same results. I mana
ged to keep my car. I parked it behind a locked gate inside the IBD’s building. The gate couldn’t be bribed!
The debacle of the combined meetings was not a battle I was prepared to fight and lose. I kept my focus on the main goal, which was to complete the privatisations. To this end, I had a free hand in creating a strong position in the financial markets, preventing fraud in privatisation funds and transferring control of strategic Czech companies to multinationals.
Having been primarily occupied in building up our share of the capital markets, I did not pay much attention to the activities of the other divisions. When I picked up indications of the suspicious use of the bank’s capital in the commercial division, I passed them to the KB’s supervisory board and to the national bank. There was no response. Their failure to supervise was going to have consequences. The countdown towards a financial crisis was about to begin.
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British Embassy
I had finished my brief and was watching the British ambassador, David Brighty, tasting and approving the wine with a nod. He turned to me and said plainly,
“Glad to hear that your job is nearly completed. Are you thinking of handing in your resignation? The business is now profitable. HM government will save money on your salary.”
It was early June and we were sitting in the embassy garden, under a large oak tree. The garden backed onto the walls of Prague Castle. There was a small gate in the wall, which allowed the ambassador to slip through, unobserved, for a cup of tea with the country’s president.
“What are your plans?” asked Brighty. “Will you stay in Prague?”
I thought for a moment.
“There are opportunities to do more good, but doing business here has its own rules. These rules are dictated by networks of people from the former regime. It will take a long time before these rules change. Take Komerční banka, for example. Its red wolves are on course to wreck the bank. I can’t work for them.” The ambassador sipped his wine and I continued.