Red Wolves & White Knights

by Peter Kysel

  “Are the elites of the former regime largely in charge!?”

  “Yes. They have formed themselves into mafia families. Ideologically, the red wolves are right-wing opportunists. Their communist ideology has been discarded. The West has won.”

  “What about your future?”

  “I am planning to create an independent investment bank by buying a majority stake in IBD. The mission would be to restructure companies and privatisation funds, before placing them with reputable foreign owners.”

  “Wouldn’t the Czechs resist that?”

  “No. Czech elites don’t suffer from nationalistic para­noia, and the economy would be successfully transformed.”

  “And if you don’t buy your investment bank?”

  “The draining of the economic swamp is irreversible. The country is well on its way to joining developed Europe. If I return to London, I’ll continue to cheer their efforts on from there.” After finishing our tea, we said our goodbyes and I left.

  #

  Hampstead

  On Friday evening I continued my conversation with Florisse about our family’s future. Over dinner I told her about my meetings at the embassy and with Dr Salzman. Florisse offered her view.

  “You have made a clear profit of a billion crowns in just eight months this year. The Czechs will be arrogant enough to think that they can do this too. Dr Salzman’s spies in your office will tell them that they can make an even bigger profit. Therefore, if you don’t bribe Exco, they won’t sell IBD to you.”

  Florisse didn’t hide her strong dislike for KB’s leadership. She went on,

  “You love the country and you have been instrumental in its transformation, but it has been a one-sided relationship. I think you have done enough and should leave now.” Her message was clear.

  So, I changed the subject.

  “And what about you and Tamara?

  “Tamara is settled at Channing. She has made good friends and I don’t want to disrupt her life by moving to Prague.” Tamara was by then fifteen years old and I missed her. I felt guilty that I had become an absent father. Florisse added,

  “I like my job and love living in this house and frankly, I don’t want to move out of London.” It was a difficult con­versation. I wanted to make sure that we would not regret our decision in the future.

  “My next step could make us wealthy, but we would have to move to Prague, or to Amsterdam.” Florisse was adamant.

  “It’s not worth it. You would be in business with former communists. They have changed their allegiance, but not their morals. Their dirt would rub off on you and make you dirty.” I noticed that both my father and my wife used similar moral arguments.

  “Are you sure you won’t regret losing this chance to be rich?” I tested her

  “I don’t care about being rich. You have partly drained the economic swamp, but Prague isn’t a good place. The country’s elites are corrupt. The society is a moral swamp, which will take generations to drain.”

  “You believe that behind every great fortune is a great crime?” I quoted Balzac in response, thinking I cannot break-up of our family tin order to become rich. That would be a crime.

  On my return to Prague, Dr Salzman repeated his offer of a permanent job. My offer to buy a majority of IBD would be considered favourably, if I offered equity participation to selected Czech investors.

  I had no intention of being tied to my KB colleagues, so I ended our negotiations.

  #

  Leaving Party

  My formal leaving party was arranged in the boardroom, where I had met my colleagues sixteen months earlier. This time the curtains didn’t twitch, and whiffs of strange smells had disappeared. My colleagues also looked different. They wore dark suits, white shirts and black shoes, nicely fitting the image of investment bankers.

  I arranged separate parties for my friends and for the family. Vojta made a brief emotional speech

  “White knights leave when they have done their job. You have done your share in making changes to this country and I’m happy that they are now irreversible.” I accepted his compliments on behalf of all the white knights, some of whom were at the party. One of them commented,

  “Your father’s comment was the only public acknowl­edgement of our contribution.”

  The last party finished at two in the morning. Without thinking, I got into my burgundy BMW to drive home. Within ten minutes I was flagged down at the police check­point on Čechův Bridge. This is an embarrassing end to my time in Prague.

  “Is this your car sir? Can I see your documents? asked the policemen. He was irritating me Stop your silly performance. You know that there are only six of these cars in the country and they all belong to KB.

  “No, it’s a KB car,” I checked myself and responded politely, while the policeman tried to make sense of my British driving licence.

  “Are you the bank’s chauffeur?” inquired the policeman

  “No. I am the supreme director.” I was convinced that this exchange was leading to a breathalyser. Instead, the policeman thought for a moment and switched his line of questioning

  “Would it be difficult to get a loan from Komerční banka?”

  “Here is my business card. Do get in touch, or speak to my assistant,” I responded relieved. He pocketed my card, but had another surprise for me

  “We don’t want anything to happen to you tonight, Sir. I’ll get two outriders to escort you back.” He realises that I need them to keep me safe.

  “Thank you, officer.”

  “Have a safe journey” I followed police motorcyclists, with flashing blue lights, without stopping at any traffic lights.

  The next morning, I remembered to call my assistant and asked him to see the kind policeman. He saved my reputation. Then I boarded the flight for England and left the country.

  #

  Flight to London

  On the BA flight I reclined in my seat, closed my eyes and reflected on my Prague experience. I felt elated.

  I had set out to make privatisation a success for the benefit of the ordinary people. It had been a simple mission but was much harder than I expected. The most exciting job of my life had been accomplished and I had got my revenge. It would not be possible to reverse the reforms now. I smiled as I congratulated myself and ordered a glass of champagne.

  The IBD was the most profitable part of the bank. I left on 31st August 1994, with the division reporting an oper­ating profit of 700 million crowns for the eight months. The IKS chipped in with another 300 million crowns. The combined annual profit of the two activities under my man­agement was 1.5 billion. It later transpired that the KB’s total profit during 1994 was half of this figure. The rest of the bank had lost money. I am leaving at the right time. KB is accumulating problems and its red wolves are poor business managers. The bank faces a precarious future and crisis.

  The country was about to experience years of rising polit­ical and business corruption. I am leaving behind a politi­cal system controlled by red wolves. The expression of Kmotr (the Godfather) was entering into everyday language. It described the heads of the red wolves’ networks.

  I turned to more positive thoughts about my young IBD colleagues and counted their achievements. They grew into their jobs and learned to carry out the largest privatisation pro­gramme in history, within a period of months. They created a share dealing system in record time. Funds under their man­agement now control 15% of the economy. They have become market leaders and the top investment banking team in the country. I am very proud of them.

  My IBD colleagues were a team of 130 people. At my leav­ing party I encouraged them to broaden their skills by get­ting international experience. I left it unsaid that the red wolves were driving the country into a financial crisis. Czech privatisation will be sealed only when controls are transferred from the red wolves to the multinationals. Then I dozed off.

  I awoke as we were coming into land. I looked at London below.

 
We turned the economic swamp in my divided homeland into a functioning market economy. There were no rewards when the job was done. I devoted two years to this patriotic project and sacrificed earnings, career promotion in the City and family life. I hardly saw my daughter, my wife, or my friends. The loneliness and separation affected us most.

  I learned to appreciate the loyalty of my family and close friends. I also learned not to expect official acclaim. These experiences would guide me for the rest of my life. Stepping into the arrival hall at Heathrow airport felt good.

  From now on I’ ll be getting my life back. The new job begins tomorrow. Everything has fallen into place and I am happy.

  PART 5

  The Second Half of Nineties – Integrating Europe

  I joined Govett on 1st September as the head of European investments. The team had been underperforming. As in my previous jobs, my task was to fix the problems and con­sistently achieve performance targets. Investment methods at Govett had to change.

  I had developed a distinctive investment process in my earlier jobs. My forte consisted of mixing quantitative techniques with an overlay of active management. We created two sets of algorithmic models for handling asset allocations and investment selection for adoption by the European team.

  This systematic process had the distinct advantage of clearly attributing performance contributions. Computers were used not to replace managers, but to make their work methodical and results more consistent. Most manag­ers became willing adopters, but individuals who refused to adapt and who underperformed, were replaced. In the midst of this work, I found that I hadn’t shaken off Eastern Europe. Barely three months after my return from Prague, I received a phone call.

  Chapter 15

  Harvard Funds

  “It’s Viktor here, I am staying at Claridge’s. Let’s have dinner.” Viktor Kožený had built up his Harvard Group into a major financial institution over the previous three years, but he had acquired a bad image. The media branded him ‘The Pirate of Prague’ and my father called him a vul­ture, who flew into the country to embezzle people. Over dinner in London, Viktor admitted,

  “I always got bad press. There is a conspiracy against me. I can’t work in Prague any longer.” He then dropped a bombshell.

  “I want you to take over the Harvard Group and if you do, I hope you’ll keep my associate Boris Vostrý.”

  “Why? What are you going to do?”

  “I have a large privatisation business in Azerbaijan, which needs to be managed locally.”

  “Have you stripped the assets of the Harvard funds?” I asked bluntly

  “No, I have not. Boris will show you the books.”

  I knew Boris. He was Viktor’s right-hand man and was a co-founder of the group. When we originally met in May 1992, he had joked

  “I was ready for the market economy. At political semi­nars they taught us about the differences between capital­ism and socialism.” I remembered similar seminars from my youth.

  “Oh Yes? What differences?”

  “I learnt that under capitalism, one man exploits another. Under socialism, it’s exactly the other way around” I liked his joke.

  When we met in Prague, to discuss Victor’s proposal, Boris measured me up and asked

  “Why do you want to get involved?”

  “People trust us with money. We can be either the stew­ards of their savings, or vultures. If there is a chance to stop fraud and clear the name of Harvard, I’m prepared to do it.” Boris gave me a quizzical look but nodded.

  Viktor has lost his credibility. I believe that Harvard could be restructured to benefit the investors” we discussed how this could be done.

  We prepared a takeover proposal and I flew to the Bahamas to discuss it with Viktor. He lived in a large colonial style house on the exclusive Lyford Cay club estate in Nassau. We sat on the terrace, overlooking the gardens which sloped down to a canal, with a seagoing cruiser moored at the jetty. Viktor agreed to hand over the group. By late afternoon, we were ready to join Michael Dingman and other residents for a business barbecue.

  The following morning, I returned to London and waited for Viktor’s signed confirmation. Discussions stalled when Viktor asked for the option to regain ownership of the Harvard group once it was cleaned up. I disagreed.

  “Viktor, I can rescue Harvard, but you can never own it again. You are finished in Prague.” He disagreed and we parted, never to meet again.

  The following year, Viktor, Boris, and Michael restruc­tured the Harvard group. Following the restructuring, Harvard investors lost money, undermining their trust in Czech financial institutions.

  My father’s warnings about vultures came true and there was a public outcry. Court proceedings were inevitable. Worse was to come.

  #

  Teetering Bank

  There were initial warning signs about KB when its share price began to wobble at the end of 1994. Rumours spread that the commercial division was linked to fraudulent entrepreneurs. The number of non-performing loans rose to a third of all the loans. Rumours spread about the prop­erty division. Only the investment and retail banking divi­sions appeared to be unscathed. The bank was losing its credibility.

  In December I wrote to Dr Salzman and to the National Bank about my concerns and offered my help. They ignored me. The lending binge continued, and the regulators failed to respond to the warning signs. Banks, managed by circles of red wolves, mirrored KB. Privatisation funds managed by more red wolves defrauded their investors.

  Outsiders observed the accelerating putrefaction of the banking system, helplessly. Fraudulent commercial banking coincided with asset stripping by fund managers. People were being embezzled by the elites. The government of Václav Klaus, having created the conditions for a financial crisis, looked the other way. The Czech financial sector was going into meltdown. The crisis would last for six years. Taxpayers, who were defrauded as investors, were then called upon to pay up for the second time, to clean up the banks’ balance sheets.

  Initially, I felt angry and helpless. When the crisis began, I changed my mind, seeing it as an opportunity. Cataclysmic meltdown was bound to force drastic change and the trans­ference of control of the financial sector, from the red wolves to foreign institutions.

  #

  Magic Circle

  The mothership of communism launched its own reforms. Using the Czechoslovak template, the Russian privatisa­tion process was structured in three stages. Shops, flats and small enterprises were sold for cash. Next came voucher pri­vatisation, open to all residents.

  Astonishingly, 144 million Russians, or 98% of the pop­ulation, bought privatisation vouchers. Minority stakes in some fifteen thousand companies were privatised, at 5% of their true value. The government sold vouchers to res­idents at twenty-five roubles (1 US cent). They were sub­sequently traded at up to 29,000 roubles. Voucher priva­tisation was designed to allow the red wolves to exercise control of companies.

  A notable example was the gas monopoly producer, Gazprom, which came under the control of Viktor Chernomyrdin and the lovingly named Rem (acronym for Revolution + Engels + Marx) Viakhirev.

  The most fraudulent privatisations were through loans-for-shares. These created a new elite of oligarchs, and tainted Russia globally with corruption. The government had run out of cash to pay its employees’ salaries and the loans were designed to provide emergency funding for the state. The scheme was designed by the banker Vladimir Potanin, to bypass the communist-ultranationalist duma (parliament). It was endorsed by president Yeltsin in 1995.

  Michael Johnson came to London on holiday in April, with details of the privatisation reforms. We met at the Travellers Club, to review them. Michael explained Potanin’s loans-for-shares scheme over lunch.

  “A selection of Russian private banks will auction state loans. These loans will be guaranteed by the majority own­ership of leading Russian companies. The auctions will be rigged in favour of this magic circle. The state will th
en default on the loans, and its shareholdings will be trans­ferred to new owners, typically at 1% of the companies’ real value.” I asked for confirmation.

  “So, we will have no chance of participating?” Michael nodded.

  “No foreigners and no Russians from outside the magic circle will be admitted to the auctions. The banks receive lists of approved participants and the dates and locations of the auctions are secret.” I raised an obvious point,

  “But no Russians have enough cash to provide loans.”

  “That’s where the proceeds from the clandestine sale of gold, the recycling of the Communist Party’s funds and other collateralised assets come in. You calculated that they were worth at least $20 billion.”

  “I didn’t know what the stolen money was for.”

  “It will be lent to members of the magic circle, who will pass on loans to the state.” It was clear. They will lend money stolen from the state, to the state. I was impressed. Potanin’s scheme was going to transfer $1 trillion (that’s twelve zeros) worth of Russian state assets to a few people in this magic circle.

  And all the time people were suffering. President Yeltsin’s approval rating had dropped to 5%. The Communists were popular. Would the emerging oligarchs be able to keep their wealth?

  #

  Samara

  “I’m planning a trip, to visit the spiritual centre of Russia, Nizhny Novgorod, Tolyatti, the centre of car manufac­turing, and the former secret city of Samara.” Michael responded enthusiastically.

  “I’d love to join you. Borby owns the Lada dealerships and they’ll give us a VIP tour, but why Samara?”

  It was renamed Kuybyshev by the Bolsheviks in the mid-thirties and the city vanished from all maps for nearly sixty years. It became the reserve Soviet capital during the war and the central hub for military production.”