The Reserve Bank lifeboat to Bankorp/Absa, which is under renewed scrutiny following a report by the public protector, is outlined in great detail in former governor Chris Stals’s submission to the inquiry into the affairs of Tollgate in 1996.
Tollgate, which owed Absa more than R200m, collapsed in 1992 amid allegations of dishonesty and mismanagement, leading to a five-year-long inquiry.
The document is a fascinating insight into how the Bank behaved in the dying days of apartheid and the criteria it applied to bank assistance.
Two investigations — one by Judge Dennis Davis and another by Judge Willem Heath — reported in 2001 that the form of the Bank’s assistance was illicit and had essentially provided Bankorp and Absa with free money.
However, unlike the public protector’s report, which says Absa must pay back the money, the judges argued that this was not practical.
Stals’s account of the lifeboat is quite different.
Nothing untoward happened, he writes, and given the circumstances at the time, he did the right thing to protect the banking system by extending assistance to Bankorp and then to Absa, which bought the troubled bank in 1992.
His submission details how Bankorp approached the Bank four times beginning in 1985 against a background of a debt standstill, declining credit-worthiness and a domestic liquidity crisis for banks.
"In the view of the monetary authorities, the situation of Bankorp, one of the major banks in the country, created a serious threat of contagion of the rest of the banking system," Stals’s report reads.
It is this ongoing assistance over 10 years that is one of the grounds on which Davis criticised the lifeboat.
In 1985, the Bank’s assistance included a low-interest loan of R200m, which was extended to R300m in 1986. In 1990, when Bankorp proved unable to meet its repayments and its situation deteriorated, the Bank stepped in as a lender of last resort.
The loan facility was increased to R1bn, which "had to be collateralised at all times by redepositing funds with the Reserve Bank or by ceding government stock to the bank".
Nothing untoward happened, Stals writes, and given the circumstances, he did the right thing to protect the banking system
It was this arrangement in which Bankorp bought government bonds at a yield of 16% while paying interest of 1%, providing a revenue stream for Bankorp, which has been criticised by Davis for amounting to free money.
Stals’s submission states that not even this revenue stream — which amounted to R150m per annum — was enough to save Bankorp, which in 1991 could no longer meet capital adequacy requirements.
On realising that Bankorp’s doubtful debts amounted to R1.9bn, an agreement was reached between it and the Bank that shareholders would cover about R800m of the potential losses and that the Bank’s loan would be extended to R1.5bn.
This loan would enable "the bank, through the investment earned in government stock, to generate R1.125bn over five years, which would be applied towards the write-off of the accumulated losses".
In his submission, Stals went on to say "the balance of about R800m had to be absorbed by the shareholders".
The income from the interest differential was about R225m per annum and had to be applied to the gradual absorption of a part of Bankorp’s losses.
As the loan was ceded to the Bank, it was assured that the Bank would not incur any losses on the transaction.
The loan amount would become repayable to the Bank once an amount of R1.125bn had been earned.
This agreement remained in force until 1995, when the total amount had been earned by Bankorp/Absa.
Therefore, in Stals’s account, the "free money" identified by Davis "was fully utilised to absorb part of the losses" accumulated by Bankorp.
In 1994, following the takeover of Bankorp by Absa, a new agreement was drawn up transferring all the rights and obligations under the previous agreement from Bankorp to Absa. Once Absa took over the company, the income stream from the Bank’s assistance continued to be used to absorb the bad debts Absa had taken over with the purchase.
It was prohibited from using the income for any other purpose than this.
In 1995, when the full assistance package had run its course, Absa repaid the R1.5bn in full.
The public protector’s draft report on the lifeboat, which was leaked last week, recognises that the capital amount was repaid but states that the interest — which it says was 16% — was not.
It recommends that the Bank and the Treasury pursue Absa for the outstanding interest of R1.225bn, as well as the interest on that amount that has accrued since then.
But the interest in the contract was 1% and not 16% and was repaid, according to Stals’s submission to the Tollgate inquiry. This is also the evidence he gave to the public protector’s office in his interview with it last year.
The interpretation of Stals’s statement was then taken a step further by the drafters of the report to imply that Absa had an agreement with the Bank to repay the interest, on which it had reneged.
It is this that helps the public protector draw the conclusion that grounds exist for the money to be recovered.
In the preamble to his explanation of how the Bankorp lifeboat worked, Stals also discusses the special nature of central banks as the only institutions in an economy that can create money.
In a case where a central bank creates money — as was done in the case of Bankorp — and at the end of the transaction the money is returned to the central bank for cancellation, the cost to the taxpayer is highly debatable, he writes in the submission.
To read the full submission click here.
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