On the evening of the last Wednesday in March, the directors of Laiki bank, the second largest in Cyprus, gathered in their sixth floor board room for the last time.
With the portraits of chairmen past staring down at them, they all resigned, something that had become inevitable earlier in the week when each director received a letter from the Central Bank of Cyprus telling them a special administrator had been appointed to run their bank and the board was suspended.
After less than an hour, the board broke up for the last time, its members accepting that their 112-year-old institution was no more. "It was like a funeral," one director said.
The death of Laiki, also known as Cyprus Popular Bank, was brutal. Board members said they had fought to the bitter end, imploring political leaders not to accept the bank’s closure as part of a 10 billion euro ($13 billion) bailout deal last week to save the country from bankruptcy.
The bank the directors were fighting to save lost 1.8
billion euros before tax in the first nine months of 2012 and another 4.1 billion euros the year before, as a gamble on Greek bonds ended badly, and bad lending decisions took their toll.
"Laiki Bank was a very good bank for many, many years," said Afxentis Afxentiou, a former governor of Cyprus’ central bank.
"Unfortunately, they were the victim of too many things.
First, the haircut on the Greek sovereign debt which caused a loss of about 2.5 billion euros, secondly its exposure to Greece in loans given to Greece, and thirdly the world economy crisis which hit the company."
A government-ordered inquiry into Cyprus’ banking and economic crisis prompted the country’s finance minister Michael Sarris, a former Laiki chairman, to resign on Tuesday.
Reuters spoke to five of Laiki’s 11 recently-departed directors; all requested anonymity as they wanted to be able to speak more freely about sensitive issues
Laiki’s first major blow came in 2011 when Europe agreed to an unprecedented restructuring of Greece’s sovereign bonds.
Laiki was holding 3.1 billion euros of the bonds and ultimately suffered losses of 2.3 billion euros.
After merging with Greek bank Marfin in 2007 and coming under Greek management, Laiki in 2009 built up a large position in Greek bonds, which offered attractive interest rates.
The eventual losses were a devastating hit for a bank which began 2011 with total equity of just 3.6 billion euros, but it was almost a year later before Laiki was rescued after flunking the European Banking Authority’s 2011 stress tests and failing to attract private capital.
In June 2012, Laiki got a 1.8 billion euro bailout from the state, giving the Cyprus government an 84 percent shareholding.
Seven new directors were appointed by the finance minister, and the board was charged with drawing up a business plan that would convince the European Union the bank could be viable again.
The new directors knew of the bank’s Greek bond tragedy, and had also seen accounts of questionable lending practices.
A Greek parliamentary enquiry had called attention to "serious conflicts of interest" in Laiki’s Greek operation. It had loaned money to a community of Greek monks involved in land deals, and to others who used the money to support a share sale by Marfin Investment Group, a company linked to Laiki through a shared chairman, Andreas Vgenopoulos, until November 2011.
Vgenopoulos denied any wrongdoing.
The board were taken aback by size of the problem at Laiki.
"I found what I did not expect to find," said one board source, describing how the bank was already relying on the Cyprus central bank for more than 9 billion euros of emergency funding that had to be renewed fortnightly.
The priority was to appoint advisers to help create a plan for Laiki to cut costs, sell assets, recapitalize and "ring fence" its Greek operations so any shocks in its 11.8 billion euros Greek loan book wouldn’t hurt the Cypriot parent.
At the end of June, they appointed KPMG, which drew up a plan that called for selling assets, cutting costs and putting bad loans into an asset management company.
Laiki was also prepared force losses on people who had bought "senior" bonds, a traditionally safe investment that has so far avoided taking any hits in the banking crisis. Imposing losses on depositors, the strategy controversially included in Cyprus’ bailout plan, was not considered. "No-one would have the view that we could impact depositors," said one director.
At the end of August, the plan was submitted to the authorities. Around the same time, the bank’s chief executive Christos Stylianides, a long-time Laiki staffer who had mainly worked in the UK and Cyprus before taking the top job in December 2011, went on sick leave.
As a stand-in, the board chose Takis Phidias, then head of Laiki’s life insurance arm. About 500 staff were laid off in Greece, another 120 in Cyprus, salaries were cut, mobile phone use was restricted, and the bank renegotiated its rents.
Asset sales began, as did talks on selling Laiki’s 50 percent stake in Russia’s Rossiysky Promyishlenny Bank.
When they started, they were prepared to sell at a 9 percent discount, targeting loans in Serbia and Ukraine, and part of a 2 billion euro shipping loan portfolio in Greece, but it was not enough and they began selling at a 15 percent discount in early 2013.
Stylianides, back after sick leave, clashed with the board, which wanted him to quit so the bank could have a fresh start.
The sands shift
Outside the bank, the sands had been shifting since October.
Aside from concerns about the efficiency of a bad bank, the troika - the European Union, the International Monetary Fund and the European Central Bank - also worried whether Cyprus could foot the bill for a bad bank.
A bad bank was however a critical part of the KPMG plan, so Laiki moved to Plan B. Its idea was to put the "healthy" Cyprus bank into a new subsidiary that could be sold once it was freed from the long shadow cast by Greece, which was to remain in the bank’s main holding company.
"It wasn’t a good bank and a bad bank plan," said one board source. "We were going to focus on restructuring."
In December 2012 Laiki hired consultants Alvarez and Marsal, who were working with the central bank; Laiki believed hiring the same consultants would boost the plan’s chance of success.
As Plan B was pushed forward, Laiki was facing growing difficulties. News reports of possible haircuts for depositors were already prompting people to pull their cash out.
That left Laiki ever more dependent on the central bank’s emergency liquidity assistance (ELA).
"ELA was a continuous struggle, every fortnight they were asking us for more assets (as collateral)," said one bank source. The bank pledged every building it owned, along with batches of loans and bonds.
The 1.8 billion euro bailout from June did little to help, since it was done with a government bond that was not accepted by the central bank, which needed approval from the European Central Bank. The ECB declined to comment.
As Laiki sought new collateral, the value of assets it had already used fell further. "You could see the overall amount falling as non performing loans got worse," a bank source said.
Laiki ultimately pledged about 20 billion euros of collateral to draw down 9.95 billion euros of central bank cash.
Cyprus’ elections in February were a turning point. Before that, the ECB had seen Laiki’s growing vulnerability but had continued to allow it to draw down ELA. Now with a newgovernment in place the ECB wanted action, fast.
The final act
On Friday March 15, finance minister Michael Sarris went to Brussels to negotiate a bailout deal for the stricken island.
The agreement that emerged in the early hours of March 16 was a shock. Cyprus was to raise 5.8 billion euros of the money it needed by levying a tax on deposits, including a 6.75 percent tax on small savings which were explicitly guaranteed.
Laiki’s board began to meet almost daily, an intensification even for a body that had met about 100 times since June.
The next bombshell came quickly. On Monday March 18, four Laiki representatives were summoned to the Central Bank.
They were joined by representatives from Cyprus’ two other major banks, Bank of Cyprus and Hellenic.
The banks were given a two and a half page document, seen by Reuters, detailing the terms of the sale of their Greek operations to an as yet unknown Greek bank.
They were asked to take it to their boards for approval, but immediately protested at the vagueness of the terms, and the lack of board involvement and due diligence.
The document asked the Laiki board to confirm that the agreement had been reached "without coercion". When the bank’s representatives voiced concerns, Central Bank Governor Panicos Demetriades told Laiki that its shareholder, the government, would expect the board to sign.
The directors believed the deal meant Laiki Greece, which a central bank-commissioned review predicted would lose 7.4 billion euros between June 2012 and June 2015, had to be recapitalized with about 2.8 billion euros before being sold.
"The board was surprised and disappointed, the deal was obviously very adverse to the bank," said one director. The board believed they would have gotten a better deal had the branches been sold in the normal way, with competitive bids.
Laiki refused to sign, so Demetriades signed for them. The Central Bank did not respond to queries on the issue.
Selling the Greek branches shrunk Laiki and removed the risk of any further Greek loan losses, but the board believed the bank’s position had been materially worsened by the deal.
Board meetings now sometimes lasted until midnight.
Emissaries were sent to talk to Russia about a takeover deal, which failed.
On the evening of Thursday March 21, Laiki workers began protesting in Nicosia after hearing that the bank was to be put into a "resolution" regime that would see it split into a "good" bank with healthy loans and small deposits, and a "bad" bank that would be wound down. Some directors only heard the news on local TV stations.
"No-one ever explained to us why we had to go into resolution," said one Laiki source.
Now Cyprus had just three days to formulate a bank restructuring plan that would win troika approval, secure a sovereign bailout, and prevent the ECB from making good on their threat of cutting off the country’s banks’ from emergency funds.
The plan, as ultimately agreed, will see all the good parts of Laiki bundled into Bank of Cyprus, the island’s largest lender, while deposits above 100,000 euros and troubled loans are run down under a special administrator.
The Laiki brand will likely be consigned to the scrap heap, and the bank’s 8,400 workers face an uncertain future. As one director put it: "Everyone knew the bank had problems, but no-one thought it would come to this." [Reuters]