China Forestry - Incompetence in Banking

In 1987 when I arrived at Citibank, I was impressed. In their day to day work, the people were capable and competent. Phones were answered quickly and care taken to provide excellent service. Deals were analysed with precision and new initiatives came under the most comprehensive scrutiny. It was a place where clever people worked and made money from hard work and intelligence.

Over recent years, the banking industry has deservedly taken a knock. Overpaid bankers have hit the front pages and banking losses which threw whole economies into turmoil have rocked the foundation of our capitalist system. However, a recent article about China Forestry sums up what has gone wrong in banking as well as anything.

This article is not about fraud in Chinese business. This is about the incompetence and greed of Western bankers in letting it happen. In short, a company is permitted to raise hundreds of millions of dollars of equity and debt from banks, private equity funds and retail investors (following a listing) with little or no due diligence taking place. Even the ratings agencies were outsmarted (more of which later).

In my current activities, I lecture entrepreneurs and businesspeople about bankers being lazy. They want to receive the necessary information in a format that can be simply 'fed upstairs' for approval with limited work having to be done. Clearly, China Forestry took advantage of this. No-one thought about 'kicking the tyres'. It was more important that the excel spreadsheet looked sensible than it was to actually see the trees. I am sure that the info memo looked very professional. Had the requisite photographs, financial summaries and all the legal mumbo-jumbo that no-one reads and only rewards printers who are paid to produce tens of wasteful pages.

This is also a story about finance guys losing their way. Back in Citibank days, I underwent an intensive credit course, everyone did whether you were earmarked to be a credit manager or a forex trader. It made good sense for everyone to understand the basics of who you wanted to do business with. Its clear that many of the middle management that are running branches of banks and funds these days didnt undergo the same training. It is not surprising that this can happen at UBS. They lost their conservative Swiss mentality a long time ago. It is not surprising that the credit agencies were duped. No organisation is lazier nor less aware of operational management than them. However, that Carlyle and Standard Chartered screwed up is scary.

Carlyle is a private equity fund of some repute and controversy. However, it has also made impressive investments in difficult companies and whilst I always felt it had built a questionable 'unfair advantage' through its political connections, I would have credited them with a far more effective controls process.

Standard Chartered has never been a place where the greediest of bankers worked. It was a cautious emerging markets bank. A place where an old school banker such as Mervyn Davies could extract enormous value by avoiding the temptation to join the rush to be the next 'Goldmans' or pursue businesses that they didnt understand. It was a place where bankers were taught basic credit analysis and where due diligence was understood as being important and not an impediment to making money. What has happened?

I am a 45 year old ex-banker who has lived in Asia for 20 years. During my time in banking and afterwards, I've been cheated, laughed at, ignored. Since leaving banking, I have witnessed the type of behaviour that is clearly exhibited in the China Forestry story, but on a smaller level. This is not a new game. Friends of mine were cheated in the 1990's by similar games in Thailand and Burma when teak plantations were promoted. China companies have taken advantage of poor due diligence to list on the SGX without the most basic of investor relations provision.  I could probably write a book about it (hence the length of this posting!).

So why didnt the banks and PE companies miss it here? The reality is a combination of laziness, incompetence and a lack of oversight. Not regulatory oversight, that would be a waste of time (regulators are easy to cheat) but oversight by senior managers who care more about their reputation than the next bonus, and who have lived in the real world.