Wag the Bawag

17 October 2005

How did the small Austrian bank come to have a E425m exposure to the brokerage? And to whom precisely did it lend the money? These are questions Bawag has yet satisfactorily to answer. It needs to do so soon.

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Bawag has admitted that it has an exposure of E425m ($510m) to the scandalhit US securities broker Refco. Philip Bennett, Refco's chief executive, was arrested last week on fraud charges.

Austria's fourthlargest bank did not say to whom it lent the money, or when it made the loan, or loans. It said the exposure was secured on certain unnamed assets, and it assumed this collateral would enable it to recover the amount lent.

Writing off the whole loan would take a big chunk out of Bawag's core capital, which stood at E1.8bn at the end of last year.

The Financial Times reported that Bawag lent E350m to Bennett directly, secured against his 35% stake in Refco. The bank also provided a E75m credit line to Refco, FT said. Other press reports have suggested that Bennett used the E350m to repay a $430m loan he owed to Refco. Bawag has not commented on these reports.

At the time of Refco's initial public offering in August, Bennett undertook not to sell or pledge his shares in the company for 180 days. Bawag said it had provided against the full amount of its exposure, but thought that a total loss was unlikely.

In October 1998, the two companies teamed up to set up a clearing house, in which Refco and Bawag each held a 50% stake. Seven months later, Bawag bought a 10% stake in Refco for an undisclosed amount. The stake was sold in June 2004 to Thomas H Lee Partners, for a reported $220m.

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