ΤΟ ΟΝΕΙΡΟ ΤΟΥ ΜΙΧΑΛΗ ...

By LANDON THOMAS Jr.

Published: June 10, 2013

ATHENS — 

Not long ago, Michalis G. Sallas, the chairman of Piraeus Bank in Greece, had a dream: to make his bank too big to fail.

Michalis Sallas built Piraeus into the largest of Greece’s freewheeling banks, but critics call for closer scrutiny of the practices that got it there.

But now that he has managed to turn his bank into Greece’s largest, ensuring that Piraeus will be eligible for a bailout from the European Union, Mr. Sallas runs the risk that some of the steps he has taken along the way may come back to haunt him. Those moves include borrowing more than 100 million euros ($132 million) from a friendly banker in a bid to prop up the falling shares of his own bank and making risky loans to people and entities with ties to Piraeus.

Europe is preparing to close the books on perhaps the most ambitious aspect of its plan to keep Greece afloat: a cash injection of about 50 billion euros into the country’s four largest banks.

And bank governance has emerged as a critical issue, with the country’s creditors, who arrived in Athens this week to carry out their latest audit, insisting that continued aid is conditional on banks’ demonstrating that their conduct is above reproach.

Still, Greece’s overseers from the European Union and the International Monetary Fund may well find that even with increased oversight, changing the freewheeling business culture that long defined the Greek financial system will be easier said than done.

The rapid rise of Mr. Sallas exemplifies that culture. A

tough, charismatic banker who seized control of Piraeus in 1991 and built it up by dint of more than 15 mergers and acquisitions, Mr. Sallas reached the pinnacle of the Greek banking world in March when he capitalized on Cyprus’s banking disaster, buying the Greek units of that island’s three biggest financial institutions, Bank of Cyprus, Laiki Bank and Hellenic Bank.

His supporters say that Mr. Sallas should be hailed for his entrepreneurial expertise and robust appetite for risk. Seeing an opportunity to reinvent his bank, they say, he has stolen a march on his more sclerotic counterparts.

“He is someone who can really navigate the system in Greece,” said John P. Rigas, a Greek-American hedge fund operator and client of the bank who owns an Athens-based investment company in which Piraeus holds the largest share. “This bank has gone from a teetering No. 4 to a solid No. 1 in just a year.”

But others say that Mr. Sallas has pushed the boundaries of proper banking too far and that his maneuvering in the murky world of Greek finance, where the interests of bankers, the media and politicians often commingle, should be more closely scrutinized.

“Piraeus has long used problematic methods that call for investigation,” said Costas Lapavitsas, a political economist at the University of London who follows banking and politics in Greece. “What concerns me is that Piraeus has emerged as the leading bank in Greece not because it improved these methods. The old regime is just adapting to the new conditions, and for me that is a sign of sickness and not health.”

Anthimos Thomopoulos, deputy chief executive of the bank, said all aspects of Piraeus’s business “have been exhaustively examined by independent auditors and regulators, inside and outside Greece, with no adverse findings.”

A trained economist, Mr. Sallas, who is 62, made his first career strides working under Andreas Papandreou, the Socialist premier who led Greece in the 1980s. In the years since taking over Piraeus his influence has continued to expand. He is close to the governor of the central bank, George Provopoulos, who until 2008 was vice chairman at Piraeus. And the bank is one of the largest advertisers in the Greek media.

Altogether, European governments and the International Monetary Fund have staked about 200 billion euros of taxpayer money on keeping Greece in the euro zone and eventually restoring its economy to health. To justify this commitment, Europe has subjected Greece’s largest banks to a root-and-branch investigation, focusing in particular on related-party lending, or loans to entities in which the bank may have a financial interest, and has concluded that they have finally cleaned up their acts.

With regard to Piraeus, however, this assessment clashes with the conclusions reached by a team of auditors at Laiki Bank in Cyprus, one of the banks whose Greek unit Piraeus acquired in March.

Under new management in 2012, the bank’s board authorized a full-scale audit and uncovered loans of 113 million euros made to three offshore investment vehicles controlled by Mr. Sallas and his son George and daughter Myrto.

According to the Laiki audit reports, copies of which were made available to The New York Times, these loans were used to buy Piraeus shares in the open market and participate in a rights issue in 2011.

Despite repeated requests from Laiki, auditors say, Mr. Sallas did not post additional collateral as the shares rapidly lost value; eventually the debt, measured by the gap between the size of the loan and the Piraeus stock that backed it, reached 107 million euros, according to the reports.

In a separate report by PricewaterhouseCoopers, Laiki was advised to set aside 93 million euros against the Sallas family loans. And last month, in a letter to Parliament, the central bank of Cyprus said that it had warned as far back as 2011 that the loans required provisions.

In mid-February, just a month before the bank was bought by Piraeus, the loans were transferred to Laiki’s recovery department, according to people briefed on Mr. Sallas’s credit history. This is the area of the bank where legal proceedings and other forceful remedies for seeking repayment of delinquent loans are deployed.

A spokesman for Piraeus says that Mr. Sallas, via an outside company, only borrowed 44 million euros from Laiki and that this loan is in good standing.

When the Cyprus transaction was announced in March, it was seen as the masterstroke of Mr. Sallas’s deal-making career, capping an extraordinary run in which he purchased the healthy portions of four midsize banks for nominal sums. In roughly a year, the bank doubled in size, going from a laggard trailing its three peers to, by Greek standards, a behemoth, with 100 billion euros in assets and a country-leading network of 1,306 branches.

The transaction also put Mr. Sallas in charge of the bank that a month earlier had deemed loans owed by his family’s investment vehicles as uncollectable.

Although highly unusual, there is nothing illegal about one bank absorbing another where its top executive has a large outstanding debt.

But the Laiki examiners, in their audit reports, argue not only that the loans made no financial sense and were not sufficiently collateralized or guaranteed but also that they were part of a quid pro quo that reflected a “broader cooperation” between Laiki’s former chairman, Andreas Vgenopoulos, who auditors say signed off on the loans, and Mr. Sallas.

With regard to the Sallas loans, a spokesman for Mr. Vgenopoulos, said in an e-mail that at the time “Mr. Vgenopoulos was vice chairman of the bank and had no involvement or knowledge of these alleged and totally spurious transactions.”

A lawyer turned entrepreneur, Mr. Vgenopoulos built the Marfin Investment Group, then the parent company of Laiki, into one of Greece’s larger holding companies during a boom that followed Greece’s entry into the euro zone and that lasted until about 2006.

The two men have known each other since 2001, when Mr. Vgenopoulos bought a small investment bank from Piraeus that became Laiki.

From the outset, examiners focused on a troubled convertible bond offering by the Marfin Investment Group in March 2010.

When it became clear that investors were not interested in the deal, the original target of 403 million euros was scaled down to 252 million euros. On March 22, Marfin thanked investors for their participation and hailed it as “a great success and a strong vote of confidence” in the group.

But Laiki investigators reported that of the 252 million euros, only 25 million euros came from outside investors. The rest, they said, came from either investment entities tied to Mr. Vgenopoulos or from Mr. Sallas’s Piraeus Bank.

“At least 70 million euros for this bond issue came from lending by Piraeus Bank either as part of the broader ‘cooperation’ between Vgenopoulos and Sallas or as quid pro quo for the loans made to buy Piraeus stock,” the investigators wrote in their final report last August.

A spokesman for the Marfin Investment Group said the company had no knowledge of the transactions referred to by the investigators.

The spokesman for Piraeus said the claim was “totally untrue.”

Neither the Bank of Greece nor the Hellenic Financial Stability Fund, the entity overseeing the recapitalization effort of the Greek banks, would comment on the relationship between the two men. A spokesman for Greece’s creditors said that it was up to Greece’s central bank to take action on any governance or lending matters.

Mr. Rigas, the Greek-American hedge fund executive, says he believes that there is nothing wrong with lending to related parties and that that is the way business is done in an economy dominated by banks.

Citing his own experience, he says he borrowed 84 million euros from Piraeus to buy a small investment company in hopes of attracting foreign investors to Greece. With the onset of the crisis in Greece, Mr. Rigas’s company, Sciens International, suffered significant losses, jeopardizing its ability to make good on its loans.

Piraeus, which still had a 28 percent stake in the company, eventually repackaged these loans into a corporate bond offering. Instead of syndicating the loan to other investors to spread the risk, Piraeus bought up the entire deal.

Complicating matters further, the largest holding in the company’s investment portfolio was a 30 percent stake in Club Loutraki, a struggling casino operator that owes Piraeus 39 million euros.

According to regulatory filings by Loutraki’s parent company, Queenco, submitted to the London Stock Exchange, the Piraeus loan to Loutraki is unsecured, meaning it is not backed by any collateral. Queenco also says in its filing that Piraeus is a related party to Loutraki.

Piraeus contends that the Loutraki credit is secured and is not a related party transaction. The bank declined to elaborate on why it believed the regulators’ filing was incorrect. The bank also said that its related party loans were insignificant and fully disclosed.

Mr. Rigas argues that Piraeus has merely helped out a troubled client, as other banks have done during Greece’s economic crisis. If anything, he says, it is Mr. Sallas’s willingness to go the extra mile that makes him indispensable.

“In Greece,” Mr. Rigas said, “it’s all about the banks.”