DUBLIN – The VBS Bank scandal dominated news headlines this week and in today’s episode, Alec Hogg and Felicity Duncan break down the latest we’ve learned. We look at the role ANC leaders in Limpopo played in facilitating the scheme and explore the possible links between VBS and the Zuma family. As the details of this astounding and massive heist continue to emerge, South Africans can expect to see serious political and legal consequences. We also take a look at the latest in Steinhoff news – this time, evidence of insider trading by disgraced former CEO Markus Jooste – and discuss the recent turmoil in stock markets. – Felicity Duncan
Hello, and welcome to this week’s episode of The Editors Desk. This is BizNews Radio and I am Felicity Duncan. With me on the line as always, is our editor in chief, Alec Hogg.
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Alec, we’re going to kick-off talking about a story that really has dominated business news in South Africa for ages. Since it happened, I would say, and that is the story of Steinhoff. And this week some more news emerged about, what looks like possible insider trading.
Yes, this is not good news for Markus Jooste. He’s been trying to attempt to tell anybody who would be prepared to listen that he’s innocent. He did a similar story in Parliament, when he appeared there last month. The reality of it is that the investigators at Bloomberg picked up some information that showed that he had been letting friends of his know that big trouble was going to happen. On the 30thNovember, so it was less than a week before the share price was smashed, when Jooste himself, had to resign because he wouldn’t countenance the postponement of the financial results again, which had been proposed by Deloitte. And of course, once Jooste left everything started tumbling out.
The big problem here is that Bloomberg says at least two of his acquaintances were told by Jooste that there was big trouble coming for the company, and this shows that he in fact did know what was going on and that he let confidants in on the story.
Now, whether or not they sold shares ahead of the news or on the strength of the news that he gave them, is kind if irrelevant. It’s insider trading. It was a distribution of information that should have been in the public domain already, if that was the case. But more so, it pokes a very big hole in Jooste’s story that he was unaware of any accounting irregularities. It hasn’t been a very good week for him. Particularly, on the back of last week, when as we spoke about in our previous Editor’s Desk, Mattress Firm, which Jooste had paid $3.8bn for, went into bankruptcy just two years after the purchase.
What do you think the future looks like for Jooste? Like, what are the consequences that he might face as these things start to emerge, as evidence emerges showing that, in fact, yes, he did know that there was trouble ahead?
I pity the man in a way because he is a sociopath. He’s sick and he has no understanding of reality and the consequences. That’s part of the mental condition of a sociopath. But of course, that sympathy quickly evaporates when his behaviour becomes apparent and the impact of that behaviour. Sociopaths are human beings who are mentally ill. They do not understand the world that we live in, the consequence that we have to take for actions. They create their own realities. And, in his mind, he truly believes that he’s done nothing wrong because he’s blocked out, from part of his mind, the actions and the activities that he was engaged in, which of course is so much trouble. I think he will go to a mental institution or go to jail, one or the two.
The problem with all of this is that he has resources somehow, he must have salted some away and he hasn’t yet been attacked by his creditors. But it’s going to happen. The banks, he is so deeply underwater that any asset that belongs even vaguely to Jooste, a) Will be classified as the proceeds of crime, no doubt, after the PWC report comes out at the end of the year and secondly, will be attached.
So, I see a pretty bleak future for the guy. I guess the upside for him would be to try and argue that he’s mentally ill and to spend many years in an institution, otherwise he’s probably going to be spending decades in jail.
Yes, one kind of hopes that there’s decades in jail and some financial consequences. Because so often these people who are engaged in these very high-level thefts, right, thefts – not walking into a local Spar and holding it up with a gun – but these thefts of billions and billions. So, often they just walk away, still comfortably off, and never face consequences. So, one certainly has to hope that there are consequences here.
Speaking of big thefts and big heists – let’s talk a bit what’s been happening with VBS Bank, with the EFF and just a really, crazy week.
No, that’s an extraordinary story and what a comprehensive report. It’s over 140 pages. I’ve been working my way through it, and I would strongly urge people, before they go out and make comments, to read that report because it is eye-popping, Felicity. You have a fellow, who’s a charted accountant, who was based in Johannesburg, who saw an opportunity for a little mutual bank that was struggling along, losing about a R1m a year, taking in about R220m or with a total deposit base of R220m, which they lent out to the local community in Venda, for home loans. 99% of their lending’s were home loans.
He saw this as an opportunity to plunder, effectively. So, what he did was install his own CEO, created his own company, Vele, and then systematically started attacking the assets of municipalities. And the way he did it was by paying 2% commissions to any new municipal mayor who placed money from that municipality on deposit with VBS – which comes from the old Venda Building Society, a mutual bank.
So, effectively, what you had was a municipality like Makhado, for instance, would give a R100m, the mayor would sign off R100m into VBS Bank and receive a R2m kickback immediately. That whole system was coordinated by the head of the ANC in the Limpopo Province.
Now, all of this information is disclosed in the report from Terry Motau, the advocate who investigated it with the assistance of Werksmans. From there it wasn’t enough to just get the municipalities to give their money to VBS. These scurrilous crooks – and they are, there’s a bunch of chartered accountants amongst them – then decided that the next place to plunder were state-owned enterprises, and they started off with the Passenger Rail operation, which was trying to put a R1bn on deposit with VBS, which would have wiped out, temporarily, all of the cash flow issues that a Ponzi scheme like this does bring.
In two instances, they are heroes, both women, who stood up. The one was in the Polokwane Municipality, where the financial manager stood up against this – and to great cost to herself, she was suspended from duty as a result of saying, to the mayor, that you can’t put money into VBS because it is mutual bank. It’s not a registered bank where you’re allowed to do it, according to the rules. But, of course, what happened there was there was while she was on leave in December, the mayor transferred R100m. She managed to get that money back into the municipality only by threatening to bring Treasury and the Reserve Bank into the system. And, of course, by that stage the VBS crooks thought well, we don’t need further scrutiny – let’s just repay the money. So, the rate payers of Polokwane are fortunate in that they’ve been looked after.
Similarly, with what happened at (PRASA) the Passenger Rail Agency of South Africa, where the CEO wanted to put the money in – and there were trade unionists who were being paid off as well, the numbers are R30m to R40m – and there was a financial manager, again a woman, who said, no, you can’t do this according to the rules. She too, came under enormous pressure and was suspended and so on. So, there are heroes in this story but there are a lot of crooks too.
It’s just so horrible to think about all the money, because the municipal money is public money and it’s just disappearing into this vacuum. There’s just so much shenanigans and bad behaviour going on, and you think about also, the small depositors who did have money on deposit at VBS – and what’s going to happen with all of them?
Whenever there are issues with the bank and whenever there’s this kind of behaviour at a bank, it really strikes at the fabric of the economy, because really, the flow of money is what makes everything keep turning. And it erodes peoples’ trust in the system and in the economy when something like this happens.
Indeed, the depositors should be okay. They’ll be looked after by the Reserve Bank, because what the crooks were doing was they were bringing in deposits from municipalities and they tried to do it with SOEs. So, the result of that was that the deposits that private individuals put in were relatively small, R200m out of R2bn. After being 99% to begin with, they were 10% or even lower. Also, the home loans that were granted by VBS were a fraction of the overall portfolio.
The real issue here is not the depositors but it’s the rate payers, because the poorest of the poor, in these municipalities, and some of them are very small municipalities, are expected to pay their rates and taxes. They’re expected to pay the municipality for electricity services, for water. So, you get people for whom an investment of R100 a month is a sizeable chunk of their disposable income. It’s this money that they crooks have just filched, and blatantly, Felicity. They would have gatherings at hotels, plush hotels, where they would bring together mayors and senior people in finance departments of municipalities. They would be addressed by the head of the ANC in Limpopo Province telling them it’s the right thing to do, to put money into VBS because it is a black-owned bank.
In the meantime, the head of the ANC in Limpopo was the one getting kick-backs and being incentivised to deal with the crooks. It’s a horrific story, which would have got worse. One little that came out in the report said that the Passenger Rail Agency, when there was a blockage in the R1bn, which would have kept the Ponzi scheme going – because of the intervention of the financial manager – when this blockage occurred the consequence of that, from the CEO, well the CEO was replaced but the new CEO effectively said, well, don’t worry, when Nkosazana-Zuma wins in December, we’ll be able to fund that all through.
So, there’s a very distinct connection between Nkosazana-Zuma. Plus, also in the report was a bribe that was paid to Dudu Myeni – SA Airways – into the Dudu Myeni Foundation, which the advocate says, it wasn’t the Dudu Myeni Foundation. It was the foundation she looks after as the chair, which is the Jacob Zuma’s foundation.
So, you’ve got Zuma in the middle of this, you’ve got Zuma’s wife in the middle of this, and a huge wakeup call to South Africa on what these people were perpetrating. We’ve seen it in state capture, but this is a very clear example. A lot of the exposure has been going onto the EFF and Floyd Shivambu and how his brother was involved and a really disingenuous response that he’s had to the R16m that he managed to filch. But that’s not the only political fallout here. The head of the ANC in Limpopo, plus the Jacob Zuma Foundation are deeply implicated. That’s the world that South Africa was going to, until Ramaphosa took over in December. Â
Yes, and happily that is finally coming to light and we’re really starting to see that exposed and, hopefully, there will be political consequence as we head forward. Hopefully, we’re going to see a turnaround, which of course, is already underway, under Ramaphosa.
Tell me, Alec, the week in the markets, just to wrap up. There was a lot of turmoil and we actually saw a pretty sharp sell-off in US markets, led by big tech stocks, that bounced back somewhat on Friday. But in general, US markets really ending the week in the red in one of their worst trading weeks since, I think it was about 2016.
No, well, since February. We had that 10% wipe out in February of this year. The way I interpret these things is quite pragmatic. You have a shift in the world away from, if you like, old industry, old technology to exponential companies and investors have caught onto this. And capital is going towards exponential companies and what we would define as big tech companies that are growing at 30% to 40% a year, and have been doing it for quite some time.
It’s not surprising with the money chasing these big winners that they’re going to overshoot from time to time. So, you will find these corrections occurring and that is exactly what’s happened in this case. Where Amazon doubled this year already. Now, as much as Amazon is a fantastic company into the future, you can’t expect it to double in a period of 10 months, simply because it does have better prospects and everything else around it. There is an overshooting and the pullback, many believe, is a very healthy thing, but to think that this is the end of the game, to think that suddenly we are now going to have a collapse in big tech stocks…
Remembering, stock markets always project 6 months to 12 months ahead and stock markets also, eventually, reflect underlying earnings, and revenue, and profit, and value growth. Now, there’s been no change in this relationship between exponential companies and the rest of the market, if you like. It is still very much in favour of exponential companies.
The only change we’re seeing is that ‘Mr Market’ has got ahead of himself. Now, he’s taking a panic, and saying he was too far ahead of himself. Now the share prices are coming back but you can expect, as a longer-term investor, that this is just going to move in the way that logic would suggest it does. But nothing goes up in a straight line indefinitely. I guess, one could make an argument that big tech stocks should be growing 30% to 40% a year and that they’ve been growing much faster than that so, it needed this recovery to come back to earth. But is the seismic shift over? Definitely not.Â
