Taking aim at Mkhwebane

Firing its latest salvo in the CIEX court case, the central bank wants the Public Protector to pay dearly, writes Dewald van Rensburg.

The already ugly court battle between Public Protector Busisiwe Mkhwebane and the South African Reserve Bank, Absa and National Treasury escalated significantly this week.

The central bank is now asking the court to ruin Mkhwebane financially and professionally by imposing an extremely punitive cost order on her individually instead of on her office.

“There is no way of knowing what the amount will be,” said Reserve Bank spokesperson Jabulani Sikhakhane.

“We will have to wait for the judgment.”

The central bank also wants the court to explicitly declare that Mkhwebane has abused her office.

Its livid reaction comes in response to Mkhwebane’s belated answering affidavit, lodged with the Pretoria High Court last Friday. In it, she has defended her CIEX/Bankorp report against multiple review applications, insisting that the central bank’s rescue package to Bankorp was unlawful and that Absa owes the South African people money.

Mkhwebane appears to reinterpret the meaning of the orders she made in her contentious report, released in June, regarding the apartheid-era bailout of Bankorp – and to add new evidence after the fact.

“The answering affidavit is an abuse of process,” said Johannes de Jager, the central bank’s general counsel, in an affidavit.

“It breaks virtually every rule that applies to an organ of state when its decision is taken on review.”

This week’s latest volley of court papers saw both the Reserve Bank and Absa zoom in on meetings that Mkhwebane had with the presidency and the State Security Agency in which she apparently discussed ways to pursue Absa for the money, as well as the “vulnerabilities” of the Reserve Bank. Mkhwebane met with the presidency on April 25, and again on June 6 and 7.

The central bank charges that Mkhwebane still has not said what those meetings were about – especially not the last one, held shortly before the controversial report’s release.

Handwritten notes from this meeting have made it into the court record before, and on the basis of these, the central bank claims that Mkhwebane and the presidency “discussed not only her new remedial action involving the Special Investigating Unit (SIU) ... but must, in all probability, also have included her plans to have the Constitution amended to remove the primary function of the Reserve Bank”.

The central bank goes on to say: “The Public Protector met with the presidency, and no one else, about this momentous constitutional change that had a devastating and immediate effect on the financial stability of the country.”

Absa CEO Maria Ramos is making the same argument: the president was in on it. “It is clear that the presidency is cooperating with, if not advising, the Public Protector on how to refer the recovery action to the SIU,” says Ramos in her affidavit.

Busi’s defence: ‘what’s the harm?’

Mkhwebane’s defence of her report is that it does not really affect anyone, but only makes the SIU “request” that the president reopen a 1998 proclamation “in order to recover misappropriated public funds unlawfully given to Absa Bank in the amount of R1.125 billion”.

This is just a request and has “no direct and external legal effect on the rights of Absa”, claims Mkhwebane.

All other parties reject this out of hand.

The mysterious Bankorp bailout

In her affidavit submitted last Friday, Mkhwebane insists that Absa, the central bank and Treasury are all wrong about Absa not owing any money.

Her whole report had been implicitly premised on the assumption that an expert panel, led by Judge Dennis Davis in 2002, was simply wrong – without ever saying why.

Davis’ panel was appointed by the Reserve Bank to look into the Bankorp bailout. It found the bailout was overgenerous, but that Absa had not benefited from it because it bought Bankorp from Sanlam at “fair value”, including the value of the bailout.

When Mkhwebane originally came out with her report in June, Davis told City Press he could not figure out why she rejected his findings.

“Judges can be wrong, but we would like to know why,” he told City Press at the time.

“She may be able to produce some other document with intricate calculations as to why we were wrong, but I have not seen one,” he added.

Mkhwebane has belatedly risen to that challenge by commissioning a report from Tshepo Mokoka, an economist at the University of the Witwatersrand.

This report is legally pointless because it was commissioned after the fact to justify findings that had already been made, claim the central bank and Absa.

That said, Mokoka’s affidavit finally sets out an argument for why Absa owes South Africa the Bankorp bailout, despite Davis saying the opposite.

The Bankorp bailout took place in phases over a decade between 1985 and 1995, and is maddeningly difficult to explain.

The court record includes a transcript of Davis trying to explain his finding to former public protector Thuli Madonsela – and failing miserably to convince her.

Why they should pay

The bailout entailed the Reserve Bank lending Bankorp money, with which Bankorp had to buy government bonds.

Those bonds were given back to the Reserve Bank, but it gave Bankorp the interest on the bonds, minus 1%. In effect, Bankorp got R1.125 billion in interest payments over five years with which to cancel its bad loans and stay afloat.

This was, in effect, a gift – and the reason Bankorp was so generously bailed out is that its depositors were largely Afrikaners whom the then besieged National Party had to keep onside during the turbulent last days of apartheid.

Mokoko’s essay traverses a century of theory about the function of central banks as “lenders of last resort” to show that the Bankorp bailout was ill-conceived. This was, however, never contested by Davis in 2002.

Mokoka’s actual argument against Davis is that Absa should have anticipated that the bailout was illegal and would one day have to be repaid – even if the Reserve Bank was not demanding repayment.

Because a gift such as this is illegal, it must instead be considered a loan. If it is a loan, then Absa must repay it, argues Mokoka.

The bank should have seen this before buying Bankorp in 1992 and Davis should have said this in 2002, he continues.

“Like Absa, Davis erroneously treats a liability as an asset and concludes that Absa paid fair value,” says Mokoko.

“The central bank was not empowered to offer any assistance as a gift to Bankorp. This should have been identified in the Absa due diligence report.”

The central bank’s position has been simple: that interest was never a loan and was never meant to be repaid. In other words, there is no debt.

Ramos calls the new economic arguments “difficult to understand and [seemingly ignoring] basic precepts of company law and common sense”.

The Reserve Bank calls Mokoka’s report “incorrect and ill-informed”.

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