A $2 Billion bank heist happened in Bulgaria in Summer 2014: The problem of Connected Lending BambouClub Follow Dec 10, 2015 · 4 min read

The Bulgarian Banking Disaster, June 2014

The Lufthansa heist took place at John F Kennedy Airport on December 11, 1978. An estimated $5 million in cash ($18.1 million today) was stolen. It’s featured in Goodfellas.

In the summer of 2014 organised criminal groups successfully ripped off 3.5 billion Bulgarian levs ($2 billion) from a Bulgarian bank. That’s 111 Lufthansas. It was a case of embezzlement. The embezzlers destroyed the documentation of their crime together with bank database records over a couple of years. So there is no evidence. No one has been prosecuted for the crime. A few people have lost their jobs. No one has gone to prison.

ONE evening in June 2014 my wife was unable to complete a purchase on EBay as PayPal would not process her payment. This was odd as she had 3,000 euros in her account.

The following morning, a hot steamy Plovdiv morning, she went to find out what was going on and to withdraw cash from her account at Credit Agricole Bulgaria. The ATM machine would not cough up any cash. Queues built up as clients applied to withdraw cash from the clerks inside. The news reached the TV networks; the next day the queues were longer but the bank’s doors were closed.

Credit Agricole Bulgaria was sold by the large French bank Credit Agricole to the Bulgarian bank Corporate Commercial Bank (KTB Bank, sometimes referred to as CCB Bank confusingly) just two weeks before this bank run. Both Credit Agricole Bulgaria and KTB were subjected to full audits by the Supervisory Department of the Bulgarian National Bank (BNB) before that sale was authorised.

The bank run spread. There was a run on the bank that owned Credit Agricole Bulgaria, KTB Bank. A few days later the bank run spread to the country’s largest bank, First Investment Bank.

It’s a long, Byzantine story that was largely ignored by the international media except for detailed and comprehensive reports by Frances Coppola for Forbes. It involved death threats made by the bank’s shareholders against each other, the flight of one owner to Serbia, the resignation of the BNB Governor Ivan Iskrov, reports of bank corruption and “bad apple banks” in Wikileaks.

But actually the process of stealing $2 billion was very simple. There was no use of arcane financial derivatives. Over a period of years the Bulgarian Government channeled deposits of public sector entities into KTB Bank. KTB Bank attracted additional deposits by offering unusually high interest rates on savings. KTB Bank owners then made enormous loans to parties connected to the bank’s owners without any collateral or security. The creditors never had the slightest intention of repaying these loans. It’s called ‘connected lending’.

The economist Shaun Richards quotes from a letter from the Bulgarian National Bank written to the European Commission:

The audit at KTB AD found out that important information was missing on the financial position and/or the utilisation of loans for a specific category of borrowers (with loans totalling BGN 3.5 billion out of the entire BGN 5.4 billion loan portfolio). There were strong indications of credit risk with regard to the recovery of credit exposures in this category, which could cause considerable impairments.

Now none of this would have been possible in a banking system organised on the Bitcoin blockchain. Every loan should be recorded on the blockchain, together with details of the collateral securing that loan. Then shareholders in the bank, auditors, the central bank, anyone with an internet connection and a Chrome browser can monitor the bank’s loan book on the Blockchain. Then no one with an interest has to trust anyone else — the bank’s management, the bank’s internal and external auditors, the central bank supervisory department, the EU’s banking supervisors, the Ministry of Finance — to do their job properly. And that’s optimal because you get let down when you have to trust people.

One day people will appreciate that the blockchain is an unhackable distributed ledger. In fact the blockchain is the only unhackable database. There’s no way KTB Bank could have obscured the criminal negligence of their loan book it it had been published on the blockchain, and they could not have covered their dirty embezzling tracks by entering their own database and deleting the audit trail, as they did in 2014 with the corporate relational databases.

I raised this subject with Miss Izabella Kaminska, the Financial Times’s Bitcoin critic, at the time of the Bitstamp hack in January 2015. (My Twitter handle was @ByzantineGen then.)

Miss Kaminska’s basic message is

a) We need to trust the regulators (yes, the same regulators who enabled not only the $2 million KTB scam but a global financial crisis 2008–2011) :

So one must rest one’s trust in people like the criminally negligent BNB regulator who let the KTB $2 billion theft take place on his watch, Mr Gounev, who is photographed here shaking hands with ex-Bugarian PM Sergei Stanishev. Stanishev appointed Gounev to his role at the Bulgarian National Bank. He is now leader of the European Socialists, the second-largest party in the European Parliament. The lunatics have taken over the asylum.

and b)

Well, I don’t trust the banks or those who claim to regulate them. And I am working on my reading comprehension. And I am buying bitcoin. And I reckon its pay-off profile looks like this: