This article first appeared in Groundup.

A group called Lungelo Lethu Human Rights Foundation is preparing a class action suit against the four major banks for what it says are the unlawful evictions of thousands of South Africans from their homes.

The group is being led by King Sibiya, who has waged this fight before. “What we are seeing now is no different from the human rights violations that we fought against during the apartheid years. The difference now is we are fighting the banks. And it is not just black people who are victims of the banks, white people are too. This case shows that justice is for the haves, not for the have-nots.”

The Constitution provides protection against arbitrary deprivation of property, but Sibiya says this is routinely flouted by the banks.

Most of the evictees represented by the Foundation are from poor communities in Gauteng. In many cases, they were evicted from properties they had occupied for decades, properties that were acquired during the apartheid years when blacks were denied freehold title. The best they could get was a 30 or 99 year lease from the local municipality, which was the primary landowner in places like Soweto. Banks started lending money to those with leasehold title, and this is where trouble seems to have started. Part of the claim the Foundation is making against the banks is that they were not entitled to loan money to those with leasehold title, since in the event of default the property would revert back to the local authority – effectively nullifying their collateral (being the house). This is part of the legal mess the court is going to have to sift through.

At a meeting of about 40 evictees in Johannesburg’s Central Methodist Church last month, some disturbing stories of abuse were told, such as that of 91-year old Gladys Mviko, who was evicted from her home in Vosloorus in 2012 for reasons she cannot fathom.

Mviko acquired her home in 1988 by way of a 99 year lease, and took out a small loan with the Perm (later acquired by Nedbank) to build an extra few rooms. On 24 November 1998 a judgment was allegedly handed down against her for default on her loan with the bank. This is an impossibility she says, as she was up to date with her payments to the bank. The property was sold at auction on 17 May 2012 for R100 – a ridiculous and suspiciously low price. Mviko says no summons was served on her, and on the basis of this alleged judgment she was evicted from her property – without a court order.

“Who gave the bank permission to sell my house?” she asks. Her loan to the bank was debited every month from her pay cheque, and was not in arrears, she maintains.

She now lives with her daughter, Florence Majola.

Sibiya points over to the Johannesburg High Court building, a half block away from where we are sitting. “Go and look at the court roll in the High Court any day of the week. 80% of the cases in the court are home repossessions and Road Accident Fund cases. And nearly a third of the 80% are default judgments.”

I went over and checked the court roll as he suggested and he was right. By far the majority of cases on this particular day involved the banks against presumably defaulting clients.

Sibiya fought for tenants’ rights in the apartheid years, and was one of the architects of the Mngomezulu versus City Council of Soweto case in 1986 that prevented tenants being evicted from their homes for non-payment of rent on the grounds that the City Council had not followed the law in setting rentals. The case was won on technical rather than human rights points, but it gave black residents greater security of tenure in their homes. While whites enjoyed freehold title over land under apartheid, blacks were regarded as transients who had to make do with leasehold rights.

The stories of eviction range from the tragic to the bizarre. Moses Mgijima (65) now lives in a shack in Thembisa, having been evicted from a municipal house he had acquired under leasehold title in 1982. He says he never borrowed a cent from Nedbank, but was evicted in 2012 when he was informed that his house had been sold by Nedbank to a company going by the name CC Trade 57 cc. He brandishes a letter from Nedbank saying a loan was taken out, but Mgijima says they have the wrong person. “I never had a loan with Nedbank. They show my property in the name of Maria Mbatha (who lives in Thembisa at a similar numbered but different address).”

Josephine Ncanywa also lived in a leasehold property in Dobsonville Ext 2. She borrowed R28,700 from the bank and admits to falling behind on her payments, but I was shown an insurance policy issued by the Perm that it would cover any shortfall payments – which apparently never happened. She says no summons was served on her (a common complaint) and she was evicted in 2005. She complained to the local municipality and was told to re-occupy the house, which she did. She claims she was then evicted a second time in 2008 by Red Stripe Trading 68 cc without a court order – which is illegal. She went to retrieve her court file but it was lost. She now lives in Orange Farm.

Communities are wising up to the home repossession scandal and now come out in force whenever the sheriff arrives with officials to evict tenants. The same tactic is being used in other parts of the world and lawmakers are getting the message. Greece has changed its law to prevent homeowners being evicted from their primary residence.

At the Central Methodist Church in Johannesburg I meet up with Solomon Nhlapo, whose late mother Mary acquired a 99 year lease house in 1965 and in the 1980s borrowed money from the Perm to build extensions. Mary passed away in 1994 but her son Solomon continued paying the bond until 1997 when he figured he had probably paid off the loan amount. He approached the bank and asked for the outstanding balance, only to be told he could not have that information as the account was in his mother’s name. “But my mother is dead and I am the one paying the bond,” he told the counter clerk. He told the bank he must assume the bond was now fully paid up and therefore stopped paying. He then discovered that the house had been sold to a company CUF Properties for R100 at auction. No summons was issued, no eviction order was presented, according to Nhlapo.

CUF has since sold the house to a new owner for R350,000. Nhlapo shows me a letter from the bank showing the bond was paid up and instructing Nedbank’s home loans department to hand over the title deed. Instead, the bank sold the property to CUF.

When I previously investigated a slew of similar complaints in Cosmo City, to the north of Johannesburg, the pattern was the same. No summonses, no eviction orders. All of the evictees were working people, some of whom had lost their jobs and run into cash flow difficulties, with little or no knowledge of the law. It is easy to bamboozle them with official-looking eviction notices. One Cosmo City resident, Victor Zuma, had his home repossessed by FNB over an arrears amount of R6,000. He is now seriously ill, the result he says of the stress of first losing his job, then his house. When contacted for comment, FNB says it tries to give defaulting customers time to catch up on arrears and only engages in the sale in execution process as a last resort – a stock answer whenever this type of question is raised. I asked the same question of the other banks and got pretty much the same answer.

“What they do is the sheriff arrives and if no-one is around he hands the summons to a neighbour,” says Maxwell Dube, publisher of the Cosmo City Chronicle, which has investigated corruption around home repossessions in the area. “Most of the people I have spoken to who have been affected by this did not see their summons before they were evicted.”

One investor had purchased 26 properties in Cosmo City in 18 months, all of them repossessed by Absa. When I tried to contact the investor, he would not take my calls. Later I discovered that he had started transferring the properties out of his name, presumably to cover his tracks.

Another sad case is that of Johannah Tshabalala who, with her late husband Mantae Petrus, acquired a house in Katlehong’s Khumalo section for R39,000, financed by Nedbank. This was fully paid in February 2007. In fact Tshabalala over-paid an extra R1,000. She tried to approach the estate agent who sold her the property for her title deed, but he had since disappeared. In 2010 she received a summons saying the owner of her fully-paid up house is CUF Properties and she had 30 days to vacate. A deed search shows CUF bought the house in 2009 for R69,000. The deeds register shows the house has been sold seven times since. She was evicted in April 2015, but remains a squatter in her own house. She was arrested for trespassing and granted R300 bail – all for a house that she insists is fully paid up.

Though Nedbank features prominently in the cases mentioned above, it is by no means the only bank accused of improper or unlawful behaviour.

When presented with the above information, Nedbank appeared keen to resolve the matter.

– See more at: http://groundup.org.za/article/residents-fight-back-against-banks-eviction-tactics_3572#sthash.mrIcGcOF.dpuf

This article first appeared in Moneyweb.

When the term Black Economic Empowerment (BEE) first floated into the South African business and political lexicon in the early 1990s, there was some hopeful discussion that it would last just 20 years and then be phased out.

Well, 20 years have come and gone, and if anything, BEE has morphed into something more oppressive and outrageous than even the original architects could have imagined.

In the foreward to Anthea Jeffery’s book BEE: Helping or Hurting?, author Rian Malan writes that most journalists missed the most important story of the post-apartheid era. “By the time I reached the halfway mark I was trembling with outrage and bombarding friends with distressed SMSes and emails. Are you aware, I said, that the ANC government has drawn up a ‘final policy proposal’ allowing it to expropriate 50 per cent of farmland without compensation being paid to the farmers concerned? And that the Constitutional Court has already given its indirect blessing to such a move?”

South Africans of every colour need to face up to some harsh realities: white South Africans need to admit that they unfairly benefited from apartheid race laws that kept blacks out of the race; black South Africans need to recognise that the laws being drafted by this government in their name have the capacity to destroy our society “just as surely as the Xhosa nation was destroyed by the Great Cattle Killing of 1856 to 1857.”

There’s a whole library of laws on the table that will empower the government to plunder pretty much what it likes: the Expropriation Bill, empowering “thousands of officials at all three tiers of government to expropriate property of virtually any kind”; the Protection of Investment Bill of 2013, which denies foreign investors the right of international arbitration in the event the government decides to seize their assets; the Mining Amendment Bill, which gives the government the right to take control of privately-run oil and gas fields for whatever compensation it likes.

The consequences of BEE and associated laws are slapping us in the face daily, yet we choose not to notice: foreigners are investing in Kenya rather than SA; South African companies are shipping their money abroad as fast as possible. Sweeping amendments to BEE laws are tabled that will accelerate these trends, yet we yawn and pretend it will all come out alright. South Africans are truly sleeping through the revolution, as Malan points out.

Critics of BEE typically point to the handful of politically connected individuals who have been the primary beneficiaries of BEE, leaving the broad mass of South Africans in relative poverty. But there is no doubt the massive expansion of the black middle class (which now outnumbers the white middle class) is a major outcome of these policies. Free Market Foundation economist Loane Sharp argues that the black middle class will double over the next seven years to about 11 million, helping to pull the economy out of the mud.

Far less attention is paid to the costly and disastrous policies and laws that have been passed under the umbrella of BEE. Take Outcomes-Based education, one of the costliest social experiments in the post-apartheid era. The teaching of reading, writing and arithmetic were down-played, and in 2010 The Times reported that five million pupils leaving school were unable to read or write adequately. African drop-out rates at university were 50% according to a 2013 Council on Higher Education report, while just 16% of the 2005 intake completed their three years degrees within the designated time. Pass rates were dropped to make the graduation figures more commodious for the education bureaucrats. All in all, a shockingly poor return for what is one of the biggest expense items in the budget.

This book is not a pleasant read. But to flinch from this touchy subject is fatal, because the technocrats drafting some of the crazy laws that Jeffery dissects have no intention of stopping here. They want to go all the way, wherever that may be. Many of these technocrats are ideologically-driven fellows of the Marxist-Leninist school who harbour a secret admiration for Robert Mugabe. Others are dirigistes who would leave no human endeavour untouched by the supposedly benign hand of government.

Criticising BEE exposes one to charges of racism, if white, or sell-out, if black – which is precisely why so many destructive laws have been allowed to pass in almost total silence.

Most South Africans in the 1990s conceded that it was not enough to simply repeal discriminatory laws, but that remedial action would be needed to overcome the legacy of past discrimination. Hence the Constitution in 1996 was anchored in the concept of non-racialism and equality before the law, with a sub-section authorising the taking of “legislative and other measures designed to protect or advance persons…disadvantaged by unfair discrimination.”

But elements within the ANC were more committed to the national democratic revolution, which they believe exempted them from the Constitution and the negotiated settlement thrashed out between the ANC, its allies and the National Party. Their goal was eliminating property relations and ensuring demographic representivity in every sphere of society.

Who would have thought South Africans entering university would still have to declare their race, nearly 25 years after the Population Registration Act was abolished? The declared intent of the Employment Equity Act is to end racial prejudice, instead it feeds it by entrenching racial consciousness.

The use of racial quotas was always going to be messy, and so it has turned out. Coloureds in the Western Cape (where they account for nearly half the population) have been over-looked for promotion in the Department of Correctional Services because national demographic quotas require Africans to make up the numbers. In Krugersdorp, the SA Police Services promoted a less qualified African male over an Indian woman with 24 years’ experience, until this was overruled by the Labour court. It is left to the courts to wade through the bizarre calculus of racial quotas and make determinations on who gets the job.

Jeffery provides an interesting expose of “inappropriate appointments” made possible by a provision in the Employment Equity Act allowing the appointment of black people with no proven capacity but “the potential to acquire the ability to do the job.” This soon became the favoured loophole behind which kin, friends, and comrades were favoured over more competent applicants. A 2012 report by the state-funded Human Sciences Research Council warned that “the ANC’s deployment strategy systematically places loyalty ahead of merit and even of competence and is therefore a serious obstacle to an efficient public service.”

BEE is great for the connected elite. Mathews Phosa, former national treasurer of the ANC, until recently sat on more than 80 company boards, Cyril Ramaphosa, deputy president of the ANC, sat on more than 50, though said he planned to resign from many of them to concentrate on his political duties.

There is no quarter of the economy that is not skewed by racial profiling and BEE points, quotas and policies. New procurement regulations have been tightened to stop the “fronting” (or “renting of black faces” as Cosatu calls it), but this raises the costs for businesses, and ultimately consumers. BEE equity deals on the JSE in the decade up to 2008 were valued at about R600 million.

“BEE ownership deals are thus imposing an enormous cost on a country struggling to maintain or expand essential infrastructure…,” says Jeffery.

Land reform has been an admitted failure, with 90% of land reform projects unable to produce a marketable surplus. So government has spent billions of rands in taxpayer money to take hundreds of farms out of production, costing thousands of jobs and billions more in lost revenue.

And so it goes on. This is the ANC’s 20 year scorecard on BEE, as presented by Anthea Jefferey, and it scores an F. It’s time to look past the racial sensitivities and get a real national debate going on this subject before the race engineers annihilate what’s left of the economy.

Is there a better tax system than the monstrosity currently in place?

Stephen Meintjes, analyst at Momentum SP Reid Securities, and the late Michael Jacques, authors of Our Land, Our Rent, Our Jobs certainly seem to think so. What if we could replace income tax, VAT, customs duties, excise, sin taxes, fuel levies, the Unemployment Insurance Fund (UIF), skills development levies and every other ‘tax it if it moves’ impost with a simple-to-collect tax based on land value?

There is so much invested in the current tax system that it is hard to imagine an alternative. The cost of administering SA revenue systems is about R10 billion a year, and there are an estimated 2 000 registered tax professionals lumping another R1 billion on top of that as fees. A far greater cost is the combined hours and expense incurred by companies, executives, lawyers and the courts dealing with tax matters. That’s a stubborn oak to cut down. But cut it down we must if we want to unleash the true potential of the economy, say the authors.

Then there is the complexity of the tax system. A report by PwC among the top 50 companies in SA found they were subjected to 21 taxes divided between profit, property, employment, indirect, environmental and other taxes.

Governments are loath to abandon the Marxist mantra of ‘progressive tax’ (from each according to his ability, to each according to his needs) as a means of wealth redistribution.

There are multiple alternative ideas to the current tax system, but most have the effect of stifling economic growth and job creation. The authors argue that the existing system punishes enterprise and ingenuity. Hence, tax on profits discourages profits. Value-added tax (VAT) discourages adding value and expenditure. One frequently-proposed alternative is to remove all other forms of tax in favour of increased VAT. This would encourage savings since to pay less tax, people would spend less. SA’s national savings rate is notoriously low precisely because there are insufficient incentives to save.

The solution proposed by the authors seems implausibly simple: establish a national land database and impose a ‘resource rental’ on the land itself. This is how most municipalities used to value land for rates and taxes prior to the introduction of the Local Government Municipal Rates Act of 2004. The authors argue that this resource rental could be phased in over a few years and gradually replace all other forms of tax. The fact that municipal site valuations were so widely employed prior to 2004 means the proposal has a better chance of succeeding in SA than in almost any other country.

How would that help the economy? For one thing, all land would be subject to resource rentals, so communally-owned farms and redistributed land would have to be productively used in order to afford the rental. For that to happen there would have to be security of tenure – such as leasehold and freehold title – as a precondition for gaining access to credit markets and to free up billions of rands in ‘dead capital’ currently tied up in under-utilised land.

Under this scheme, the government would essentially become a rent collector. Airports, toll roads, marine resources, oil concessions and the electromagnetic spectrum would all be treated as rent-earning assets. The income from this would, over time, not only replace all current forms of taxation but, by unlocking productive capacity, generate much higher receipts for the government, both locally and nationally. Local governments in particular would no longer be dependent on hand-outs from central government, and so deliver better quality services to residents.

You would pay rent on your land only, not on the improvements you make to the land – which would be deemed the fruits of your own ingenuity, and therefore for your pocket.

This sounds Pollyannish, but is there any precedent for this elsewhere in the world? In fact, there are quite a few stunning examples, including right here in SA. The land tax as it was commonly known played a crucial role in the industrialisation of Japan and Taiwan, before it became abused by various vested interests. Hong Kong and Singapore are interesting case studies in that the governments own virtually all land and derive considerable revenue from the land for the benefit of all. This in large measure accounts for their low tax rates and consistently high economic growth rates.

It may be that a homeowner in Bryanston, Johannesburg, living in a prime residential area will pay R50 000 or more a month as a resource rental on that land. This sounds like a preposterous amount, but it should be remembered that someone in this income bracket is already probably paying more than this in income tax, VAT, fuel levies, property rates, and so on.

The preamble to the Constitution says South Africa belongs to all who live in it, and that includes all natural resources such as land, air and water. But most land has been sold off as private property, so locational advantage and the resource rental which accrues from this is for the benefit of private property owners.

The argument here is not against private property, and the corresponding right to earn private rentals on property. What is being argued is that “such conflation of private property and a perceived corresponding right to any unearned benefits (arising from such property) has no foundation in natural law and is totally unnecessary”.

The current system punishes the poor in several ways. A subsistence farmer with no legal title to land has to pay VAT on goods whose prices have been inflated by duties and taxes.

Adam Smith in Wealth of Nations spelt out the basis for a just tax system: it should be equitable (taxes being levied according to abilities), certain, convenient and efficient.

He was against a tax on the necessities of life, just as he was against a tax on labour, because these are inflationary and therefore likely to increase poverty.

Though Smith is considered the father of the modern tax system, the authors believe he would be shocked at the “odiousness and intrusion of most taxes”, particularly taxation of company profits and on labour.

For a country in search of inspiration, here’s an idea that deserves a decent airing.

* This article first appeared in Moneyweb.

More than 400,000 white expat South Africans have returned to the land of their birth since the apex of the financial crisis in 2009, according to research by Free Market Foundation economist Loane Sharp. This is based on extensive analysis of job candidates on the database of the country’s largest recruitment firm, Adcorp.

Sharp says SA’s white population of working age (15 to 64 years) peaked at 5.9 million in 1973, but declined steadily to 3.9 million in 2009. Since then, the white population has risen to 4.3 million, a net gain of 400 000 over six years. That’s a substantial brain gain for the country, since most of these returnees bring vast international experience in finance, engineering, medicine and other professions.

Some employment agencies are specifically targeting expatriate South Africans to fill highly skilled positions in sectors such as engineering, mining and construction, and that is accounting for some of the migration back to SA.

Free Market Foundation economist Loane Sharp says returning whites have little trouble finding work because of the high level of skills they bring with them. “The truth of the matter is that SA has virtually zero unemployment in highly skilled professions, so those returning whites of working age – most of whom would be classified as skilled – are easily absorbed into the economy. Those without skills, or without sufficient skills, are those that cannot find work. This is why the overall unemployment rate for the country is officially above 26%.”

A variety of reasons account for the two million drop in the country’s white population between 1973 and 2009. Sharp says many of them left in the 1970s and 1980s out of a disdain for apartheid and fears over what the future held for their children. Those who left in the post-1994 era were pushed out by Black Economic Empowerment, crime and a deteriorating political environment. Thousands of young white graduates with little prospect of employment due to BEE quotas ventured overseas in pursuit of careers, usually in English-speaking countries such as the UK, US, Canada, Australia and New Zealand. Many of these are now returning armed with skills that are still in high demand in SA.

“South Africans working abroad got a rude awakening after the financial crisis in 2008 when they realised their overseas jobs were not as secure as they had once thought,” says Sharp. “Many of them realised there is no such thing as permanent, as in guaranteed, employment, and this is when they started to look for opportunities back in SA. This has been a huge net gain for the country, since we are acquiring skills that might otherwise have been lost forever to SA. In addition to this, they bring experience of working in highly developed economies.”

The Institute of Race Relations estimated that 841 000 white South Africans had left the country between 1995 and 2005, and by some estimates two million South Africans live abroad. Based on more recent figures, SA may be experiencing the biggest in-gathering of its Diaspora since the end of apartheid 25 years ago.

Philip Park, MD of recruitment agency Professional Career Services, says there is a notable influx of returning South Africans looking for work on his firm’s books. Ten years ago, they would have slotted into the larger corporations, but today it is medium-sized firms that are doing most of the hiring. A growing proportion of South African firms are hiring for projects in Africa and elsewhere, particularly in the construction and engineering sectors, says Park.

While the job prospects are good for those with skills of any race, the same is not true for those without education or skills. Sharp reckons the unemployment rate at 26% is skewed by Stats SA’s loose measure of employment – defined as one hour in the survey reference week. He believes SA’s unemployment rate will rise to 40% within seven years, and over 50% if a narrower definition of employment is used.

Employment by numbers (Second quarter 2015)

Looking for work 20.9m

Employed 15.7m

Unemployed 5.2m

Discouraged 2.4m

* This article first appeared on Moneyweb.

Two charts tell the story of South Africa Inc. One shows that SA companies cannot invest outside the country fast enough, and the other shows that the JSE All Share index, measured in US dollars, is unchanged since 2007.

Old Mutual economist Rian le Roux put together the following chart which shows SA companies invested abroad to the tune of R80bn in 2014, and more than R60bn on a rolling, cumulative basis up to the second quarter of 2015. Back in 2012 the figure was zero.

Old Mutual chief investment strategist David Mohr says the rate at which SA companies are investing abroad suggests they are nervous about the current operating environment in SA, and see better returns elsewhere.

“Power outages, an unfriendly business environment, rigid labour laws, all the usual suspects account for this migration of capital outside the country,” he says. “If there are any positives to be highlighted as far as SA is concerned, we still have a relatively disciplined fiscal regime and low foreign debt, which should shield us from some of the harsher consequences of delinquent behaviour being experienced by other emerging market countries such as Brazil and Turkey.”

The second graph suggests that virtually all gains on the JSE since 2009 have come by way of rand weakness. If there is a positive to this it is that as the rand weakens it protects investors against a possible bear market. The reverse, of course, would apply: any strength in the currency from here would hurt equities.

The exodus of capital from SA is in large part a vote against the government, which shows no appetite for essential reforms in the areas that investors consider most pressing, such as labour and energy. SA companies have realised that international diversification is a vital hedge against further maladministration. That SAB Miller is now the subject of an attempted buy-out by Anheuser-Busch is a logical outcome of a process which has been two decades in the making.

Larger companies, starting with the mining houses, started the process of international diversification around 1994. Sanctions had kept them out of the race for the juiciest mining assets outside our borders, so when the international embargo was lifted in the early 1990s, there was a sense of urgency in their move abroad. Other companies were quick to follow. The wisdom of this exodus is now plain to see.

The current weak state of the rand will not halt the capital drift. Companies plan for five, 10 or even 20 years into the future.

The common factor in both charts is the rand, which has already breached R14 to the US dollar in recent weeks. There is some consensus that the rand will likely end this year around current levels of R13.50 – R14, but what if there is a blow-out to R16 or even R18 in the next two years, as some have suggested? This is not beyond the bounds of possibility, as the rand has already skidded from R7 to R14 to the US dollar since 2011. The emerging market rout is by no means over, which means further pressure on the rand. That, in turn, is going to make it harder to reduce the current account deficit. Inflationary pressures – mercifully subdued for the moment – could resurface if the rand takes further strain.

If it’s more bad news you want, the South African Chamber of Commerce and Industry (Sacci) has just delivered a corker. This week it announced that its business confidence index sank to a 22-year low, requiring policymakers to do something extraordinary to right the tilting ship. We have to go back to before the 1994 elections to match anything like the current mood of despondency.

Most of the large cap companies on the JSE now earn more than half of their revenues offshore, a prescription which smaller cap companies, such as Truworths, are determined to emulate. It doesn’t always go according to plan, as Tiger Brands discovered when it purchased Nigeria’s Dangote Flour Mills for R1.59 billion in 2012 only to see the value of this investment slip to zero and even negative territory.

Sappi is a good example of how international diversification has cushioned its mattress. Roughly half its assets are in southern Africa and half in Europe, though two-thirds of its sales come from Europe. It’s a similar story at Steinhoff, which derives about two-thirds of its sales from Europe where it houses 59% of its assets. Africa now accounts for just 31% of SAB Miller’s revenue, and 27% of MTN’s, and a quarter of Aspen Pharmaceuticals. Wine and spirits group Distell is making inroads internationally, where it now derives roughly a third of sales. In each case, this is the result of investment decision taken a decade or more ago.

Now, of course, is not a good time to be shifting money abroad. Those who made this decision five or 10 years ago are smiling, but if you believe the rand will hit R18 to the US dollar over the next few years, then a case could be made for getting out now. But as Warren Ingram of Galileo Capital cautions, if you invest abroad now and the rand strengthens from here, you are locking in a certain loss. Recall what happened in 2002, the last time the rand hit R14 to the dollar. By 2005 it had dropped to below R6, and there are many sour memories of the rush to expatriate funds when the rand was weak. Many investors have yet to recover from this shock.

This is the new corporate South Africa: moving the furniture abroad as fast as possible.

* This article first appeared in Moneyweb.

Two South American countries – Colombia and Venezuela – offer lessons in governance that we would do well to heed. Colombia is now one of the fastest growing economies in South America. Venezuela, ravaged by a drop in oil prices and poor leadership, is moving in the opposite direction.

I highly recommend the Netflix series Narcos for some background on what Colombia has been through during the reign of drug kingpin Pablo Escobar. Also worth watching is the Spanish-language (with sub-titles) Palbo Escobar – El Patron del Mal (Pablo Escobar – The Lord of Evil). This provides some excellent context to the recent resurgence of Colombia as South America’s third largest economy.

This article first appeared in Moneyweb.

Colombia, once the drug den of the world and now one of its fastest growing economies, has a few lessons to teach SA. This is true also of its neighbour Venezuela, now the basket case of South America. In Venezuela’s case, the lessons are tragic.

Like most neighbours, Colombia and Venezuela haven’t always seen eye-to-eye. The two countries nearly came to war in 2009 when Colombia arrested four Venezuelan soldiers who crossed the border, and has repeatedly accused its neighbour of harbouring Marxist FARC guerrillas.

Relations have improved since then, but in most other respects the two countries are headed in entirely different directions.

Colombia, once the regional hub for drug traffickers and kidnappers, has undergone a remarkable transformation in recent years. Its economy is the fastest growing in the region after Bolivia, clocking an average 4.3% growth between 2001 and 2014. It also ranks second in the 2015 Economic Freedom Index, behind Chile, the result of vast improvements in labour, trade and investment freedoms.

The same index lists Venezuela as the second worst country in the region in terms of economic freedom, just a shade above Cuba.

The Colombian government simplified and shredded laws that stood in the way of growth, reduced tax on business and signed free trade agreements with scores of countries. It offers assistance for start-up businesses, and a housing boom – powered by government subsidies and soft bank interest rates – has helped the construction sector achieve 10% annual growth in recent years. The government is also spending huge sums on infrastructure, which is expected to boost economic growth by 0.7% a year.

Colombian President Juan Manuel Santos, re-elected for a second term in 2014, has tried to distance himself from the policies of his predecessor, Álvaro Uribe, who resolved to smash FARC guerrillas and reduce crime. Santos has put economic vitality at the forefront of his government. He has done far more than his predecessor in reaching an accommodation with the guerrillas and reducing crime, which by the latest count is down 30% over the last decade.

A peace deal thrashed out in Havana, Cuba, between FARC guerrillas and the government last year promises to bring an end to all illegal drug activity and redistribute land to the rural poor. This is a war that has been waged with varying levels of intensity since 1948. The writing was on the wall for FARC once the US offered Cuba and Iran an olive branch, and by some reports, just a few thousand guerrillas remain in remote parts of the country. The rest have opted for reintegration and a chance to launch a new career in South America’s hottest economy.

Astonishingly, Colombia has now surpassed Argentina as the region’s third largest economy, after Brazil and Mexico.

The story in Venezuela could not be more different. Its growth rate averaged 2.5% between 1998 and 2014, but is expected to shrink by 7% this year. The economy has been savaged by the drop in the price of oil, on which it depends for 95% of its foreign earnings. Inflation is likely to top 150% this year, the highest in the world, and there is a fear the country will default on its foreign debt in 2016.

The country operates a three-tier official exchange rate, alongside the black market rate which has halved against the US dollar this year alone. South Africans who lived through the two-tier financial rand under apartheid will understand the propensity for fraud in such a system, where those with access to the cheaper financial rand could profit 20% or more by converting these to so-called commercial rands. Venezuela’s weak currency makes it a bargain for tourists with hard currency, but the country’s reputation for crime and shortages is keeping all but the hard-core backpackers away. Some hotels, while offering great deals, are asking tourists to bring their own toilet paper and soap. Shortages of food, medicine and other basic necessities, most of which are imported, are blamed on the declining revenues from oil sales.

Under the late President Hugo Chávez, Venezuela was venerated by post-Soviet coffin bearers as a socialist Valhalla that would redeem Karl Marx’s fading vision of a workers’ paradise. That vision lies in tatters under his successor, Nicolás Maduro, who seems cursed with bad luck, bad governance and a gaffe-prone tongue. Not to mention out-of-control corruption: an estimated US$20 billion of the US$59 billion allocated for imports in 2012 disappeared through fraud, according to the former head of the country’s central bank, Edmée Betancourt.

Venezuelans have responded in the only way they can: emigration. Research by Simón Bolívar University’s economics department says 1.2 million Venezuelans now live abroad, a 2000% increase since the mid-1990s. Nearly one in ten of those remaining are considering moving abroad.

Brazil, the largest economy in the region, squats uncomfortably between these two. Though it has a sizeable industrial base, it reliance on commodity exports has pushed it into recession. Like SA, its growing welfare bill has crippled its budgetary flexibility, though with an unemployment rate of just 6%, Brazilians are better able to ride out the storm.

All countries in the region look with envy at Chile and Colombia, the two fastest growing countries in South America. SA would do well to study them too.

Update: It is worth noting that Colombia has experienced a 60% drop in both crime and drug production and an eight-fold increase in tourism in a little less than a decade. A key ingredient in this astonishing success was The Way to Happiness campaign initiated by the Church of Scientology in collaboration with senior members of the Colombian military, police and political parties. The campaign emphasises common sense moral values. Once the campaign was embraced by the police and military, it was cascaded down to ordinary people and is widely acknowledged to have played a major role in the turnaround in Colombia’s fortunes.

Competition never sat easy with SAA, which used R30 billion in taxpayer-funded bailouts over the last decade to shut down a string of competitors, from Sun Air to Trek and tiny Flitestar. No competitor was too small to overlook. Now its demons have come to haunt it in the form of two court challenges that could cost the airline over R6 billion in damages.

National carrier SAA, amidst ongoing senior managerial disorganisation, is currently facing two massive claims, amounting to around R6 billion after tax, one for R1 billion by Comair and the other for R2.2 billion from businessman Robert Watson, owner of Rethabile, BEE minority shareholder of now-defunct Sun Air. Add interest to that lot and the claim could well exceed R6 billion. As we previously explained, the claim relates to charges that SAA conspired with Safair to take Sun Air out of operation, then gobble up its share of the market.

The alleged conspiratorial agreement between SAA and Safair only came to light years later, and forms a crucial component of Watson’s claim. What seems to have happened is that SAA purported to take majority control of Sun Air, baulked when it came to paying for its shares, and promptly shut it down. This, says Watson’s court documents, is one of several frauds committed by SAA.

Then CEO of Safair, Ralph Boettger (who last year resigned as CEO of Sappi due to ill-health), shortly after the demise of Sun Air in 1998, provided the liquidators with a summary of events leading up the demise of the airline. He records a discussion with two Comair executives who believed Sun Air could have survived had SAA not intervened. It was estimated that 60% of Sun Air’s capacity was picked up by SAA, 30% by Comair and 10% by Nationwide. As a result of this, the Comair executives believed SAA benefited by as much as R200 million a year.

This agreement between SAA and Safair only came to light years later, and forms a crucial component of a court case now being brought against the national carrier by businessman Robert Watson, who has acquired the rights and claims of Sun Air’s former BEE shareholder, Rethabile. What seems to have happened is that SAA purported to take majority control of Sun Air, balked when it came to paying for its shares, and then promptly shut it down. This, says Watson’s court documents, is one of several frauds committed by SAA.

In a recordal of events by Safair, the following rather incriminating statement shows what SAA was planning: “Mr (Andre Viljoen of SAA) did allude to the fact that they engineered Sun Air’s closure and that Sun Air’s closure is highly profitable to them. Mr Boettger mentioned R200 million per annum for a once-off payment of R50 million to Safair. Mr Viljoen said the R200 million was towards turnover, not profit.

“Mr Boettger mentioned the additional turnover would go straight to the bottom line and Mr Viljoen smiled and agreed, ie. the conclusion is SAA carefully planned (as we knew) Sun Air’s demise and was prepared, right from the outset, to pay a price of R50 million plus in fact the R20 million Rethabile debt for ongoing profits of more than R200 million per annum irrespective of whether they acquired Sun Air or not.”

Rethabile should have long disappeared into the undergrowth, but the wheels of justice move inexorably forward, even if it takes a generation or so to get there. Rethabile’s shareholders argue that Sun Air was not insolvent, but this is in any event irrelevant to its claim.

Most, if not all, of the key players have since moved on to new gigs, barring perhaps Michael Katz, who was part of SAA’s advisory team and who remains firmly ensconced at Edward Nathan Sonnenberg (and whose name has once again surfaced as having been a member of Safa board at the time the bribe was paid by the South African soccer authorities to secure the 2010 Fifa World Cup).

Coleman Andrews pocketed R220 million for his 20 month stay at SAA before heading back to the US to head up a money management firm for high net worth individuals. His web biography says he once led SAA in a “strategic, tactical and financial turnaround.” That’s a rather generous interpretation of what happened. Andrews was a former colleague of US presidential hopeful Mitt Romney at Bain Capital, and the R350 million profit reported by SAA under his tenure was pure puff having largely been derived from the sale of the airline’s assets. His contract was terminated 14 months early with his legacy in tatters.

It was Coleman who opted to switch the SAA fleet to Boeing. Two years later, with Coleman out of the hot seat, SAA’s then managers switched back to Airbus. These planes are now being delivered to SAA at 25% above market price, according to Comair’s CEO Erik Venter.

Other airlines are punished for such folly. SAA has no such worries. The government is always on hand to help it out in its moments of need.

Competition is a sin

SAA was never comfortable with competition, even before Coleman Andrews arrived in 1998, and used every weapon at its disposal to club start-up airlines to death. Tiny Flitestar, with its fleet of six aircraft, was the first to fold. Flitestar knew what the flying public wanted and focused initially on the business traveller, offering excellent service and high levels of customer care – two areas where SAA was perceived to be weak. The arrival of a competitor to the moribund SAA stung the national carrier. Back in the early 1990s Flitestar captured 25% of the domestic market and boasted a rather healthy carrying load of 63%. SAA embarked on a campaign of dirty tricks, using its influence with the Safari ticketing system to make it appear that Flitestar flights were fully booked so that agents booked travellers on SAA instead. It got flight traffic control to give SAA preference so that Flitestar take-offs were delayed. SAA increased its commissions to travel agents and expanded its frequent flyer programme to the domestic market, knowing that its financial recklessness would be underwritten by government. Flitestar, with no taxpayer money to bail it out, succumbed to the bullying on 11 April 1994 when it ceased operating.

One down, just a few more to go. SAA then took out Trek Airways by paying out its shareholders, Safren, Rentmeester Beleggings and the de Moelenaar family to cease any competitive airline service for five years.

That left just Sun Air, Nationwide and Comair, which was a 25% shareholder in Sun Air. In July 1999, Sun Air’s fate was already sealed, as was made clear by Coleman Andrews at the SAA board meeting on the 23rd of that month.

There was no way the market could sustain four, or even three, competitors, according to Andrews. He argued that Sun Air was in trouble. Its costs had multiplied, while load factors had dropped about 20% in the third quarter of 1999. He pointed out that the Comair directors who sat on the board of Sun Air resigned in July 1999 because they believed the company was trading while insolvent, and wanted to avoid personal liability.

It was clear, he said, Sun Air was going down, the only question was would it be an orderly or chaotic shutdown. SAA had plans to take on 260 Sun Air staff and acquire Sun Air’s 62% BEE shareholding at a discount.

Predatory pricing

In late 1998 Sun Air, Nationwide and Comair complained to the Competition Board over what they termed predatory pricing by SAA, and the dumping of capacity in the market. Sun Air subsequently withdrew its complaint because, records Andrews at the board meeting, “they wanted to engage us in discussions about some sort of commercial relationship and we indicated we weren’t prepared to hold these discussions while they were clubbing us over the head on what we think is a specious complaint.”

Andrews then discussed a meeting that was held with Comair to limit adding capacity on domestic routes. “The effect of that is going to be to make sure there are sort of rational additions to seat capacity as they are needed over time, which would tend to keep prices from further declines,” said Andrews, adding that the board was delighted with the approach and Comair had “in principle agreed.”

This acquisition by SAA of a controlling interest in Sun Air would allow it to manage the liquidation. Said Andrews: “If it goes into a disorderly liquidation then we have a major threat, because if the whole thing gets handled by a judge and its disposition gets handled by a judge, he may well conclude to sell the entire operation to Virgin or KLM, who are keenly interested in entering this market.”

Stopping Virgin or KLM entering the domestic market became a key priority, not least because of the additional competition this would pose on SAA’s international routes. So SAA locked Sun Air into an agreement not to talk to other potential white knights, and calculated it could pick up 75% or more of Sun Air’s traffic. This, Andrews calculated, would boost earnings by about R125 million a year. SAA was prepared to pay R28 million for Rethabile’s 35,75% in Sun Air, Co-ordinated Network International’s 19,25% and any other debt or equity interests.

In August 1999, Comair and Nationwide signed on to a plan to support SAA’s acquisition of Sun Air shares in return for a capacity sharing arrangement on domestic airline routes. The plan was sanctioned by the Competition Board, which concluded that the South African airline market was too small to sustain four carriers. In a press release issued at the time, the Competition Board invoked “public interest” – the fact that Sun Air’s demise was inevitable, leaving passengers, creditors and staff in a dire predicament – as the motive for condoning SAA’s acquisition of a majority share in the apparently troubled airline. “The shareholders (SAA) then intend to immediately liquidate Sun Air,” said the Competition Board, making no reference to the potential for an anti-competitive bloodbath that was, according to former Rethabile shareholders, taking place in full public glare.

SAA would then proceed with an orderly shut-down of Sun Air, and settle R28 million owed by Rethabile and CNI to their respective banks. But government was also a creditor, to the tune of R20 million. For the plan to work, SAA had to get government to write off the R20 million. In August 1999 Andrews wrote to then transport minister Jeff Radebe informing him of the “rescue proposal” for Sun Air, which was a euphemism for killing it off. SAA and Comair would honour tickets bought by Sun Air passengers and absorb some of their staff.

Andrews painted a grisly picture of a company facing wipe-out within days. Sun Air had creditors claims of more than R70 million and cash and debtors of just R25 million, with “cash evaporating at a rapid rate.”

“SAA will continue to monetise the remaining assets and negotiate settlement with the other creditors in a thorough, professional manner,” wrote Andrews to the minister.

The collapse of Sun Air, now days away, would leave thousands of passengers stranded, employees unpaid and shareholders wiped out.

Discussions had taken place with Sun Air shareholders to sound them out on the possibility of SAA acquiring their shares, with the sanction of the Competition Board, with a view to effecting a rescue of the airline. Once the shareholders relinquished control of Sun Air to SAA, it should have been obvious that it would be snuffed out with stunning efficiency. Which is exactly what happened.

This article first appeared in Noseweek.

The financial crisis has percolated down to first time home buyers in Cosmo City near Johannesburg, many of whom claim they have been evicted irregularly after having their homes repossessed. Scores of Cosmo City residents have been tossed out of their houses after falling into arrears on their bonds. Maxwell Dube of Cosmo City Chronicle decided to investigate and found 23 of these – all of them bonded with Absa – ended up in the hands of just one investor. The more he dug, the fishier the whole thing smelt.

Outrage is building in Cosmo City north of Johannesburg over dozens of repossessed homes that have ended up in the hands of just a few wealthy investors.

One of the investors scooped up 23 houses – all of them bonded to Absa – at auction prices which were well below market value, and then promptly sold some of them at a handsome profit. Another investor is reckoned to have bought another 40 houses at auction, also at knock-down prices. Some of the houses are being put on auction for arrears amounts as low as R6,000. Yet the banks insist they only take legal action “as a last resort” – something the residents of Cosmo City find hard to believe.

Some Cosmo City residents who lost their houses say they were never issued with summonses by the banks, and that the sheriff’s office is abusing the court process to the benefit of a few investors. “People here have never had any dealings with the courts so they have no idea that they have to be served with summons before they can be evicted,” says Maxwell Dube, a resident of Cosmo City and publisher of the Cosmo City Chronicle which first broke of the story.

“What we are seeing here looks like a complete abuse of the court process, but the results are tragic. People are being thrown out onto the street for reasons they cannot understand,” he says. “One of the so-called investors bought 23 houses over a period of years, all of them bonded with Absa. How is this possible that none of the houses he bought were with other banks, unless there was inside information?”

Dube and several other Cosmo City residents want to lay an official complaint with the Hawks over the irregular manner in which their houses were put on auction to the benefit of a handful of investors.

Cosmo City was former President Thabo Mbeki’s dream project. It was conceived in the early 2000s as the country’s first mixed residential township, where low cost housing sits alongside middle and upper income suburbs.

What is happening in Cosmo City suggests the financial stresses of recent years have percolated down to first-time home buyers in some of the lower to middle-income areas of the country. As Dube points out, most of affected people are unschooled in the court process, making it a relatively simple matter to kick them out of their houses without granting them the constitutional right to put up a defence against the banks.

Houses auctioned over arrears as low as R6,000

Some of the Cosmo City homes were auctioned by the banks over arrears as little as R6,000. One former homeowner, Victor Zuma, was evicted from his house in 2013. “Someone arrived at the door and told me I didn’t own the house and had to get out within 21 days,” he says. Zuma bought the house for R187,000 in 2011 and took out a mortgage bond with FNB. His repayments were about R1,800 as month which he dutifully paid until he lost his job as a welder about a year later. Yet he still continued paying as much as he could, about R1,000 a month. In the end he lost the house over an arrears amount reckoned to be no more than R6,000.

He is now seriously ill and unable to work – the result, he says, of the stress from losing his house. He now lives with his wife, Beverly Msibi, in an RDP house where they pay rent of R3,000 a month.
Finweek was shown his file of court papers, which includes a sheriff’s return of service, suggesting he was properly served with a summons. Zuma vehemently denies this. “What they do is the sheriff arrives and if no-one is around hands the summons to a neighbour,” says Dube. “Most of the people I have spoken to who have been affected by this did not see their summons before they were evicted.”

Several of the dispossessed Cosmo City homeowners say they were not notified by the banks or their attorneys that legal action was being taken against them.

Acting Krugersdorp sheriff since 2012, Martha van der Merwe, says she reviewed the files of her predecessor, Mr Venter, and could find nothing wrong with the legal execution process. The previous sheriff passed away some years ago and she is unable to conduct any further investigation as his old case files are closed. She points out that there is no restriction on how many properties a buyer can purchase at auction: “As long as they comply with the conditions (of the auction) they can buy as many as they want.”
Another point Dube wants investigated is how poor people from Cosmo City are having their homes repossessed when they are supposedly covered by government housing subsidies. The Department of Housing, in reply to questions posed by Corruption Watch, replied that the houses in question were not RDP houses and therefore they were not entitled to government subsidies. This is hotly disputed by several Cosmo City residents affected by the repossession blitz. The housing subsidy is aimed at first time home buyers with gross household income of no more than R3,500.

Several dispossessed homeowners admit they fell into arrears but tried to make repayment arrangements with their banks. Some banks accepted the softer repayment arrangements but proceeded with legal action anyway.

A case in point is Moses Mesa, who fell into arrears on his FNB mortgage bond and made arrangements to pay off his arrears over six months. He says he stuck to the revised payment schedule but the bank still took judgment against him. The account manager at FNB, Meshack Modisane, says Mesa was given ample warning of the consequences of falling behind on his bond payments, and insists the legal process must take its course. The arrears amount is around just R12,000. Mesa was at least served with a summons by the bank. Many other Cosmo City residents say there were not so lucky.

Refaat Gierdien, head of Legal at FNB Housing Finance, says the bank has investigated the two instances mentioned in the article. “We can confirm that the correct legal processes were followed during the debt recovery process against the customers. We can also confirm that both customers were kept informed throughout the legal process in line with the legal requirements and our strategy to ensure that customers are given every opportunity to rehabilitate their accounts.

Read more.

An ostrich farmer from Grahamstown has thrown the local court into a spin by apparently proving that his mortgage loan with Standard Bank has been on-sold to an investor in Taiwan. This is the first time a securitisation audit has been presented in a SA court. On the basis of the evidence presented, the farmer says Standard Bank has no right to be in court.

Ash Davenport, a 63 year-old ostrich farmer from outside Grahamstown in the Eastern Cape, may be about to make history in his effort to stave off attempts by Standard Bank to take possession of his 3,260ha farm over a R3 million loan he took out seven years ago.

Last week he threw the Grahamstown High Court into a spin when his attorney, Bev Carruthers of Port Elizabeth, plonked a securitisation audit in front of the judge. The securitisation audit suggests that his bank loan has been on-sold to a Taiwanese bank and is no longer owned by Standard Bank. That being the case, Standard Bank has no right to be in court. More than that, the audit suggests the bank has securitised (or on-sold) his bond for R5 million, not the R3 million he supposedly signed for.

The court reserved judgment as to whether to allow the audit to be presented as new evidence in a case that has been dragging on for close to seven years.

“I intend to fight this all the way,” says Davenport. “These banks have been getting away with this nonsense for too long. I had to pay R17,000 for the audit but it was worth it, since it provides proof that the bank has in fact been securitising mortgage loans and then coming after property owners when they have no right to.”

Securitisation audits are a new development in South Africa, but are common in the US. They effectively carry the same weight as a financial opinion by a company’s auditor, though the banks are trying to dismiss them as hearsay.

Standard Bank attempted to discredit the audit by Michael Carrigan, a certified mortgage securitisation auditor in the US, who managed to track the chain of title for Davenport’s mortgage bond all the way to Taiwan. The bank referred to Carrigan’s evidence as “speculative at best” and claimed he did not have a grasp of South African law. It then reiterated that his loan had not been securitised.

Carrigan also provided a second audit for another Grahamstown resident, Jay Brown (not his real name), apparently proving that his Standard Bank mortgage loan had ended up with a bank in Thailand. Brown is also defending his property against repossession by the bank.

Bear in mind that the bank in both cases has denied – as all the major banks have done in thousands of other similar cases – that it had securitised these mortgage bonds. Brown went one step further, by settling his debt to the bank by way of a promissory note of his own – similar to a cheque or bank note – which he claimed is legally permissible in terms of the Bills of Exchange Act.

This is a rather interesting defence first developed in SA by the late Johan Joubert, who insisted that individuals should issue their own promissory notes in settlement of debts, just as the banks concoct money out of thin air on their computer terminals. Standard Bank has refused to accept Brown’s promissory note.

Davenport has taken a more traditional route, arguing his case based on whatever evidence he can get his hands on. He asked Standard Bank to produce a “wet ink” copy of his mortgage bond and what was produced looked a little strange. The lines, the type face and the signatures did not line up with another copy he had. To all intents and purposes, it looked as if the documents were manufactured after the event, according to Davenport. Like someone had literally cut and pasted sections from one document, pasted them onto another, and then made a photocopy. This made him even more suspicious, even more certain that his mortgage bond had been securitised and the bank was hiding something.

So how did Davenport end up in this position?

The first thing to understand is that he is an eastern Cape farmer with a sharp tongue who doesn’t take kindly to bankers in suits coming to take away a farm that he and his family have been working since 1956. At one time he was the Eastern Cape’s most prominent ostrich farmer. He was exporting his ostrich meat to Europe and making a decent living. In 2004, the Avian flu scare hit SA. A government vet (Davenport calls him a “prick”) was sent down from Pretoria to inspect his birds, and with a wave of his pencil decided they should all be slaughtered.

“What these pricks don’t understand is that the ostriches develop antibodies to the Avian flu virus. Once they have had Avian flu and survived, they are immune against the disease. They will never get it again. So what the vet was picking up was the antibodies, and on this basis he decided my entire flock should be slaughtered.”

Davenport’s trouble all started when a government vet ordered his entire flock of ostriches to be slaughtered, even though the birds were healthy and had no signs of Avian flu. His business destroyed, he was forced to approach the bank for a loan

Overnight, Davenport’s business was destroyed. He was forced to approach Standard Bank and ask for a R3 million overdraft facility. The bank agreed, provided he put up the farm as security. But this R3 million was getting him nowhere. He swallowed his pride and approached the bank a second time asking for additional credit facilities that would allow him to rebuild his business.

This is when the bank started to get alarmed. When Davenport drew down his facility to R2,6 million to pay his monthly wages and running costs, the bank suddenly froze all his accounts.

Then came the summons for repayment of the loan. Davenport knew nothing about the law, so he sent the summons on to a lawyer friend who did nothing with it. Then the bank got a default judgment against him.

Trouble arrives in the form of a summons

Now he was in trouble. The bank was about to put his farm up on auction for R4 million, when Davenport reckons it is worth R60 million. His mechanic put him in touch with a DIY lawyer who somehow managed to stop the sale at auction.

The bank came back with a second summons. This time he decided he should probably get a proper lawyer, which was when he met Bev Carruthers in Port Elizabeth, who had two days to prepare for his case in the Grahamstown High Court. Carruthers stood before the judge saying she had only just been briefed, and asked for a postponement – which she got.

At the time she knew nothing about securitisation, but Davenport had been reading the material on the New Economic Rights Alliance website and was convinced that his mortgage bond – which the bank alleges had been pledged as security against his R3 million overdraft – had been securitised. The problem with this defence is that the banks, supported by the courts, demand that the borrower provide proof of this. Of course this is impossible. This is analogous to a thief who has made off with your wallet. You catch him after he has disposed of the wallet and he then demands that you provide proof of the whereabouts of the wallet to prove his guilt. Insane, sure, but the courts are buying this.

Then Davenport and Carruthers were introduced to Virtual Velocity, a company that had just started offering securitisation audits in SA. This involves interrogating multiple databases in SA and overseas to track the movement of mortgage loans and the associated mortgage “notes”.

The US-based auditor, Carrigan, is considered a world expert in securitisation, and has testified in close to 3,000 cases in US courts. In both the Davenport and Brown audits, he presented screen shots from the Bloomberg database showing where the “notes” got divorced from the “loans” and where they both ended up.

In his affidavit for Davenport, he testified that the loan ended up with a Special Purpose Vehicle known as Standard Bank of South Africa/ Taipei CBO, Series 2006-1. This is an entirely different legal entity to Standard Bank itself.

The audit shows that Davenport’s mortgage loan has probably ended up in Taiwan

The audit report shows how the securities certificates were divorced from the mortgage loan and ended up in the hands of the investors. The mortgage documents remained with Standard Bank, the securities certificates ended up with the investors and the “borrower funds” ended up with the Land Bank of Taiwan. Carrigan claims in his affidavit, once the Mortgage loan and “note” are divorced from each other, the purported creditor loses all legal right to approach the borrower, and is in fact committing fraud.

The audit – as is the case with any audit, financial or otherwise – is not definitive, but it casts sufficient doubt on Standard Bank’s assertions that the mortgage has not been securitised.

Should Davenport win this round, his matter will go to trial and then the bank will be asked to explain why his loan appears on the Bloomberg database as being owned by a bank in Taiwan. And why Brown’s mortgage loan appears in Thailand.

This, alongside the recent discovery by Adv Douglas Shaw that banks are able to hide their securitisation activities by not reflecting the new owner’s name at the Deeds office, makes for a very interesting battle looming for the banks.

It only takes one case to win, like Davenport’s, and the whole house of cards comes tumbling down. Then come the class action suits.

What Carrigan’s affidavit says

This is a bit technical, but worth repeating here for those following the securitisation argument. Notice how the courts in the US do not recognise any creditor who cannot produce the note alongside the mortgage. And how banks doing this are actually “double dipping” – taking payment twice – which is a fraud. Judges in SA need to start paying attention to this and haul bank executives into court to get to the bottom of this securitisation hall of mirrors.

Carrigan’s affidavit for Ash Davenport says: “The written agreement that created the Standard Bank of South Africa/ Taipei CBO, Series 2006-1 is a ‘Pooling and Servicing Agreement’ (PSA), and is a matter of public record, available on the website of the Securities Exchange Commission (SEC). The Trust is also described in a ‘Prospectus Supplement,’ also available on the SEC website. The Trust by its terms set a “closing date” of on or about TBD (To Be Decided). The promissory note in this case became trust property in compliance with the requirement set forth in the PSA. The Trust agreement is filed under oath with the Securities and Exchange Commission. The acquisition of the assets of the subject Trust and the PSA are governed under the law.

“In view of the foregoing, any Assignment of Mortgage executed after the Trust’s Closing Date would be a void act for the reason that it violated the express terms of the Trust instrument.

“In Carpenter v. Longan 16 Wall. 271,83 U.S. 271, 274, 21 L.Ed. 313 (1872), the U.S. Supreme Court stated ‘The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while assignment of the latter alone is a nullity.’”

“By statute, assignment of the mortgage carries with it the assignment of the debt. Indeed, in the event that a mortgage loan somehow separates interests of the note and the Mortgage, with the Mortgage lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the Mortgage from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the Mortgage is the agent of the holder of the note. Without the agency relationship, the person holding only the trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the Mortgage.”

“Generally, if the Mortgage and the Note are not together with the same entity, there can be no legal enforcement of the Note. The Mortgage enforces the Note and provides the capability for the lender to foreclose on the property. Thus, if the Mortgage and the Note are separated, foreclosure legally cannot occur. The Note cannot be enforced by the Mortgage if each contains a different mortgagee/beneficiary; and, if the Mortgage is not itself a legally enforceable instrument, there can be no valid foreclosure on the homeowners’ property.”

“No Entity can be a creditor if they do not hold/own the asset in question (i.e. the NOTE and/or the property); a Mortgage Pass Through Trust (i.e. R.E.M.I.C., as defined in Title 26, Subtitle A, Chapter 1, Subchapter M, Part II §§ 850-862) cannot hold assets, for if they do, their tax exempt status is violated and the Trust itself is void ab initio. This is an indication that either the Trust has either voided its intended Tax Free Status, or the asset is not in fact owned by it.

“In the event that the loan was sold, pooled and turned into a security, such event would indicate that the alleged holder can no longer claim that it is a real party of interest, as the original lender has been paid in full.

“Further said, once the Note was converted into a stock, or stock equivalent, that event would indicate that the Note is no longer a Note. If both the Note and the stock, or stock equivalent, exist at the same time, that is known as double dipping. Double dipping is a form of securities fraud.

“Once a loan has been securitized, which the aforementioned loan may have been done many times, that event would indicate that the loan forever loses its security component (i.e., the Mortgage), and the right to foreclose through the Mortgage is forever lost.”

Virtual Velocity contact details:
Web: www.VirtualVelocity.co.za
Email: support@virtualvelocity.co.za
Phone | FaceTime | +27110835567

Jonathan Buckley of Centurion in Pretoria may be the first South African in history to win six judgments against Standard Bank in one day. When the bank failed to comply with the court orders compelling it to release documents related to loans he had taken out, he sued the directors for contempt of court and tried to have them arrested. Here’s how it happened.

Jonathan Buckley of Centurion in Gauteng may be one of the few people in South Africa to win six judgments in one day against Standard Bank. And he did this arguing his cases alone, without legal representation.

The judgments, obtained in 2013 in the South Gauteng High Court, compelled Standard Bank to provide all documentation relating to a series of loans he had taken out with the bank in the preceding years. When the bank failed to comply, Buckley sued for contempt of court and asked that the court authorise the arrest of the entire board of Standard Bank.

Chutzpah, you might say, but Buckley insists he was applying the same standard as the banks do to customers. “Why is the law different for banks? If an ordinary South African citizen fails to comply with a court order, you can bet that the courts would issue an arrest warrant,” he argues.

So why isn’t the board of Standard Bank sharing a cell with reputed gangster Radovan Krejcir? Well, that’s a story in its own right, which we’ll get to in a minute.

Let’s backtrack a little bit. Like millions of people around the world, Buckley read Rich Dad Poor Dad by Robert Kiyosaki and came to the blinding realisation that assets are only valuable if they generate income. So Buckley started investing in properties and renting them out. The Kiyosaki business model was simple: if the rental income exceeded the bond repayments, you were a winner. Once the bond was paid off, you had income in perpetuity. Kiyosaki, who sold 26 million copies of the book (not counting the follow-ups), has been criticised for peddling bad financial advice and encouraging a stampede into questionable property transactions.

Buckley appears to have embraced the Rich Dad Poor Dad philosophy a little too enthusiastically. He ended up with eight properties by 2008 which, as we all know, was when the party came to an end and the financial hangover set in.

But 10 years ago the economy was pumping and property prices were rising at Olympian speeds. Any warnings of an impending speed wobble were drowned out by the chorus of salesmen flogging their wares. Banks were showering customers with easy credit, knowing full well the National Credit Act was about to put the brakes on all the fun. The Act came into force in 2007, but before then credit checks by the banks were sparse to non-existent. Banks were showering customers with easy credit, knowing full well the National Credit Act was about to put the brakes on all the fun.

Until 2008, the Kiyosaki business model was working perfectly for Buckley. His rental income, supplemented with a bit of money from his business, was sufficient to cover the bond repayments. For Standard Bank, he was a great customer. In 2006 the bank approached him with what seemed like a tantalising offer: throw all properties into a single pot with just one repayment a month, instead of eight. The bank was marketing the product under the Liberator brand.

This was an offer Buckley could not refuse. He did as the bank suggested. Then came the good news: the bank revalued the entire property portfolio and informed him that there was surplus equity of about R1,5 million which was his to use as he saw fit. In other words, the then market value of the properties exceeded the amount owing to the bank by R1,5 million. Buckley took the additional credit on offer and bought a ninth property.

In late 2008 the world economy had gone into meltdown. Buckley then ran an insurance brokerage for Liberty Life and lost most of his sales team in one fell swoop. His business was taking strain, so in 2008 he approached Standard Bank to warn them of trouble ahead. He might have difficulty meeting his monthly bond repayments, he told them. The bankers must not have heard what he was saying because after the meeting was over, they offered him yet more credit to purchase a vehicle, which Buckley graciously accepted.

Trouble ahead

His business continued to flounder and a few months later he placed himself under debt review.

Standard Bank accepted the revised schedule of repayments, but it still had to be sanctioned by the Magistrates Court in Pretoria. The court date was set down, but Standard Bank didn’t show up. The matter was postponed twice and, meantime, Buckley’s debt counsellor disappeared. “The whole debt review was up in the air. Were we under debt review or not?” says Buckley. But Standard Bank was behaving as if it had accepted the debt review, according to Buckley.

Then in 2010, Standard Bank approached Buckley with what it called a debt rehabilitation proposal which would reduce his monthly repayments. Buckley accepted the offer, but still the rental income from the properties was insufficient to cover the loan repayment. The point here is that Buckley says he was in constant discussions with the bank to manage his loan repayments and stay afloat. He has never denied that he borrowed money and fell into arrears. His main beef is with how the bank went about trying to recover its money.

Then the bombshell arrived. Without warning, the bank was awarded two judgments against Buckley for default on company overdrafts. Buckley managed to rescind one of the judgments on the grounds that the company in question no longer existed. The second judgment still stands. A third judgment was taken against him for the vehicle he purchased after the earlier meeting when he says he tried to warn the bank that he was in financial trouble. To date, he has not had sight of the judgment, nor the summons for the vehicle.
Then the bombshell arrived. Without warning, the bank was awarded two judgments against Buckley for default on company overdrafts

By this time Buckley was doing a crash course in consumer and banking law. He read up on the National Credit Act, the Consumer Protection Act and the Banks Act. It became apparent to him that he could not mount a defence against the bank without the documents that he purportedly signed at the time he took out the loans. So where were the documents, he asked his bankers?

Months went by without an answer. Buckley was getting anxious. He went a step further, serving letters of demand on the bank, delivered by the Johannesburg Sheriff’s office. Again, no response was received from the bank, so now he served it with a Notice of Motion, signalling his intention to have the South Gauteng High Court force the bank to supply the documentation for six different loan accounts.

Still the bank remained silent. It gave no indication it intended to defend the matter, so Buckley set the matter down on the unopposed roll for hearing in November 2013. Buckley had also served Absa with a letter of demand to supply documents relating to a credit card he had with the bank. This time he did receive a reply to the effect that the documents were destroyed in the famous Absa fires (see here and here for more on this).

Going it alone

But his main focus was on Standard Bank, since this is where his greatest indebtedness lay. Buckley appeared in court in November 2013, alone and unassisted by any legal professionals, and miraculously won seven judgments in two different courts, six against Standard Bank and one against Absa. The judgments compelled the banks to supply the missing documentation.

Still the bank failed to comply. It was time to strap on the knuckle duster. “I then informed the bank that I was applying for a contempt of court application. I asked the court to authorise the arrest of entire board of directors of Standard Bank for non-compliance with the court orders. You cannot arrest a company, you have to arrest the board.”

Standard Bank, now clearly scrambling to avert a potentially embarrassing scene, appointed attorneys Findlay Niemeyer of Pretoria to attend to the matter. Buckley was informed that the missing documents could be viewed at Findlay Niemeyer’s offices in Hatfield, Pretoria, but he was not allowed to take them away as they still had to be collated. Buckley had asked for the original wet ink documents, but what he saw appeared to be copies, and he informed the bank in writing that he was not satisfied that the papers he was allowed to view, but not carry away, were the originals.

All of a sudden, Norton Rose Fulbright appeared on the scene. It was time for a heavyweight law firm to spring the bank from its predicament. The bank applied for a rescission of the judgments previously won by Buckley. So now there were two cases running in parallel – Buckley’s urgent application for contempt of court against the bank, and the bank’s application to have the judgments rescinded. Norton Rose Fulbright wanted to have both sets of cases heard together, since they related to the same matters.

In February 2014, Buckley again appeared alone in the South Gauteng High Court before Judge Tshabalala. Arrayed against him were a senior counsel and six attorneys, no doubt an intimidating prospect for any judge. This also shows just how seriously Standard Bank was taking the matter. The judge deemed Buckley’s matter was not urgent and postponed it to a later date.

The bank’s decision to call in the heavyweights from Norton Rose appears to have been a good one. It eventually succeeded in its rescission application on 3 November 2014 on a technicality of the court process, in that Buckley had not properly notified it of the application to seek judgment against it. Buckley’s contempt case then fell away.

This must have been a relief for the directors of Standard Bank, who could sleep more soundly at night knowing they did not have to share a cell with Radovan Krejcir.

New attorneys appear on the scene

But the story was not over yet. Suddenly, out of nowhere, a new firm of attorneys (Newtons of Pretoria) appeared on the scene. The bank no doubt decided it was time to kill the beast once and for all and take judgment for its outstanding loan. Buckley says the new attorneys served three sets of papers to addresses where he would not receive them. Only later did he find out that the summons demanded repayment of an amount of R6,9 million, being the total sum owed on the Liberator facility with the bank. This time, the case was to be heard in the North Gauteng High Court, in Pretoria.

Why the sudden change to Pretoria, when all his previous cases were heard in Johannesburg? It could be argued that as he lives in Centurion, the Pretoria court has jurisdiction, but Buckley suspects foul play. If so, this is not the first time a banking client has been wrong-footed in this way (see Jonn Basson’s story here).

Newtons argued in its papers that these addresses were the ones they had on record. Buckley had pre-arranged with Norton Rose Fulbright to receive papers by email or at the address of a legal advisor he was then using. Obviously, this news was not shared with the new attorneys, who managed to serve three sets of papers, all of which miraculously missed their intended target. They then stood in court unopposed (because Buckley says he did not receive the summons), and obtained judgment for R6,9 million.

The first Buckley knew about this was when he got an unsolicited call from a liquidator offering help in light of the recent unfortunate judgment against him.

“What?” said Buckley. “What judgment?”

He thought there must be some mistake as he knew nothing about this particular court case. He raced over to the offices of the bank’s attorneys, who charged him R2,900 for a copy of the judgment. Nothing is for free these days.

Buckley says he still does not have the documents he needs to mount a proper defence and is considering a Constitutional Court challenge on the grounds that a fair trial requires full access to all documentation related to a banking transaction. While he does not dispute the loans, he wants to see what terms he apparently agreed to. For example, did the loan agreements include an acceleration clause? Many bank agreements pre-2009 did not include these clauses, which means the bank can only claim the arrears, not the full amount of the loan. But banks have been getting away with this and executing on customers’ houses when all they are entitled to claim are the arrears.

The fight goes on

In any event, Buckley is now preparing to apply for rescission of the judgment based on the technical issue of “no service” (ie. he was not properly served the summons). He is also challenging the bank’s locus standi, arguing that his loan has been securitised, or on-sold to investors, and the bank has no right to be in court. Standard Bank denies it has securitised Buckley’s mortgage bond and accuses him of embarking on a “fishing expedition”.*

Buckley recently dug up 96 random bonds on Windeed, the online deed search facility. Only one of these (an Absa bond) had been ceded to the new owner, which is evidence of securitisation. Based on the banks’ own figures for securitisation, it was expected that at least 20% of these would have been ceded to new owners (ie. securitised). The point being that when a loan is securitised, the bank loses all legal title to it.

So what appears to be happening is that the banks are securitising loans but not reporting them as having been ceded to new owners as required by law. When challenged on securitisation by customers, the banks can stand in court and hold up the title deed, pointing to the lack of “endorsement” or cession on the title deed as supposed proof that they remain the lawful title holders. New research coordinated by Advocate Douglas Shaw suggests something more sinister is afoot. A team of researchers dug up several hundred mortgage bonds and so far, only one of about 600 has been ceded to a new owner. As we previously reported, an expert statistician has deemed this to be a statistical impossibility. Shaw says this points to widespread and systematic fraud by the banks, and the Commercial Crimes Unit has called for more information.

Buckley’s fight is far from over. He wants to apply for rescission of judgment against the bank in the Pretoria court, and plans to appeal the rescission application won by Standard Bank because of its failure to supply all the documents underpinning his loans.

“I still do not have the documents I need to mount a proper defence,” he says. “How can there be justice against the banks when customers have to battle as I have done to get the right documents? I had to go to court at huge expense to myself just to get the bank to obey the very laws under which they are expected to operate.”

He adds that the documents belatedly supplied by the bank are incomplete. Buckley is a game opponent who seems to enjoy tweaking the noses of the brass at Standard Bank. “I don’t dispute the debt. What I want to establish is what are the rights of banking customers in these situations? What has happened to all these securitised mortgage bonds? How is it that the courts have yet to hold the banks to account for this deception where they have sold the loans yet still pretend they are the owners?

“Now we have evidence that the banks are hiding from the courts the fact that they no longer own these loans. It’s about time someone put a stop to all this bullshit.”

* The article has been updated to reflect the fact that Standard Bank, in its papers before the court in this matter, denies it has securitised Buckley’s mortgage bond. In support of this claim, it refers to a Windeed search which apparently shows the bank is still the registered owner of the mortgage bond. Adv Shaw argues that this proves nothing of the sort in light of the research referred to above. The only way to resolve this issue is to force the banks to disclose their securitisation registers, which in any event is required in terms of Section 69 of the National Credit Act.

This article first appeared at Acts Online.