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State Bank Insolvency Follows Embezzlement Saga, Placing Conservative Government Under Pressure

First published in the Aegits Times

In an announcement which shocked the markets and the general public, the National Investment Bank of Stiegae (NIB) announced on March 2 that it would be unable to continue operations and was filing for insolvency. As the effects of the pronouncement spread throughout the financial system, details about the government’s role in the bank’s final days, alongside accusations of love-fuelled nepotism within the Treasury, increasingly became front-page news.

In an early morning statement on March 4, the Palace confirmed that the First Minister to the Treasury, Frederick Kennedy, had been removed from office on the advice of the Chief Minister. Such a rapid turn of events, especially given the lack of the usual resignation from the offending Cabinet official, suggests turmoil within a government hanging on for dear life as the Budget approaches.

State Takeover

Troubled waters were first noticed in early 2017, before the revolution, when the NIB filed a Section 28(c) notice with the Financial Oversight Authority. The rarely used procedure, reserved for state-chartered companies, allowed the NIB to violate the ring-fence around funds for pensions to prevent imminent cash flow-related insolvency. The filing, which was only made public six months later after the company claimed it had resolved the crisis, led to several projects folding that the bank was heavily invested in.

Most dramatically, the long-awaited North-South Corridor, a significant railway project connecting the French-speaking northern region with Eldham, the nation’s economic hub, was forced to pause construction; over $4 billion in funds the NIB had pledged to the project would no longer be provided. While the government eventually pledged to provide the needed funds as a stop-gap solution, it had become obvious to observers that the NIB would inevitably face a shake-up of leadership in the face of such a near-collapse.

Indeed, in December 2017, the Treasury took the unprecedented step of seizing all of the banks’ self-owned shares, resulting in the state increasing its ownership of the bank from 21% to 62%. Just days later, at a hastily arranged emergency shareholders meeting, the entire Board was replaced, its Charter significantly amended, and, most crucially, the company was compelled to withdraw from its public listing status.

Immediately, with just days before trading on its listing would close, existing shareholders rapidly dumped their stake. As shares tumbled, dropping in value by nearly 45%, a group of investors chose to buy up the now very affordable shares on the grounds that the bank was now secured by the government. In doing so, the group, which publicly filed as National Bank Investments Limited, took over nearly all of the non-state shares. By the end of the day’s trading, the new shareholders owned 35% of the bank.

It is at this point that the elephant in the room should be addressed. The re-establishment of the monarchy in 2018, which was the result of the civil war of the same year, left the bank in limbo. After the horse-trading led to the formation of a new government, it was assumed that the bank’s structure would once again be upended.

Henriette Simon, the newly-minted Executive Director, confirmed the bank was solvent, buoyed by a $1 billion contribution from the Treasury. With nearly sixty community projects being granted funding as part of the new Conservative-led coalition’s ‘Community Comes First’ agenda, spearheaded by Frederick Kennedy, it appeared the bank was experiencing its very own post-revolution golden age.

Corruption Allegations

In February 2019, the group of minority private investors began proceedings against the NIB in federal court over accusations that the Board was failing to provide required accounts. In their filing, the group also alleged that “the Board has failed to outline the extent of potential conflicts of interest of the Executive Director, most notably relating to her relationship with the First Minister to the Treasury.”

Like most affairs relating to the NIB, the lawsuit was kept sealed as per regulations issued by that very Minister. In fact, Simon and Kennedy had been briefly married in the 1990s, though they had the marriage annulled just months later, resulting in there being no public record of it in the usual archives. Having failed to declare the relationship previously, Kennedy was forced to issue the following statement when the media became aware of the fact:

“Henriette Simon and I had a brief relationship nearly 30 years ago, when we were both very young. That relationship, however, has not, and will not, prevent myself or Henriette from performing our roles without conflict of interest. Her appointment as Executive Director was recommended to me by an impartial committee, and I had no involvement in the decision beyond what was, legally, a rubber stamp final approval.”

While the media storm went on, with one tabloid running the now infamous headline of ‘Minister Sticks More Than Just Fingers in Bank’s Business’, the NIB quietly released its quarterly report in March 2019. In contrast to its filing in the previous quarter, where it had at the very least broken even, during the course of three months the bank had achieved the questionable status as the worst-performing company in the quarter. With revenues of $6 billion, the bank succeeded in accruing a loss of $9 billion, pushing them to the precipice of another insolvency filing.

A Summer of Bad News

With the lawsuit rumbling on, the bank was under increasing pressure to resolve its cash flow crisis or face dissolution. It was at this point, however, that salacious new details emerged from the private investors. During the case, it had emerged that just days after the new Board was appointed, they increased their own salaries considerably. In the case of the Executive Director, Ms. Simon was now receiving a cool $4 million a year, up from the comparatively mild $500,000 her predecessor had collected.

More significantly, however, was the revelation that the current wife of the Treasury minister, Mrs. Kennedy, was being paid nearly $400,000 a year to “advise the Board on strategic opportunities.” Before this could hit the front pages, though, the Kennedy’s received an emergency injunction from the courts, claiming that “releasing the nature of Mrs. Kennedy’s role in the [NIB] would endanger the national interest.”

Immediately, the Aegits Times joined the Freedom Guardians and thirteen other news organisations in challenging the injunction on the grounds of public interest. While the injunction remained in place, however, it was not possible for the private investors or the media to reveal even who was the subject of the injunctions. By June, it had become clear that the bank was on the verge of collapse. Once again, it filed a Section 28(c) notice and drew capital from its pension funds, amounting to almost $700 million, while also cutting back its community investments by nearly half.

As the crisis deepened, the NIB sought “compassionate relief” from the courts in both cases, another rarely used procedure that allows respondents in cases, when undergoing certain legal processes (such as a Section 28(c) notice), to be relieved from having to comply with court orders or deal with the case for a specified length of time. In this case, that period of time ended on January 31 of this year.

28 Days of Wrangling

On February 1, with the relief over, both the media and the now very agitated private investors resumed their suits. While the media alliance continued to seek the immediate lifting of the injunction, the private investors now sought to trigger ‘mandatory share reorganisation’. A procedure often used by activist investors in startups, it had never been used on a company of the NIB’s size.

If approved, it would have created a new class of shares with a majority voting power that would be automatically granted to investors according to a specific formula, if the current executive leadership was viewed as failing the principles of the company or company law. It was initially felt by many in the corporate law community that the courts were unlikely to grant the request, given both its context and the fact that the bank had once again reversed its Section 28(c) notice.

On February 21, after eight days of wrangling between the Kennedy counsel and the media alliance, the High Court of Stiegae ruled in favour of lifting the injunction. In doing so, what appeared to be the full scope of Kennedy’s involvement in the bank was suddenly splashed across the nation’s media. The next day, the Chief Minister confirmed that an internal inquiry led by the Standards Commission would investigate the circumstances.

Despite criticisms that the government was shirking responsibility, given it was allegedly clear that the First Minister to the Treasury had violated the standards code of both the House of Representatives and government, in addition to corporate disclosure law, the Chief Minister refused to dismiss, or ask for the resignation of, Kennedy.

In what appeared to be an attempt to temper calls for her husband’s head, on February 23, Mrs Kennedy resigned from the NIB Board and waived the lump sum she would have received as a ‘golden parachute’. While this relieved some pressure on the Kennedy family, it did little to solve the crisis enveloping the state of the bank’s ownership.

The hearing into the share reorganisation request was scheduled to begin on February 28, but the day before the NIB once again requested emergency relief, citing “unexpected financial upset.” The court refused their request, and the hearing was only into its third day when, on March 2, the bank’s chief counsel delivered the news which rocked the financial markets:

“As the result of unforeseen circumstances, the National Investment Bank of Stiegae half an hour ago filed for Section 90 insolvency. We request that these hearings cease while the matter of the Section 90 is sub judice elsewhere.”

The End of a Government?

At 9 p.m. that same day, the Executive Director issued a statement alleging that undue pressure placed upon the NIB by the government, and in particular the Treasury, had forced the bank to invest in projects which had failed audits, feasibility assessments, and the bank’s own reviews. In addition, she claimed the Treasury had forced the bank to issue an unsustainable dividend to a class of shares which had been created in secret, and which only the Treasury held.

In doing so, the Treasury siphoned off nearly $1.2 billion from the bank’s stretched resources. Some of that had been withdrawn while the bank was under the conditions of its Section 28(c) filing, meaning both the Treasury and the bank were in violation of the most basic corporate criminal laws, namely misuse of ring-fenced funds.

Such a radical accusation forced the hand of the government; after receiving confirmation from civil servants that Kennedy had, in fact, authorised the dividends, the Chief Minister dismissed the First Minister to the Treasury. The government had been due to propose its Budget on March 12, but it inevitably postponed it to deal with the fallout of the crisis.

Before the scandal, it was widely assumed that with the support of Stiegae First, the nation’s premier populist party, the Budget would scrape through at vote. Stiegae First, however, has seen the potential usefulness of the crisis the government is facing and has confirmed it will vote against the government, fancying its own chances to capitalise at the polls.

The political infighting will do nothing to soothe the pain of the community projects now lacking millions in NIB funding, however – from community shops to playgrounds, to new buildings for primary schools, the bank had provided vital support for infrastructure up and down the nation. With its Section 90 forcing the Treasury into a minority stake (the notice has allowed the private investors to force their way into control), it is likely that the bank will either be wound up or see its very focus be shifted.

All opposition parties have confirmed they would sell the remainder of the government’s shares in the bank, and it is likely that, in the situation, the Conservatives will be forced to do so. In doing so, an institution which has provided vital funding to the nation for over a hundred years will likely change forever.


  • Lewis is a former citizen of The Communist Bloc, having been so for nearly 4 years, and has been playing NationStates for nearly 5. During his time in the Bloc, he served in the executive branch in a multitude of positions, including as General Secretary. Lewis has also served as an important member of the legislature, drafting well over 30 legislative instruments, including major constitutional restructurings. He currently serves as the Chairman and Chief Executive Officer of NationStates Today.