The Rise and Fall of Gulf Finance House

“The Rise and Fall of Gulf Finance House” a report authored by three Reading University postgraduate Islamic Finance students has certainly ruffled a few feathers. A copy of the report can be found here.

This report provoked a response allegedly from an ex-employee that has been doing the rounds by email, and is reproduced in full below:

The report is a very bad report!

For the following reasons:

1) The Authors are very unknown and just trying to claim some credit!

2) The Authors are very unfamiliar with any tangible information and they are just trying to get some credit for a dead horse that they did not know anything about and that they still don’t know anything about! (لين طاح الجمل إكثرت سكاكينه!)

3) The analysis is so academic (analysis of decline in assets and profits, etc.) and doesn’t include any “qualitative” analysis; i.e. why really this happened (every loser blames his shit on the global financial crisis!)

4) The Authors of this report could be best described as amateurs who are happy with themselves learning big terminologies. They failed to identify even the smallest part of the problem.

5) By producing this silly report they are giving so much credit to GFH to be a “real” investment bank!!

6) The Authors have no clue that the bank they are talking about and trying to analyze in such a lengthy report doesn’t and didn’t even exist except in the eyes of the naive people who only saw the growth of the gimmick business called GFH, without realizing that the whole GFH was nothing more than a real estate trader with a rosy picture of a bank … It was nothing more than a glamorous version of the latest scandal of the BD 38 million pulled off by that Bahraini from Sanabis!

7) Nothing about GFH was real .. Nothing but lies .. No real products; i.e. Where is BFH (though it was the very first mega project is Bahrain)?! Nothing but 2 lousy buildings! But this is not BFH! … BFH was supposed to be almost a city. The 2 towers at BFH are successfully operational only because they are now owned by some powerful man, not because it was a “real” product by GFH. This powerful man forced the 2 towers to be profitable.

8) In fact to make these unreal products and cover up for them, GFH intentionally hired fresh college graduates and other juniors who would not know better and naturally wouldn’t have the courage to question anything. The report fails to mention anything about the management (the people who were running this operation). At the height of its time (in 2005 – 2007), the average age of the employees in the investment department was 26-28 years! Most of which never worked in any other place! This was done purposefully. During the same period the investment department was running without a head; the head of the investment department resigned and his position was empty for almost 2 years, during which several mega projects were launched. The report doesn’t mention anything about the number of seniors and heavy weight bankers hired only to be fired after less than 6 months for raising their voices in opposition to the very wrong banking practices conducted at GFH! One of the latest examples is that Lebanese-Australian CEO who did not last for more than few months!

9) This report could be applied to a real bank with real products, but not to GFH. Examples of their “false” products:

1. Balexco: they bought it, charged the investors a premium, without having a plan for doing anything with it!

2. BFH: The original DVD of the project was showing building a “city” that was supposed to be ready by 2008 (before the crises, so no one should blame this not happening on the financial crises!) It is worth mentioning that the project was launched in 2003, but they prepared the market study in 2005 after the auditors complained of not having any supporting business study for this “mega” project!

3. Dubai Land: They sold the residential lands to “their own” (the managers’) companies to sub-sell it and made tons of money (which is big time fraud). BUT, they never build the theme park (Legends) which was the reason for giving them the land in the first place. Finally, the Dubai government gave up on them and withdraw the land after 2 to 3 years of not showing any development for the theme park!

4. Al-Areen: started as a $66 million project. After a month, it became $80 million, another 3 weeks it became $180 million. This was 3 days before officially launching the project. On the official launch (within 3 days) it became a $600 million project with no feasibility study ever made. The project was sold before the Government allocates the land and before even the Government confirming its size! … These are only examples, the other products follow the same path.

10) The business model of GFH is a very well known one in the fraud world. GFH applied 2 well known techniques called the Ponzi scheme and Pyramid scheme. Here are their definitions: http://en.wikipedia.org/wiki/Ponzi_scheme and http://en.wikipedia.org/wiki/Pyramid_scheme. Ponzi and Pyramid schemes are very similar to each other with some differences.

11) After reading the definition of Ponzi Scheme, here are real examples to show that GFH followed this scheme:

1. Balexeco: It made loses unlike what they promised investors (due to lack of any real plan). So GFH “exited” the investors and paid profit to Balexeco investors out of its own pocket (out of new “unreal” products)!

2. Menajet: same as Balexeco.

3. Injazat: same as Balexeco.

4. Dubai Land (Legends): same as Balexeco.

5. Real estate project in Spain (Andalusia): same as Balexeco J

6. A number of losing real estate projects and companies and others: sold to its subsidiary Khaliji Commercial Bank at a profit!

7. And when they were done with the above, they sold their losing businesses to their partners in crime (some Kuwaiti Islamic investment company) at a profit in return for GFH buying its partners’ losing businesses and paying them a profit. In other words, widening this Ponzi Scheme.

8. I don’t know of any of GFH’s investments that made money except for KFI (Capivest now) and that is because Capivest followed the same business model!

12) After reading the definition of Pyramid Scheme, here are real examples to show that GFH followed this scheme:

1. GFH products from 2007 onward were partly sold by marketers who were not employees of GFH. They were marketers in other banks and companies who would sell GFH product on behalf of a GFH placement officer in return for sharing the commission between the two. In other words, the placement officer of GFH would set and collect commission for just “recruiting” other marketers, very much similar to a typical Pyramid Scheme.

13) The report doesn’t speak of any fraud or malpractice! It is enough to know that the CEO (Chairman now) of GFH was and still the chairman of all of the SPV’s and subsidiaries of GFH (numbered 36 plus), effectively allowing him to buy and sell from himself as he pleases to create bogus transactions! The report doesn’t speak of any conflict of interest.

14) Lastly, the report doesn’t even talk about any regulations or regulatory issues (to my surprise) and that is one of the reasons why I believe the Authors are amateurs. Can you imagine, for example, a report about the rise and fall of Enron or Lehman Brothers without having a section about regulatory issues! But again I am not surprised because all of this happened because of lack of regulations and professional environment. In my opinion, 90% of the blame goes to the CBB for allowing this to happen in the first place!

Part 2

Everyone knows that GFH charged premiums and took mark-ups, etc., but that wasn’t the problem, for example, none of the billion dollar investments where billion dollar investments! GFH just liked that propaganda to deceive people. Most of these investments where much less than a billion. This is not a secret! This information is published in their PPM’s! This deception is to confuse investors with the huge markups!

The economic and financial data published in GFH’s PPM’s had no support; no reference to any official meaningful data. If a school kid would had written that for a school project he would had gotten an “F” grade. But the CBB put a seal of approval on them!

Another example, Energy Bank, as per its PPM, it was set to have a capital of $750 million, but the product was oversubscribed for to $1 billion. Typically, and as an industry practice, GFH was supposed to return the extra $250 million, but instead it kept it. So again, this is public information, GFH announced (as per its CEO): “due to the oversubscription for Energy Bank, GFH has decided to increase the capital of Energy Bank to $1 billion”. The report should talk about this joke and should talk about the position of the CBB (if any)! Any central bank in the world would have asked GFH: How would you suppose to accommodate for the huge amount of $250 million in the business plan for Energy Bank? How would this amount (which is by itself is another capital for a bank) would affect returns and the performance of the new bank?! From this “public” data, they could have concluded that there was no business plan for Energy Bank to begin with. And I don’t think GFH could sue them for this logical conclusion!

The report, if it was really professional, should have had the “input” or “position” of the CBB and also the role the CBB played (if any) from the beginning to control (regulate) or to contribute to this miss. The report doesn’t even hint to any entity to be responsible for this tragedy. The only thing was left to say in the report was to blame all of what happened on the rain!! The tone of the report conveys a sad and deceiving message: that what happened was bad luck due to bad times!

Now this is what we are missing here: What we are talking about here is not personal “3agrah” about GFH, but it is about the economy and banking industry and fraud and Regulator (CBB), and how we can understand it better to prevent it from happening again. I would have wrote the same about any other bank (if I had the information).

You cannot claim that you have the “best regulator” in the region (the mighty CBB) and then a bank with the size of GFH is let alone to operate on its own without any control or regulation. Otherwise, why people strive to establish banks in Bahrain?! .. they would simply go to Somalia!

Ex Employee of GFH

P.S. Again, sorry for the lengthy comment, but the topic is beyond GFH. It is about our livelihood and future and economy.

I first came across GFH in 2002, and quickly realised that you should not do business with these shysters at all costs… so in some ways it is satisfying to see their come-uppance now, but sad that the party was allowed to continue for so long, and that respectable financial institutions in Bahrain are likely to be tarred by the same brush.

Expect a lot more articles to follow as the rest of the world catches on to Bahrain’s home-grown version of a banking business model based on fraud, and gullible investors. And then there are several other financial institutions, whether linked to GFH's shareholders or not, who imitated GFH’s “successful in the boom-times” business model…

And where was the CBB in all this? It seems that the people who were supposed to regulate began to see the world through the eyes of its most “successful” private sector player.