Lõhmus would rather worry about I pension pillar

Rain Lõhmus

PHOTO: Mihkel Maripuu

Banker and LHV founder Rain Lõhmus says the problem is not with the second pillar of pension but the first, which is something he is not afraid to call a Ponzi scheme – a type of investment fraud where outgoing investors are paid with the money of new members without any economic activity taking place. Lõhmus agrees with sensible reform of the second pillar.

Could recent Swedbank CEO Robert Kitt get a job at LHV?

Every person needs to decide what they want to do and where first. Today, Kitt is still employed by Swedbank, which is why he could not work for LHV.

News of suspicious cash flow keeps rolling in. Suspicions against three employees of Äripank, new board at Swedbank. Is Estonian banking in crisis?

I believe that these are echoes of the past. There have likely been businesses that were not in line with current standards. The cases of Äripank and Swedbank are very different. One is a small niche bank, the other a leading universal bank.

How seriously should we take news of possible money laundering? Has the reputation of Estonian banking taken a hit when viewed from Switzerland? (Lõhmus lives in Switzerland – ed.)

People who keep talking about reputation… They have nothing better to do. I see them more as backseat drivers.

A fundamental question right now is how far they’ll go in terms of banking regulation. It has been said that banks should know their clients. I do not disagree. However, now, they are talking about banks knowing their clients’ clients. That is a concept I would not buy! This kind of meddling in another company’s business is too aggressive for me. Perhaps we could do it more simply?

LHV has benefited from other banks’ money laundering scandals. You have boosted your market share; for example, by acquiring Danske’s private loans portfolio.

It is similar to someone getting rich off of war. Is it good or bad? While what you said is a fact, I believe we would grow anyway. I’m not one to gloat when others are having trouble, but Hansapank also grew as others fell. We were growing steadily, but things really took off when others closed shop.

It is said that competition is weak on the Estonian banking market. That said, we are seeing new banks. Your point of view?

Competition has abated to some extent. We have seen new banks, but they are too green.

Three years ago, one of the first ideas of the new government was to lay down a banking tax. Why was that? Because they needed to find €30 million, and they asked themselves where they could get it. When Jesse James (famous American bank robber – ed.) robbed a bank, they asked him why he did it. His answer was that because there was money there for the taking. No one loves bankers. Besides, it is much harder to get money out of people on the street.

The process culminated in advance income tax for banks, which wasn’t the worse solution. And yet, the attitude is that banks are something that need to be combated, like alcoholism.

At the same time, it sends a message to banks. For example, a bank ponders how much it should charge for a home loan in a situation where the government might want more money in ten years’ time. A bank starts considering the price of long-term risks.

Last year brought lower second pillar management fees and free share investments. Now, we have a new government that is about to reform the pension system again. What will that result in?

I’m not against revisiting and changing things. But give us, banks, time to implement these changes.

As I see it, it’s the first pillar of pension we should be worried about. People cannot be bothered to think about what it is. It’s a Ponzi scheme (an investment scam were outgoing investors are paid with money put in by new members without any actual economic activity – editor).

If Rain Lõhmus or LHV said they plan to offer a product called the first pillar that would see one person’s money immediately paid out to another, we would be locked up!

But governments all over are doing it, and everyone seems to think it’s brilliant. A Ponzi scheme only works as long as you are getting new taxpayers. The problem in Estonia is that we are about to run out.

That is why it makes no sense to compare the first and second pillar. One calculates the rate of return of a Ponzi scheme, the other of an actual investment portfolio. I can set up mu own Ponzi scheme, demonstrate magical profitability and say I’m the best investor in the world!

Indrek Neivelt says that funds have cost people a billion euros due to high management fees and low productivity.

I think that Indrek has too much free time and too little to do. I can calculate all manner of things. Russian chemist Dmitri Mendeleyev calculated that Russia should have over 500 million people and they should colonize Siberia. How things really turn out is something else.

Why do you dislike the government’s plan for a voluntary second pillar?

Perhaps it is a good idea; perhaps good things will come of it. Personally, I think that is not the case.

What happens when you give people a lot of money at once? You are releasing them into the wild where predators will come after them. Herbivores who are let out of the reservation become pray. Financial markets are chock full of predators.

Is LHV also planning a hunt?

We are a listed company and cannot comment.

Has the new government managed to ruin Estonia’s reputation?

I believe that reputation is overrated in this case. Estonia’s reputation has been long in the making. Barring an event that unleashes a media feeding frenzy, such as a mass murder, reputations change slowly.

I recently met with an old acquaintance who represents an international institution in Estonia. They did not seem shocked at all. I believe these things get exaggerated. Perhaps if something happens that makes the news in USA, perhaps that could do some damage. But it has not happened so far.

Is Estonia too expensive? Is it a problem that we have to pay €3 for a cup of coffee?

Life has definitely become more expensive in Estonia, but people’s income has also come along. I recently hosted a person who last visited Switzerland ten years ago. They said that if everything seemed garishly expensive then, it just seems expensive now.

And compared to Estonia, not that expensive anymore.

Should we be talking so much about border trade and the excise duty on alcohol?

It is first and foremost something that concerns alcohol producers. Reading the news, it does not seem like something that is vital from the state’s point of view. But because people consume a lot of alcohol, this topic has been paid too much attention.

The lesson the government should take away from this is that vessels always communicate. You cannot make decisions in isolation. Everything has consequences. It is basic knowledge in the world of business, but politicians seem to think there is a car only they can drive and that does not depend on anything else. That is not how it works.

How have ECB quantitative easing and low interest rates affected our lives?

People have forgotten that money used to cost quite a lot and interest rates were serious business. The consequences of that are not good. Interest rates used to be a gauge – projects that promise a better rate of return than your interest rate get done and those that do not meet the criterion are discarded. That bar has dropped so low by now that people are stepping over it and paying it no mind.

Because this balance has been destroyed, it is likely a lot of senseless things are being pursued right now. People spending their workdays and lives on pointless endeavors that would not be needed under normal circumstances. It is slightly reminiscent of the Soviet Union. But everyone was eager to do it.

Is the euro a successful project?

On the one hand, it has helped unite Europe. On the other, its creators failed to foresee the problems it would create. Countries and cultures within the Eurozone are so different. Hooray-optimism has passed, with justified questions taking its place.

If the question is whether it has been good for Estonia, we need to ponder the alternatives. We used to have our own currency, the Estonian kroon, that never was an independent currency in that it was tied first to the Deutsche mark and then the euro. It was a derivative. Things are okay today, compared to when we had the kroon.

All the questions that have been in the air concerning the European Stability Mechanism this week – to what extent should an Estonian taxpayer be held liable and pay to rescue faraway banks – I feel are justified questions.

Everyone knows Europe is full of zombie banks. But no one is really doing anything. It is simply a matter of time before they need money. And then the question will be whose money and how much.