Wednesday, June 15, 2005

The Good Old Days - IV 

Recently I have been beating up on the Wall Street Journal's O'Grady for her ineptness and dishonesty. In todays version of the Good Old Days - the story of what Venezuela was like when the opposition ran it - we get to see how much better the "Americas" column of the WSJ was when they actually had someone who knew something about Venezuela running it - Carlos Ball. Definitely about as right wing a Venezuela as you'll find (with the exception of Annibal Romero)but he can be brutally honest. Of course he was a little over optomistic in thinking that the banking failures would end cronyism - it was only Chavez's election that finally put an end to that.

In this installment of the "Good Old Days" you will get to see how the job of government officials was to facilitate corruption. In contrast to the Vth Republic where people get fired for acts of corruption, in the IVth Republic it was NOT engaging in corruption that would get you fired. Enjoy:

Bank’s Failure Signals End of Cronyism in Venezuela

Wall Street Journal, Friday February 4, 1994

The Jan. 13 collapse of Banco Latino represents more than the end of reckless banking practicies by Venezuela’s second-largest commercial bank. It also may signal the end of an era of political-corporate cronyism that has characterized Venezuela’s culture for the past 20 years.

In the late 1970s, during ex President Andres Perez’s first administration, Banco Latino was known as “the bank of the12 apostles.” The word “aposlte” was used for the dozen or so Venezuelan businessmen close to the presidential palace who became multimillionaires practically overnight. (Most of these fortunes were made through public construction work, as well as foreign contracts in Latin American countries that were receiving aid from the oil-rich Venezuelan government.)

The lavish spending habits of Banco Latino associates were well known. Probably no other bank in the world had more members of its board with private jets. Banco Latino’s chairman, Gustavo Gomez Lopez, reportedly owned three. Last October, when knowledgeable corporate treasurers were already withdrawing their deposits from Banco Latino, hundreds of corporate chief executives invitations to attend the opening of the bank’s Paris office. The offer included free flights in chartered jets and an all-expense-paid three-night stay at the Crillon or Ritz. As for banking practices, clients who toward the end wanted to withdraw their Cds were offered an interest rate of 105%, about twice the going rate.

It may not seem surprising that the financial authorities didn’t more closely monitor the bank’s operations when one examines their collegial relationship with Banco Latino. Fogade, the local equivalent of the Federal Deposit Insurace Corp., had 33.66% of its funds in Banco Latino, and a further 12.87% in a closely related bank. Those funds weren’t even in highly liquid assests, as the law prescribes, something that seriously complicates the Venezuelan banking crisis. But then, the head of Fogade had no previous experience in the financial world. An attorney, whe was married to the former chief bodyguard and confidant of ex-President Perez.

A new and far more restrictive banking law took effect Jan. 1, too late to save Banco Latino. But even with the new law, Banco Latino had been associated for so long with the ruling elite that bureaucrats weren’t about to put their jobs on the line investigating it (this includes leaders of both major political parties, the AD and Copei). The latest issue of the most respected local bank risk report reads, “a tolerant and permissive attitude by the supervisory agency favors speculative conduct, instigates noncompliance with the law, and does not penalize accounting practices and manipulations that reduce the transparency of the financial statements.”

Things at Banco Latino began to get seriously out of hand after the bank’s long-time chairman, the late Pedro Tinoco, was appointed head of the central bank in February 1989 by the now impeached President Perez. During Mr. Tinoco’s nearly four-year tenure at the central bank, his own Banco Latino really took off.

In March 1989, a sophisticated operation called “debt reconversion” was established by presidential decreee. This decree allowed the purchase of the nation’s foreign debt at prevailing marked-down prices and the resale of that same debt package to the government at near face value. This scheme was set up to help troubled companies, and the first beneficiaries were naturally companies of the apostles. Over 50% of all debt reconversion deals were done through Banco Latino.

After leaving the central bank, Mr. Tinoco returned to his law office and to his job as chairman of CADA supermarkets, part of the Cisneros conglomerate of companies (Organization Diego Cisneros). Mr. Tinoco’s law firm partners, together with Ricardo Cisneros (younger bother of “apostle” Gustavo Cisneros) and Gustavo Gomez Lopez (the son-in-law of another of the original “12 apostles”), controlled Banco Latino and sat on its board. Another board member was Francisco Perez, a brother of President Perez.

The Tinoco law firm represents the Chase Manhattan Bank in Venezuela and played on both sides of the fence in the long, involved and very profitable deals concerning the country’s foreign debt.

Soon after the second military coup against the Perez administration on Nov. 27, 1992, the Cisneros conglomerate started to reduce its exposure in Venezuela. On Dec. 4, 1992, it borrowed $55 million in order to buy – in partnership with Mexico’s Emilio Azcarraga – the largest Spanish-language television network in the U.S., Univision. Later, CADA and Banco Latino began to be siphoned off to purchase Pueblo Supermarkets in Puerto Rico and Xtra Supermarkets in Florida.

The logic behind such transactions is not hard to deduce. President Perez’s political support had evaporated with accusations of fraud and his later impeachment. The Cisneros media empire already had switched to endorsing someone else, Eduardo Fernandez, for president. Mr. Fernandez, the then-secretary general of the Social Christian Party (Copei) lost out in the presidential primaries to Oswaldo Alvarez Paz. The Cisneros group then immediately threw ist backing to Gov. Alvarez.

While campaign contributions aren’t made public, it was widely known that Banco Latino had become the largest contributor to Gov. Alvarez’s campaign. In fact, one of the principal reasons why Gov. Alvarez lost the presidential election last December to Rafael Caldera was probably voter concern over his ties to several businessmen who had greatly benefited from the Perez debt reconversion and privatization programs.

With Messrs. Perez and Alvarez out of the political arena, and with former President Caldera – an outspoken opponent of corruption in high places – back in the presidential palace as of Wednesday, it seem more than likely that the group that had flourished thorugh its its political connections decided to cut its losses, wipe the slate clean and get out of Venezuela.

The collapse of Banco Latino leaves one million account-holders pressuring the government to live up to its implicit guarantee to cover all deposits, not just the first $9,300 insured by Fogade. On their side is the fact that most of the money belonging to the state oil corporation pension funds, and the pension funds of the armed forces, were managed by Banco Latino. Colonels without pensions present a very real risk to any Latin American government.


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