Sunday, May 22, 2005

The Good Old Days 

To give those who don’t have much of a frame of reference for what Venezuela was like before Chavez’s ascension to power I will publish a little series of articles called “The Good Old Days”. Why the “Good Old Days”? Because for some people, primarily those who make up the opposition, they were the good old days. The opposition held power, did things as they saw fit, and life was good for them.

Why should we care? Because if the opposition ever manages to get its act together maybe it will again challenge for power. It will then be important to know what an opposition government will be like. What better way to know what they will likely do in the future than to look at what they did in the past.

To that end, enjoy the first installment of “The Good Old Days” which shows what it was like when Venezuela had bankers who knew how to have a good time.

Failure of High-Flying Banks Shakes Venezuelan Economy

James Brooks Special to the New York Times

May 16,1994

Caracas, Venezuela- In Latin America’s worst banking crisis of the free-market 1990’s, a string of failures since January has left half of Venezuela’s banking industry in the hands of the Government.

Venezuelan taxpayers face a $6.1 billion bailout bill, as the government props up nine banks, including Banco Latino, the nation’s second largest. More banks may fail as inspectors unravel a five-year-long banking spree generated by deregulated interest rates and minimal supervision. This often resulted in banks offering rates for deposits that were far higher than were justified by loan demand.

“Eighty to 90 percent of the banking system is comprised in this catastrophe,” said Oscar Garcia Mendoza, president of one of the strongest banks here, Banco Venezolano de Credito. “If you don’t have policeman on street corners, bankers will run red lights.”

The costly bailout is contributing to political instability. And while fugitive bank directors enjoy comfortable overseas exile, Venezuelans are paying for the bank failures with high inflation, reduced government services and shrinking economic activity.

For Venezuela’s economy, today’s financial crisis is roughly 10 times as severe as the failure of savings and loans institutions in the early 1990’s was to the United States. The $105 billion savings and loans bailout represents 1.6 percent of the United States’ gross domestic product and 7 percent of the projected 1995 Federal budget.

By contrast, Venezuela’s $6.1 billion bailout represents 11 percent of Venezuela’s gross national product and 75% of the Goverments 1994 national budget. Banco Latino had 1.2 million depositors – about 10 percent of Venezuela’s adult population.

By setting interest rates far higher than sound banks, Banco Latino lured many depositors, then used the funds to build a lavish headquarters, charter jets for each director of the bank , throw lavish parties and make loans to insiders.

“There was absolutely no supervision”, one American banker here said, reviewing the collapse. “The regulators weren’t trained. They didn’t have a budget”

Late last fall, when Banco Latino officials began to realize that their house of cards was collapsing, they started transferring hundreds of millions of dollars overseas. In the final frenetic days, one bank director foresaw judicial orders on freezing assets and sold his million dollar mansion. Another office, Folco Falchi, the bank’s coordinator for international investments, was reportedly seen loading suitcases stuffed with dollars into his corporate jet on the Caribbean island of Curacao.

After the authorities padlocked Banco Latino on Jan. 14, bank officials, operating from offshore refuges, entered the bank’s computer electronically with a modem and erased and altered thousands of records.

At the time, Venezuela’s Superintendent of Banks, Roger Urbina, was buying race horses in Argentina. He decided not to come home.

Guidelines Ignored

At the Deposit Guarantee Fund, Venezuela’s equivalent of the Federal Deposit Insurance Corporation, Esperanza Martino, the president, apparently got the job in 1990 because she was married to the chief bodyguard of President Carlos Andres Perez, who was impeached last year for misuse of Government funds. Despite her training as lawyer, the director ignored guidelines and concentrated almost half of the money for banking emergencies in only two of Venezuela’s 47 banks: Banco Latino and a bank that collapsed in February.

The two regulators resigned on Jan 21. Without displaying any urgency, Venezuela’s Senate waited for three months to ratify their replacements. One legislator, Pablo Medina, charged that Congress’s reluctance to investigate Banco Latino stemmed from past generosity by the bank’s public relations department. With a $3-million-a-month budget, the department reportedly paid the bills of Banco Latino credit cards furnished fee of charge to 36 congressmen.

Venezuela has no tradition of punishing white-collar crime. Three bank failures in the late 1970’s resulted in one officer being jailed for one year.

In the Banco Latino case, a criminal court judge issued 83 arrest warrants in early March. The list was apparently prepared by copying names out of the bank’s most recent annual report. The following week the judge excused herself from the case, but left the arrest warrants standing.

Four months later, only 6 out of 83 suspects have surrendered. Virtually all the others are believed to be abroad.

Venezuelans, displaying little confidence in their banking system, legal or political systems, keep some $50 billion in foreign banks. Deposits in Venezuelan banks total only $12.7 billion. Venezuela’s dollar reserves have dropped by 25 percent since the start of this year a hemorrhaging that was worsened by the Banco Latino crisis.

The gigantic problems in Venezuela’s small banking sector have their roots in a free-market change adopted by Mr. Perez when he was president: the freeing of Government regulated interest rates.

“Free interest rates were adopted in 1989, but banking supervision was not adopted until 1994,” Tesalio Cadenas, Venezuela’s new superintendent of Banks, said in an interview here. “That gap was responsible for the Banco Latino crisis.”

With a relationship between Government and the bank, ministries moved their accounts to Latino. The army and the Government-owned oil company put their pension funds in the hands of Latino trust managers.

Flush with money, Latino built a lavish high-rise headquarters here and decorated it with expensive oil paintings and sculpture. Expanding aggressively, the bank became a ubiquitous presence in this country operating 101 branches, including one in the United States Embassy here. Affiliate banks were opened in Colombia, in Curacao (Banco Latino, N.V.) and in Miami (Banco Latino international).

When a Banco Latino representative office was opened in Paris, the bank filled a Concorde with guests for an expense-paid weekend in Paris. The bank also bought a corporate jet for virtually every bank director.

Lax Loan Policies

Struggling to keep up with rocketing deposits, Latino bankers made increasingly poor-quality loans. The same collateral was used for multiple loans. Loans were made to bank officers.

“You cannot apply Swiss standards to Spain,” one director, Ricardo Cisneros Rendiles said from Miami in a telephone interview. “Venezuelans are like some regional banks in the U.S. 15 years ago, there is a lot of community interest, everybody knows each other.”

Building a real estate empire, the bank bought 500 office buildings, only to see the market fall. Speculating in the stock market, it invested heavily in Caracas’s state electricity company at $10 a share in 1992. Today, the stock sells for $2 a share.

Without informing their Venezuelan depositors, Latino officers transferred millions of dollars in deposits to the Curacao affiliate bank. There, the bank did not have to meet the Venezuelan reserve requirements or pay the deposit insurance taxes.

Eventually, Banco Latino become a multibillion-dollar Ponzi scheme, a financial operation that could be maintained only by attracting more and more investors. Last year, the bank paid 105 percent interest on one-year certificates of deposit, more than double Venezuela’s 1993 inflation rate of 46%. Depositors over 60 years of age received interest premiums of 3 percentage points.

But when Mr. Garcia of the Banco Venezolano de Credito publicly urged banking officials to investigate Banco Latino’s high interest rates, the only reaction was a threat by the National Banking Council to expel him. (This industry group happens to be housed in Banco Latino’s headquarters building.)

‘Doing Dumb Things’

“They were doing dumb things, but all the banks were,” said Mr. Cisneros, a minority shareholder who said he was only actively involved in Banco Latino affairs when shareholders mounted a last-ditch attempt to save the bank in early January. “If it hadn’t been Banco Latino, it would have been any other bank. The proof is that eight other banks are under receivership.”

When the collapse came in mid-January, the Government suddenly had more than one million angry depositors on its hands. After one huge street demonstration, several depositors invaded a judge’s legal chambers, where they waved toy guillotines.

Seeking to buy political peace, Venezuela’s new President, Rafael Caldera, signed into law an emergency banking bill on March 10. This law retroactively raised depositors’ insurance from $9,000 to $35,000. With 99.8 percent of savings accounts and 94.3 percent of checking accounts fully covered, Banco Latino reopened uneventfully on April 4 as a Government run bank.

To placate some 2,000 depositors in Latino’s Curacao branch, Government officials announced in early May that the Government would extend the $35,000 coverage to their previously uninsured deposits. The banks in Miami and Colombia are to be sold, and the Government hopes to sell Banco Latino, as well as the other eight banks now under Government control: Banco de Amazonas, Bancor, Banco Barinas, Banco de la Construccion, Banco La Guaira, Banco Metropolitano, Banco de Maracaibo and Fiveca. To keep these banks afloat, the Government has pumped in $3.3 billion, more than the $2.8 billion in Government aid extended to Banco Latino.

“The idea is to privatize Banco Latino, the sooner the better” Edgar Dao, a member of the Government intervening board, said in an interview at Banco Latino’s headquarters.

But many analysts believe that Venezuela’s market needs only about 10 banks and that the rest will either have to be liquidated or merged with stronger banks. “They’ll put Banco Latino on the block, but I doubt they will get a nibble,” said Marco A. Gomez, president of the 78-member Foreign Bankers Association of Venezuela. “I don’t know of anyone who wants a bank of that magnitude.”

To prevent further bank frauds of Banco Latino’s size, the Bank Superintendent’s office is quadrupling its budget, is expanding its investigative team by one third and is seeking technical assistance from the United States Government.

As for the perpetrators of the multi billion-dollar collapse, prospects seem to be dim that they will ever be tried and convicted.

“I maintain that the presidents of many banks in Venezuela have signed many more balances with false figures than I ever have,” Gustavo Gomez Lopez, Banco Latino’s president until three weeks before the fall, wrote in March in a statement defending himself against charges of fraud, criminal conspiracy and undue appropriation.


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