(The Destructive Matrix)
When Hugo Chavez was elected in 1998, one of his campaign themes was how he was going to reduce the size of the state, get rid of Ministries, airplanes and bureaucrats. He has don exactly the opposite. While he initially reduced the number of Ministries, by now there are more of them than in the country’s history, almost double the number of public employees and the number of public institutions has multiplied without control.
But what has been most amazing, has been how Chavez has tried fixing problems by creating new layers upon layers of bureaucrats in the belief that this will somehow fix problems. Case in point is the beleaguered electric system, where Chavez had CADAFE coordinating policy, created CORPOELEC, a whole new company on top of it and later created the Ministry for Electricity. Thus you have three layers of decision makers before you get to where the action is. Add to this that Chavez nationalized the private electric sector, held rates constant and you get an idea why the problems are so severe.
This also reflects how the Government does not admit that they don’t do things right.
So, after the financial crisis, which was due to lax supervision and the abuses of a bunch of members of Chavez’ Bolibouregois, the first step should be to professionalize and strengthen supervision.
But not for Chavismo. Without studies of any kind or even consulting with those affected, the glorious Venezuelan National Assembly approved this week a new regulatory body which will oversee the three components of the financial system: Banks, brokers and insurance companies. Thus,you create another layer on top of a system that showed that did not work well, but if the three regulatory bodies underneath remain filled with crooks, people without experience or no clue about what they are doing, this will change absolutely nothing.
But since they were at it, they went even further and decided to completely dislocate the whole financial system by introducing sweeping changes in regulation which may sound fine at first sight, but will not be if good regulation is not in place.
The Bill you see, separates the three businesses from now on. Banks will not be able to own insurance companies or securities brokers and vice-versa, as the three sectors will be obligated to work completely independent of each other. That is, now cross-ownership, no co-branding, no cross-managing, no connection, personal or institutionally among the three sectors of finance.
In a well regulated world, these changes may seem to be ideal and reasonable. But in a system still reeling from the financial crisis, it may be asking for trouble.
First of all, you are going to force some of the best run and sound banks to get rid of their insurance arms and to get out of the securities business. For most banks, getting rid of the securities business implies shutting it down: They exist to provide the service to the bank’s clients and departments. Without the affiliation with the bank, its distribution network, its name, they are worth very little, if anything.
The insurance arms are worth something, but when you are obligated to sell them, you will not get a good price. And who will be the buyers? Certainly there will not be high quality buyers for the many insurance companies owned by the Venezuelan banking system.
And you are forcing these same banks to get rid of their securities business and leave it to the brokerage sector, which has recently been battered by the crisis as well as the elimination of the “Mutuos” one of their top two products.
Because in the end, banks did not fail because they used their brokers illegally. Banks failed because they used other brokers unrelated to them to lend to their own brokers, but in some cases simply used companies owned by the banks owners. So, in the end, the financial engineering that went on, originated on the lack of supervision and not in the structure of the system or its regulations. As an example, the two regulators of the securities industry named by Chavez until the crisis are a) In jail, b) being sought by Interpol for their crimes related to the financial crisis. These were people who had no connection, knowledge and/or experience with the securities business prior to being named to their positions.
Thus, all of this change for the sake of change will do little to correct the problems unless the four regulatory bodies, the insurance, banking and securities regulator, plus the new and improved Super Regulator are run by professionally qualified people and not by political and loyal appointees with no clue, track record or professional experience in the area.
Thus, the financial system will be shaken up by all this, many institutions will be in a holding pattern until the new rules are known and regulation will not improve because there is a new regulator on top of the old one. But Chavismo is like that, they believe anyone can do a job, anyone can improvise and it is always someone else’s fault.
And if it does not work, add another layer, because this time, it is surely going to work. Yeah, sure!