Archive for November 2nd, 2005

Clodo draws the sword by Teodoro Petkoff

November 2, 2005

I was going to write about this,
but Petkoff did it before me and it is hard to improve on what he wrote. I would
only add, that this is done daily by Venezuelan Government officials and in the
case of our current Minister of Finance, he “claimed”  (The money was never found) that he did the
same diversion of public funds to pay salaries that Chacao’s Mayor is being accused
for, except the minister was talking abut US$ 3 billion and not a few million
as in the Mayor’s case. The second curious item, is that Leopoldo  Lopez is not only successful as Mayor, but if
my memory serves me right, he received the highest number of votes, percentage-wise,
than any Mayoral candidate in Venezuelalast
year.  Clearly the Government fears Primero Justicia, first it was
the skeletons, then this story and now today the President of the
Assembly accuses it, without presenting any evidence of receiving support from the US Embassy. Here is Teodoro on Leopolod Lopez.

draws the sword by Teodoro Petkoff in Tal Cual

This small reporter asks himself if Clodosbaldo Russian, when he looks
at himself in the mirror, is capable of looking at himself without looking
down. This guy, that has played dumb in the face of tons of cases of
corruption, that has seen hundreds of payment orders for works never built,
that can not ignore the scandalous proportions that administrative corruption
has reached, that when the Bolivar Plan was investigated, after he killed the
tiger he s… in his pants when he faced the skin and left it at that, without ever
producing a “second report”; this grotesque personality of the oficialist
troupe, found, at last, a “corrupt one” to punish. Yesterday he announced
triumphally, that he had caught Leopoldo Lopez, Mayor of Chacao, in an administrative
crime. I do not know the details of the case but it makes me suspicious given
Russians record that the only corrupt person that he has found happens to be an
opposition Mayor. What a coincidence! And it is also a coincidence that he
banned him politically staring in 2008 (when his terms ends), when young Lopez,
obviously, could aspire to other public positions. Well, the truth is that
after the sentence about the morochas, in the officialist circus, even the hens
are beginning to crow like cocks.

November 2, 2005

Bandes is the Development Bank of the Government. It owns companies, it manages
money such as the social fund for PDVSA, and it owns bonds, invests and
performs financial operations that are required for the promotion of
development. Ever since it was created as the Venezuelan Investment Fund (Fondo
de Inversiones), it has played an important role in buying and selling the
country’s sovereign debt.

And this makes a lot of sense, a treasury rich, Venezuelan Government
institution should play those markets since the risk is its owner and those
sovereign bonds have some of the highest yields in the world’s emerging
markets. More importantly, the Bandes funds can be used in the Government’s own
strategy to repurchase its own debt, support it and why not, even
manipulate it. After all, who else has such deep pockets and the interest in Venezuela’s
sovereign bonds being strong? Truly nobody. No fund or institution other than
Bandes and maybe now the new Treasury Fund, Foden, has such deep pockets that
can be invested in the Venezuela’s

Unfortunately, the creativity of corruption knows no bounds and can sidestep
the logic and even the appearance of propriety as in the case and others. As in
the case I reported
last year
in which Bandes sold to private groups its portfolio of bonds,
only to have the Republic announce soon after that, the repurchase of
coincidentally the same bonds that had been sold by Bandes a couple of months
earlier. Some of these groups the bonds were sold to, would qualify as what is coarsely
qualified in Venezuela as “Con que culo se sienta la cucaracha” or
“On what ass does that cockroach sit” in terms of the size of the
financial transaction, but everything was structured in such a way that it
could be done by them, without transparency and, of course, no investigation
was ever called on the matter. (And the size of the ass of the cockroach
increased significantly as profits in that transaction alone were in the dozens
of millions of dollars)

Which brings us to today. For quite a while the market has been hearing that
mysterious purchasers had bought structured notes on Venezuelan sovereign bonds
in big sizes from various Wall Street firms. We are talking US$ 100 million at
a time, too big a size for regular investors. But let me explain what this
structured notes entail. Suppose that you are not willing to buy Venezuela’s
2027 bond because it is too risky in terms of maturing in 22 years. But the
yield is attractive. So, you ask a Wall Street firm to issue a structured note
for let’s say three years, in which the Wall Street firm guarantees that you
will receive a certain fixed interest rate lower than the one those bonds offer
over 22 years but still attractive, as long as the country does not default.
Thus, you sacrifice some of the yield for security in the short term. You know
exactly how much you will be paid and at the end of the three years of this
example, you get your capital back.

Now, it does not make sense for Bandes to ask for someone to structure notes.
First of all, with the notes you add another risk to the Venezuela risk,
the risk of the “issuer”, the financial firm that issues the
structured note. There is also the custody risk, as in the recent and fresh
case of Refco, which will show up again at the end of this story. (Actually
Refco could also issue the notes up to recently so the risk is quite real)

Issuing these notes is great business for the issuer, who charges hefty commissions
to the buyer, as well as making money in the trading of the underlying
securities. A few months ago, an acquaintance told me that he had gotten huge
orders for these notes from “unusual” countries, where he did not
think there were investors who woke up in the morning with a strong desire to purchase
say US$ 100 million in Venezuelan sovereign bonds structured notes. He thought
there was something “fishy” about these and his suggestion was some
intermediary or Government official was making a lot of money on these deals
and the end client had to be the Government.

Then, as if to complicate matters, last Saturday the President of Bandes acknowledged
that his institution had sold US$ 662 million of the US$ 1.6 billion in such
notes Bandes owned to none other than the Ministry of Finance. Thus, the mystery of the notes
was unveiled and indeed they were purchased by the Venezuelan Development Bank
and the amount was huge for those markets: US$ 1.6 billion!
Moreover think about it, US$ 1.6 billion in structured notes, where commissions
are of the order of let’s say a couple of percent (US$ 32 million!), versus
buying the bonds outright, where commissions could be as low as 1/16 of a
percent. (Only US$ 1 million). If you are an intermediary there is a huge

But it actually gets even worse. The Ministry of Finance turned around and sold
those notes (denominated in US$) to “four local banks” at the
official exchange rate
in a process that lacked any transparency. Imagine,
just for being one of the “chosen” four banks you were able to
purchase, in bolivars and at the official exchange rate, these notes, which you could then
turn around and sell in US$, get dollars and bring the funds back at a rate
much higher ( 27.9% to be precise!) than that! Nice deal! And then the VP says that local businessmen lack
! Why be competitive when life can be so easy? And who
promotes it? None other than the Government itslef!

The case smells so bad, that there
are suggestions
that the statements last Friday by the President of Bandes
were simply a way of saying:” I had nothing to do with the placement of the
notes in local currency”. However, the reporter apparently was not knowledgeable
enough to ask why Bandes used these structured notes rather than buying the
bonds outright. Descifrado suggests
(Subscription area) that the Government may have gotten wind of this
too and the President of Bandes may not last long in his position. But I have
to wonder given the next post, where is Comptroller Russian in all this?

Finally, where does Refco come in all this, you may wonder?
Well, reportedly some of the money and securities that got stuck in the
bankrupt company from Venezuela
is in the form of these same structured notes. And there may be another new story
in that part in the future, as this country never ceases to amaze everyone!

Extermination in Falcon by Teodoro Petkoff

November 2, 2005

Extermination in Falcon
by Teodoro
Petkoff in Tal Cual

Once again the country is shaken up by the brutal news of the murder
of young people, apparently in the hands of the police. In Falcon state the sinister figure of
“extermination” groups has reappeared. Five boys were massacred by bullies
encrusted in the police corps. Once again an investigation is announced “to the
utmost consequences” and “no matter who falls”. We have heard this song so many
times! The ineffable “utmost consequences” are always the impunity of those
accused. Whatever happened to the investigation about the crimes committed by
the Guarico police? Lots of noise and few nuts (sic). Whatever happened to the
trial of the cops of the first “Extermination” group detected in Portuguesa
state? It also ended in the freedom of those accused.

Whatever happened to the investigation opened in Anzoategui State?
Nothing ever came out of it. How many cops are in prison in Aragua state, the
state with perhaps the worst registry in police assassinations? None. The assassins
act with their faces uncovered, there are witnesses of the crimes and
nevertheless, there is never a sentence condemning the accused. Absolute
impunity protects these state criminals.

State Criminals? Yes. The actions by these “extermination “ groups, which
is not recent but that during the last years has acquired the character of an
epidemic, is associated with an unwritten conception and only commented in low
voices among the police headquarters, that the fight against criminals passes
by the execution of supposed and true criminals. The State and the Government
play dumb in the face of these actions and only when the scandal overflows all
borders, as in the Kennedy barrio case, do they pay attention. The rest of the
time, they let it be. Because the assassins have carte blanche and are at the same time judges and executioners and
decide on their own and by their will who should face the weapons, the result
has been an orgy of blood in which presumed criminals and other people have
fallen, young in general, which have nothing to do with crime. More than five
thousand assassinations of this type have occurred in the last five years.
Official tolerance in the face of these “extermination” groups drives
inexorably to the decomposition of police corps, to the putrefaction of the ethical
and moral values that one would think they should be imbued as public servants
and transforms them into criminal groups which are much worse and pernicious
than the common criminal gangs.

A police unit that acts on the side of the law, violating codes and
ordinances, is a danger to society. And it turns even more dangerous when the
Government’s failure in decreasing the social crisis derived from unemployment
and informal subemployemnt, with the consequent expansion in personal insecurity,
leads a portion of the people to assume with indifference, if not with
approval, the episodes of extermination. The conclusion is unavoidable: there
is no true policy for public safety. This Government does not know what to do
to guarantee the safety of Venezuelans. The police, the courts and the prisons
are a disaster. How can we be surprised that our criminality indices are among
the highest in the world.