The Devil's Excrement

But it hasn’t…it represents another black list and abuse of
power by this Government which is only efficient at violating people’s rights.

Absurd, because the procedure used to disqualify a person is
so ridiculous and simple and so dependent on a single person, the Comptroller,
that if the legislators had meant to it to be that way, they would have
realized what a mess it would be.

Just so that you understand the process, let me describe how easy it is to be disqualified. The procedure can be as simple as this:

-Someone from the Comptroller’s office or a citizen detects
or accuses someone of doing something improper.

-The Comptroller has the lawyers that work for him interview
the accused (without a lawyer being present), you are asked at the end to sign to certify that you said what is in the minutes typed by the lawyer interviewing you. 

-The case is reviewed and at that point new questions may
arise which require a new meeting with the lawyer, at which point they will ask
additional questions and/or clarifications about the case. The lawyers will
then say what sections of the administrative code were violated and the case
goes to the Comptroller for a final decision.

-The Comptroller, alone and singlehandedly, decides whether
you have committed a fault and decides what to do. It can be as simple as a
fine or disqualifying you from being appointed to office for a certain period.
Up to a few years ago, it was never interpreted as you not being eligible to be
a candidate.

That’s how easy the process to “disqualify” you is in this
new revolutionary interpretation.

How do I know this? Easy. A few years ago, I was on the
Board of a Foundation associated with one of the universities in Caracas. We
signed a letter of intention to buy an office for Bs. 250 million (at the time
around US$ 300,000) and asked for a mortgage from a bank. On the day we had to
pass papers, the mortgage had not come thru, so the seller pulled out unless we
paid more, I don’t recall how much more but it was something like Bs. 20 or 30
million. The case came to the Board and we approved it because we could not
find anything cheaper and the location was perfect for the Foundation.

A couple of years later, someone went to the Comptroller’s
office and denounced that there had been a payoff of some sort and that was why
a higher amount was paid. The Comptroller opened the case and all eight members
of the Board were investigated and we all went to the Comptroller’s office
twice to testify or be interviewed. The lawyers conclusion was that we were not
guilty of what we were accused but we were in violation of the law for
attempting to borrow money without the Cabinet approving it (Despite the Foundation
not having received any Government funding since 1970). Thus, we were charged
with this different accusation and the penalty was a fine of what was then
about $700-800 and two years of disqualification from being named to any
Government position.

The case went to the Comptroller (Russian, the current one)
who decided we were not guilty. We never knew why he ruled that way; we were
just sent letters of good behavior, saying the case had been closed.

This is the first reason the whole thing is absurd, you cannot
have such a process dependent on one person and subject to manipulation. Yes,
you can appeal, but in the appeal, you just write why you are innocent and the
Comptroller once again decides what to answer back.

The fact that this is the case can be seen in the statistics
which show that 80% of those disqualified from running for office are
opposition in a country where the opposition holds less than 30% of the offices
in the country between Mayors and Governors. That extreme asymmetry is no
accident.

In fact, the Comptroller is not a judge, he can disqualify
someone from being appointed to office, but he can not stop them from being elected. The only way to take
away your political right to be elected is if a Judge finds you guilty. This is
not even just Venezuelan legislation, this is part of the Interamerican
Convention on Human Rights (The San Jose pact) which in its Article 23
clearly says that your political rights can be limited by a number of reasons
such as age, nationality and…”sentence, by the competent judge, in a penal
process”.  Article 65 of the
Venezuelan Constitution establishes a similar limitation, which I still find it
hard to interpret in any other way, and takes precedence over any legislation
below it. But in any case, Venezuela signed the San Jose pact, which will
clearly delimit how anyone’s political rights can be taken away: Only by
sentence of a judge in a penal process.

Thus, we are once again facing a gross miscarriage of
justice by the Chavez administration, which has simply disqualified those
figures of the opposition that were a threat, while at the same time using
similar arguments to remove pro-Chavez figures from office in the case of those
Chavistas who were a nuisance to Chavez’ plans and desires, such as the
recently removed Governor of Yaracuy State.

If the rule of law existed in Venezuela, this would be
easily and readily fixed with a ruling from the Constitutional Hall of the
Venezuelan Supreme Court, but despite numerous injunctions submitted to that
body, the Court has either ruled against them or denied the injunctions on
technicalities.

All of this has been helped by the absolute obedience of the
Electoral Board, who despite the fact that none of them are lawyers, reached a
decision on the matter without even asking for an opinion from its legal
counsel.

I have no hope that this new black list by the Chavez
Government will be revoked. It is a Government for which the wholesale
violation of human rights represents no problem if they are in the way of the
empty political project of the Chavez revolution.

From the PDVSA workers, to the Maisanta list and now the
black list of the “inhabilitados”, it is a way of life for Chavez and his
comrades to perversely violate the rights of those that get in their way.

Then, at the beginning of this week, someone explained to me
that the transaction would simply be a hand off of the structured notes
denominated in Bolivars in the hands of BOD. Such notes are worth slightly above the half of the US$ 2.4 billion registered on the books. Santander would receive them and
ask the Government for the dollars at the official rate of exchange.

While I haven’t seen the numbers, it made some sense if the
regulator (the Government) allowed the transaction like it has allowed the
others that have taken place. For Santander, it would be an elegant way out of
the country (the bank has been rumored to be for sale for ages) and BOD would
get rid of the notes in its balance sheet, acquiring a very healthy bank with
the largest branch network in the country. Of course, the purchase would still
be suspicious in the sense that those notes were purchased with depositors
money.

That si why I started this series.

But then on Thursday there was a bombshell, the Government
issued a very strict resolution essentially banning any bank or financial institution
or even anyone currently owning more than 5% of any such institution from buying another
one, reaching an agreement to buy another one, without prior permission from
the Government. Moreover, the resolution bans the transfer of the structured
notes without the financial institution having prior approval from the
Government.

Lawyers are still arguing whether the resolution banks the
BOD/Banco de Venezuela acquisition as described, but most think the
Government’s resolution is airtight. But whatever interpretation anyone may
give it, to me it expresses in no uncertain terms that the Chavez
administration does not want the transaction. Thus, unless Chavez himself gives
the green light I don’t think the acquirer or the subject of the acquisition
will go ahead with it.

The puzzle is why it was blocked. All sorts of rumors are
flying around Caracas about this. There are basically two ways of thinking:
One, that blocking the transaction originates, as has become customary in the
robolution, in some parallel racket (guiso) being set up by someone else who wants to
by the same bank. The second one is that this reflects the arrival of the more
fundamentalist Ali Rodriguez to the Ministry of Finance and that he stopped it.
I would lean towards the first explanation, because it has always worked so far
when you are trying to find a rationale to some act by the Government that does
not make sense.

But the same resolution contained what to me is a somewhat
worrisome proposition: It orders auditors of banks to reflect as of June 30^th.
2008 the quantitative impact of the notes being valued at its true worth.
Additionally, it bans any bank from divesting itself of the notes until the
Government approves it.

The problem with this is that June 30^th is this
week and I doubt any bank is ready to divest. This means that the auditors will
look at he notes and calculate their value at the only exchange rate accepted
by the Government Bs. 2.15 per US$. But these notes are worth more than that
since the guarantees behind it are US$ which can be sold in the parallel swap
market currently around Bs 3.4 to the US$.. So, if you look at what the auditors will say, it will exaggerate the
loss incurred by these banks to the point that many will look absolutely
bankrupt.

Today the Minister of Finance complained
about this situation, saying bankers will have to capitalize their
institutions because they bought the notes with the depositors money. (Will all
of them?) And he is right. However, he fails to say that it was Chavista
Government officials that allowed this to happen without any action.

For a Government that likes to blame the 40 years of the
Fourth Republic for everything, this time around, it can’t use that excuse,
exchange controls have been in place since 2003 and all of these structured
notes were created since then.

Who is to blame?

I am pretty sure that not only will the Government not do
anything about prosecuting those buddies responsible for it, but I am sure all of them can run
for office in the November regional elections.

And will we see if the “guisos” continue now that Rodriguez
Araque is in the Ministry of Finance? He is supposed to be extreme radical, but
a straight arrow. His tenure at Finance will tell us if the latter is true.

More guisos, as they show up. Stay tuned.

In the Chavez revolution, Guisonomics has truly become a
science thanks to the wonders and arbitrage provided by foreign exchange
controls. Simply put, the fact that the Government has access to or decides who
has access to foreign currency, allows it to generate huge amounts of profits
from the artificial arbitrage between the official and the parallel swap
exchange rate.

In fact, hiding behind the exchange controls, corrupt
Government officials can obtain illegal profits in magnitudes never seen before
in Venezuela’s history of corruption. Sometimes, there is not even enrichment
involved, just the ability to use creative accounting and the artificiality
of the exchange rate to help the revolution and/or its friends without most
people noticing or even realizing what is going on.

In this first installment of Guisonomics 101, I will
describe the simplest transaction there is, in order to prepare you for some
transactions that I expect will be in the news in the next few days.

If you have been following the news lately fo example, Argentinean
bonds have
been dropping like a stone in the last few days as the conflict between the
Kirchner Government and the farmers has intensified. In fact, talk of a second
Argentinean default in this decade have also
intensified as that country’s debt levels reach historical highs once
again.

But if you have been following the news, it has been Chavez
and Venezuela that have been saving the day for Argentina buying close to US$
6.5 billion in the last three years of the countrys’ debt.

Only three weeks ago, Venezuela bought about US$ 1.4 billion
of that country’s bonds the so called Boden issue, of which between US$ 400 to US$ 600 million has
been sold by the Government in order to lower the parallel swap rate. Thus, there is about US$ 800 million left and their prices have been dropping.

But, you may wonder, has Venezuela lost money because these
bonds have dropped in the international markets?

The answer is no, because thanks to some of the elemental
principles of Chavista Guisonomics, for the Venezuelan Government it is very
difficult, if not impossible,  to lose money in
these transactions.

Say what?

This almost magical trick is possible, because
accounting-wise, for the Government all Bolivars are valued at Bs. 2.15 to the
US$, while it can manage to sell dollars at a much higher rate in the swap market.

Let’s look at an
example:

Suppose the Government buys one million dollars of
Argentienan bonds. From an accounting point of view, only the exchange of
Bolivars is registered, thus, the US$ 1 million cost Bs. 2.15 million.

Let us assume, that the Venezuelan Government bought the
bonds at a price of 100% and that they drop 20 points to 80%. (These prices are
faked for illustration purposes). How can the Venezuelan Government make money
if they have dropped so much?

Easy. It can sell these bonds to a local bank at 110% of its
value, but at the official rate of exchange of Bs. 2.15 per US$. Thus, the Government bought the bonds
at 100% and sold them at 110% for a tidy 10% profit of 215,000 Bolivars, even as the
bonds dropped in price.

But why would the local bank buy them? Also easy. The local
bank paid 110% for them at the official rate of exchange or Bs. 2.365 million
(1.1×2.15).

But then it turns around and sells the bonds at 80% of their
value in the international markets. Thus, it receives US$ 800,000 for them.
Thus, the local bank paid in the end Bs. 2.956 (Bs. 2.365 million divided by US$ 800,000) for each dollar
it receives.

But since the swap rate is somewhere between Bs. 3.4 and 3.5
per US$, the local bank makes roughly half a Bolivar per dollar or 16.9% profit
in the sale of those US$800,000 to the swap market.

Thus, the Government makes money, the bank makes money and
there is indeed such a thing as a free lunch in Chavista Guisonomics.

Or is there?

More in Part II