Archive for July 31st, 2008

A very Royal and autocratic Hugo Chavez announces his latest whim of nationalizing Banco de Venezuela, Grupo Santander, just because…

July 31, 2008

Using the very royal and regal “I” Hugo Chavez announced
that when he found out that Banco de Venezuela, part of Grupo
Santander, was for sale, then in his own words “I say, I
am interested in buying it and we are going to nationalize Banco de

It was a curious, if not surprising, end to a series of
moves that began in May when the Government ordered all banks with Bolivar-denominated
structured notes to sell them, probably not realizing its implications. In this
May 21st.
, I explained the order to sell the notes as a way of getting banks,
not only to obey the law that limits how much they can have in foreign
currency, but also pointed out the possibility that this could all be an excuse
to take over part (or all!) of the Venezuelan banking system as well as having
them help in forcing the parallel swap market to go down as ordered by Chavez.

Except that the Government did not appear to understand the
implications of forcing the sale of these structured notes. Some banks will have
huge losses, if forced to sell, and if the owners were not willing to
capitalize them, then the Government would be forced to take them over. But
even worse, some of these notes were backed by Venezuelan Sovereign bonds,
which the Government was at the time attempting to prop up, in order to be able
to issue new ones in the future.

As officials in the Ministry of Finance began understanding
the problem and the dangers associated with their strategy, one of the bankers
involved with the structured notes came up with a brilliant strategy, he
negotiated with Banco Santander in Spain the sale of Banco de Venezuela to him
in exchange for US$ 1.2 billion in structured notes owned by his bank Banco
Occidental de Descuento, as I explained in part
IV of the Guisonomics series
. (Banco de Venezuela itself had no structured
notes in its balance sheet)

When I first heard of the possible deal, I wrote the first part of the
“Guisonomics” series, thinking that I could leisurely explain to the readers
the whole deal. I had to speed up part II, not
because the deal was completed, but rather because the Government decided to
stop the deal in which Banco de Venezuela would merge with Occidental de
Descuento to become Venezuela’s largest bank by far. In part III I
explained how to buy a bank with no money. And then I rushed into part IV to ask
why would the Government stop the use of the structured notes to buy a bank.

And today we know the answer, because: “I wanted to buy it”

And what is the reason for his desire?

Chavez gave some, but none of them are at the heart of the

Chavez said first that the bank was privatized in the past
by the Government, but this happened only after the bank had been private for
over one hundred years and became part of a fierce battle over its control,
which eventually led to its bankruptcy in 1994. Then FOGADE, the equivalent of
Venezuela’s deposit insurance, sold it to Grupo Santander in an auction.

Chavez also used as a second excuse the fact that the name
was “Banco de Venezuela”, because the robolution runs on symbolism rather than

But beyond these, there are in my mind two reasons for this:
First, Chavez likes to control and if there is one sector that had not been
part of any Government effort at direct (not indirect) intervention and control,
was the financial sector. Profits at banks have been spectacular in the last
few years, as arbitrage in an atmosphere of controls, funny shenanigans
involving the Government’s “guisos”, a huge increase in monetary liquidity and
exchange controls, allowed them to make piles of money.

Separately, the Government has never hidden its desire to
owning a network of bank branches that would cover as much of Venezuela as
possible. In fact, Banfoandes has been setting up a network that reaches where
the Venezuelan financial system does not. This would complement it.

Why would you want such a network?

Simple, because the distribution of the money for the
Government’s Misiones is not easy, how do you get money to members of Mision
Ribas in a town where the Government has no bank?

But in the end, it also reflects the failure of the
Government to expand well its banking system over the last few years. It has
been a another failed priority of the revolution, as it has been slow and
cumbersome, as Government -owned banks have traditionally been badly run and
have not been run with any sense of purpose as its Presidents and Directors
have been changed every time a new Minister of Finance has been appointed.
(Chavez has had a different one every 18 months of his Presidency)

And therein lies the problem, Chavez think that he will get
a well-run bank and will be able to maintain it running as such under the
Government’s management, when in fact, the way the nationalization was
implemented by Chief Economist Hugo Chavez, implies that the bank may be in
shambles even before he agrees on a price for it!

You see, tomorrow corporations and individuals will begin
withdrawing their funds from Banco de Venezuela, taking them to other banks or
diverting the money to the swap market to buy US dollars. At the same time, the
CV’s of the people who run and manage Banco de Venezuela, from managers to
clerks, will be flying via faxes and email to the banks at the receiving end of
the funds leaving it.

Part of the money will be gone and so will be part of the

And Chavez implied today that all he has done is express an
interest in the bank. It has not been nationalized, it will be nationalized.
There is no agreement on price, as he explicitly invited the owners of Banco
Santander to come to Venezuela and negotiate a price. While all these matters and
details are finalized, the bank may become a shell, as only its branch networks
will be left and the Government will be forced to accelerate the takeover or
move Government funds to Banco de Venezuela to prop it up, even before it takes
it over. (An excuse to pay less?)

Negotiating a price should not be too difficult, Chavez said
that he had a copy of the agreement between BOD and Banco Santander. I understand
the agreed purchase price was US$ 1.2 billion; Santander will certainly put up
a fight if the Government does not match the offer, which will only prolong the

In the end, I don’t think Banco de Venezuela is the optimum
bank for the Government’s purposes. It has traditionally been the bank for the
corporate world, together with Citibank Venezuela. It paid little attention to
the middle and small businessmen and while strong in retail, there were better

Which leads me to believe that this is not the end of a
strategy, but only the beginning. Other banks will soon become the target of
the Government, as Chavez’ desires and whims, do not materialize in the reality
of running a financial institution and business efficiently.

At that time, he will want more with the customary
inefficiency, voracity and destructive powers of the revolution, which has yet
to learn how to build or run anything effectively beyond political strategy.

But in the end, this may be remembered as the day Chavez
started a run on a bank, which somehow managed to have an impact in the
country’s financial system and later on inflation, and the whole thing may go beyond
what anyone is capable of imagining today.

(Note added: I did not mention that Chavez made the announcement while meeting with a group of Catholic women, while TV stations were showing Leopoldo Lopez at the Supreme Court arguing why he should not be banned or disqualified from running. Chavez’ speech preempted the Supreme Court transmission by law. Manny Ramirez was traded from the Boston Red Sox to the LA Dodgers at exactly the same time, but this appears to be coincidental)

The sale of structured notes: What the Government giveth, the Government taketh away

July 31, 2008

According to today’s El Nacional, the Government has now extended the period for local banks to sell their structured notes for an additional 60 days, as the deadline of August 14th. is fast approaching. I understand that the El Nacional news is not precisely correct, but rather the Government is looking at banks on a case by case basis and has given extensions to specific banks of 60 and 90 days.

Thus, what the Government ignorantly decided in May, ordering banks to sell these notes that had been in the balance sheets for months under the eyes of the Superintendent of Banks, has been delayed and postponed, as the Government realized the implications of what it was doing.

Recall that banks had these notes denominated in Bolivars, but which were backed with dollars and dollar denominated instruments, bought in the parallel swap market when the rate was much higher. Banks had been doing this to hide their foreign currency positions, which were essentially illegal, since the law limits banks to having 30% of their equity in foreign currency.

If the Government had forced the banks to sell the notes, losses would have been significant and in some cases some banks would have gone bankrupt. Furthermore, the Government did not realize initially that some of these notes were backed by Venezuelan Sovereign bonds, which would force prices of these bonds down at a time when the Government wanted then to firm up.

Thus, we have fallen into the limbo that I was afraid the Government would lead us to: The tough decisions have been postponed, some banks will limp along and the possibility of things getting worse is still there.

Let me explain myself:

There is definitely a problem, as some banks, if forced to sell the notes would not survive, unless their owners put up the money to recapitalize them.The solution is simple, you have to figure out which banks survive and which ones don’t and simply go to the owners and ask whether they are willing or not to put up their money. If the answer is yes, they survive, if not the Government has to take them over, but it is all resolved speedily, no rumors can start swirling around and the system will be ok.

Instead we are now going to delay action, looking at cases individually and opening the way for rumors to affect the financial system. Such rumors may arise from the fact that the Government itself forced the banks to quantify their losses as of June 30th. and those numbers will be available before the next 60 days are over.

But what is most ridiculous is how the whole affair has been handled. The Government allowed the notes to be set up, then it decides to force their sale and then, uups, it backtracks when it realizes the possible consequences. Which simply confirms that the country is being run by a bunch of amateurs.

Even more ironically, the extension of the period is reportedly the result of the technical advise of the Government’s archenemy the International Monetary Fund, which was called in to give technical advise on the subject. I think the IMF should have made a more forceful recommendation and hopefully it will not turn into a crisis.

In the end, the losses are currently manageable as the country’s financial system is small compared to GDP, the whole system is worth around US$ 10 billion based on their sale value. But such financial crisis have an important psychological factor and an impact that goes beyond the numbers. In the end, the banks that will not survive today will only survive if the parallel swap rate jumped sharply to the levels where they bought, an unlikely event in the next few months. Otherwise, their critical situation is as bad today as it will be in sixty or ninety days.

Maybe the Government simply would like to push the resolution beyond the November regional elections, proving once again that politics is above everything in this administration.On the other hand this may have had a different purpose in mind, like taking over the financial system and the Government has had a change of mind. For now…

Thus, the same Government that giveth the order to sell the notes, taketh it away to protect itself, in another almost comical chapter in the way the Chavez Government manages the country’s financial system.