Archive for February 19th, 2009

Revisiting and retelling the Stanford International Bank story.

February 19, 2009

While I have been trying to get away from the Stanford International Bank story, it is not easy. First of all, it was all around me today. From friends to family, I learned today of a few people that I knew who had their money there, who were not able to take it out despite my warnings. I also found out about people I don’t even know who think I am an expert on either how to get SIB to wire their money or estimating how much they will one day recover. The story also provides a break from the sometimes tiring political fights in Venezuela.

I actually know very little about what’s happening, either at SIB or in Antigua, I just tell people not to expect to get their wire out, even if it happened before the SEC stepped into the problem and don’t get your hope up that you will get much back. A pyramid is a pyramid, you pay old investors with new money and keep growing it until it explodes. At most, don’t expect to get back more than 10-20% of what you had, but I am always a optimist, there maybe nothing there in the end for you.

Lot’s of people have asked when I first knew that Stanford was a fraud. The answer is have known for a very long time that something was very fishy. But using Alex Dalmady’s language, I saw the ducky signs one at a time over the years. But let me start at the beginning.

I have known about the existence of SIB for maybe eighteen years, roughly beginning right before the time when the SEC suggests in its injunction, Stanford may have been fudging its investment returns. At the beginning, it was simply hearing about this outrageously high returns on CD’s. When rates for CD’s in the US were 8%, Stanford would pay 12-13%. As rates dropped, they also went down, but always remained 4 or 5 percentage points above market rates in the US.

People always fall for this. In Venezuela, prior to the 1994 banking crisis, you could find banks paying interest rates from 25% to 100% per year, guess which ones failed? But this was in our local currency, the Bolivar, at a time of high inflation.

What I initially thought Stanford was doing, was something we had also seen in Venezuela before, offer high interest rates in US dollars by buying Venezuelan sovereign bonds also  in US$ dollars paying  say, 13% per year, and pay 8% to depositors. This may sound fine at first sight, the problem is bonds change in price. Thus, if they drop in price too much, like they have three times over the last 15 years, the value of your bonds may drop below the value of your deposits. If the depositors start demanding the money you are broke.

In fact, this happened to a local broker when the Mexican crisis struck in 1994. Venezuelan dollar bond prices also plummeted from 60-70% to as low as 38% and when depositors began demanding their money, the broker did not have anyway of paying for them. I thought Stanford was replaying that movie, using a US name and an Antigua bank, which would make a run on them much harder .

At some point, a friend showed me some marketing material which was highly unusual for a bank. An expensive leather bound book explained the history of the group, how conservative and financially savy it was. In a separate sheet, it explained that it was capable of paying such high rates because it did not have to pay for FDIC insurance. And further on, it explained that over half the portfolio was invested in stocks and some of the money in hedge funds. Say what? You gave them your money, got paid a low fixed income return, so they could aim for high returns and make the difference for themselves? What if there is a bad year? Who makes up the difference? The terrible stock market of 2001-2002 came and went, and Stanford survived. Most of its clients were Venezuelans who are somewhat greedy and don’t ask too many questions. Financial culture is very low here. People buy products if you have a fancy office, not if you have a healthy balance sheet.

Then at some point after 2002, I don’t remember when, Stanford started its website (from which everything but contact information was removed today) and publishing its financial statements every year.

The whole thing did not make any sense. Half the portfolio was in stocks, and interest income was a quarter of the interest the bank paid its depositors. Stocks were indeed over fifty percent of the portfolio and there were huge fees paid to financial advisers and parent Stanford Group. It was clear Stanford Group provided SIB with services, but you could not figure out the whole thing. But the scariest thing were the growth rates for deposits in the bank. 20-30% per year, which jived with the aggressive nature of their executives in Caracas. I was told that each executive had to gather a certain amount of deposits each quarter (I was told five million US$) and if he missed the target three quarters in a row, he was out.

At this point, I knew I should warn anyone asking me about it to go somewhere else, earn less interest, but sleep well. Few did, most took “some” money out. The typical excuse: “They have never failed paying me in twenty years”. Sure, until they do.

After the sharp drop in stock markets last year, I discussed with a few friends what Stanford would do in its end of the year financial statement. After all, if equity markets drop 40% on average, hedge funds drop 15% and commodities 70%, only gold and silver could help the Stanford portfolio not lose at least 30-35%. And then in mid-December they come out with a letter calming investors, suggesting they did not even lose money!

As Alex would say, what a Duck!

We were thus eagerly waiting for the Stanford 2008 financials which should show up in the webiste somewhere around April, when two things happened almost at the same time. First, I got an email with the link to a new blog called Venepiramides, which had exactly three posts: the first one on Madoff, the second on La Vuelta, a well known pyramid/fraud that got lots of Venezuelans two years ago and a post on SIB, comparing it to Banco Latino, one of the failed local banks of 1994 (The one that would pay over 100% interest rates). Second, I talked to Toby Bottome from Veneconomy, who I collaborate with regularly, and he asked if I wanted to write an article on  a totally different topic, saying Alex Dalmady had written an article on SIB for his monthly that was really good which suggested in the end SIB was a fraud. My interested was piqued and I sent Alex an email telling him I was looking forward to reading it.

The article had printing problems, but Toby emailed it to me the day it was coming out (I get Veneconomy personally) and I loved the way Alex had written it, avoiding the direct accusation. I also liked his very specific prediction about EMAG expecting to receive funding frm SIB. By then I had added to my Google Alerts the three words “Stanford International Bank” (This is an important trade secret). I began exchanging messages with Alex and then on Friday Feb. 6th. Google let me know about the Elandia funding from SIB, which failed to materialize. We had more evidence.

I was going to write a post for my blog that weekend, but I was really into a post on Central Banks and their balance sheets, showing how the Venezuelan Central Bank kept in its books money that was gone to the tune of US$ 26.3 billion. I wanted to make that post pedagogical and spent most of the weekend on it. I did not get to the SIB post until Monday the 9th. and everything moved very fast after that.

People ask why I did not denounce it earlier. To whom? It is clear that Venezuelan authorities have known about this even before Chavez. Stanford Group bough Banco Galicia in 2004, which I believed was done to give some form of legality to its SIB dollar business. The Government did not object. Military intelligence even raided the SIB “Asesores” office in Caracas in October 2008, so they clearly knew what was being done there. And the person who grew the SIB business in Venezuela bought a commercial bank himself a month ago. Do I have a chance with a Government which condenms an opposition politician for supposedly giving away a car, while multimillion dollar corruption and suitcases full of cash  in the Chavez era is not even news anymore?

In the end, I thought innocently that Duck Tales would blow up locally and not abroad. I even talked to Alex about how surprised I was that his write up had not even made the local news except for Descifrado in its first two weeks. Maybe if I had known how fast the blogs and the mainstream media would catch on to the story I may have posted something. But I didn’t and the credit goes to Alex.

In every post, I think this is the last time I will post on SIB. This time I will not fall  for that. There is now a drug angle to the story, there is the question of how much of the Stanford Group is impaired, where is Allen Stanford, how much money is actualy there, how negligent the Antigua authorities were (As a friend points out,  the Primer Minister said “the fallout threatens to be catastrophic…but there is no need to panic” Huh?) and then there is the local Bolibourgeois angle: will this, like Maletagate, gives us a glimpse into Government corruption?

Stay tuned…