The Devil's Excrement

One week after intervening the four banks related to Ricardo Fernandez Barrueco with open doors, the Venezuelan Government surprised everyone by announcing that it would continue the intervention under closed doors and that two of the banks, BanPro and Canarias, would be liquidated and the other two, bolivar Banco and Confederado, would be “refloated” in the near future.

The decision, as well as the way it was handled, shows a high level of uncertainty on the part of the Chavez administration on how to handle the crisis, which was caused by the lax supervision of the authorities and Chavez’ backing of the main actors of this sorry episode.

The day began with an improvised press conference by the Minister of Finance announcing the measure, with few details given out, other than the banks would not open and that there would be differential treatment given to them.

This was easier said that done, as the shut down and the lack of details created panic among depositors who did not know what would happen to their savings. According to Venezuelan law, the Depositors Guarantee Fund has to pay up to Bs. 10,000 per account (US$ 4,651) up to 21 days after the intervention, but even this simple information was not communicated in the early press conference, confusing and scaring depositors.

And most of what followed in a string of press conferences was not much better, as information was mixed and the Government clearly realized that it had a real financial crisis in its hands as well as a public relations disaster that it had to address.

But having multiple spokesmen (and bad ones at that!) at each press conference (all broadcast live, of course) did not ease tensions or clarify much.

The truth is that in our opinion, the Government has been acting hastily on this matter. Independent of the reasons why Fernandez’ financial empire was intervened (Chavez has claimed HE ordered the intervention) the original decision to intervene all four and leave them open, still seems to be the correct one. By shutting them down today, panic was created and it is unlikely that any of the banks will ever be floated again.

One would have thought that someone in the Government would recall the 1994 financial crisis, when interventions shutting down the banks did not work, and it was only when interventions were done without shutting down banks or migrating deposits to other financial institutions that the crisis eased.

What happened at the time was that as the Government began shutting down banks, people began speculating who would be next in the process and begin withdrawing their money from what they perceived to be the weakest banks. Some banks which were not strong, but did not have to go under, did fold and it was not until intervened banks were kept open that things calmed down (Even if the currency devalued a factor of almost three in a few months in the process)

Tonight, in yet another press conference it got a bit more confusing, as the Superintendent of Banks said that accounts from the banks to be liquidated would be migrated to Banco de Venezuela, which is not what the law says. In fact, this would have been a cleaner solution, to have announced a week ago that all accounts would be migrated to Banco de Venezuela and the four intervened banks would be no more.

Because after Chavez said on Sunday that he is ready to nationalize the banking system, it seems hard to believe that anyone, absolutely anyone, would be interested in buying the banks that the Government wants to “refloat” The bank buying bubble in Venezuela is over, four to five times book is no longer a possibility, as it should be. Look for book value to be “fair” for a while.

And the Government wants people to believe that this was a problem of capitalism. But this is a problem of XXIst. Century Socialism, Protectionism and lack of supervision which is why I have been calling all of these guys the “robolution” for quite a while.

Because none of these robolutionaty bankers meant to make money the capitalistic way. They meant to make money by playing the most savage financial engineering in the world. There is even a new verb for it in Venezuela, you buy a bank “para ahuecarlo” to make a hole in it. That is the true reason these four banks are worthless, they were “holed’ really badly only because there was no supervision and Fernandez Barrueco had protection from a very high authority: Hugo Chavez Frias.

In June and July of last year, I wrote a few posts on the structured notes, which was how these noveau bankers began holing Bolivar, Confederado and Banpro. Like all bubbles, you knew they were there, but you did not know when they would explode. The Government decided to protect its own, prolonging the explosion of the bubble. It is my belief that we have only seen the very beginnings of it.

Because while these banks were “small” and some of the irresponsible Chavistas, like former Minister Cabezas, have made a point of this, these four banks are not the only ones that are worthless and the handling or mishandling of the crisis is not going to help the process.

And not only are other banks going to fall, but broker U21, fully owned by Banco Canarias and fully “holed” by the robolutionaries, is also insolvent via the shenanigans of the robolution in ways we will only find out about in the next few days. Thousands of investors are soon going to find out that their investments are worthless. Sadly, U21 was created originally to service the battered Venezuelan academic community, this long forgotten ideal only exists in the memory of those that witnessed it being decimated by the robolution. Sadly,as U21 falls, other brokers with loans and deposits with it, will also be hurt.

Like all financial crisis, we all know where this one began, but no one, absolutely no one, can tell us where it will end.

Least of all, those that today tried to cover up their ignorance by repeatedly addressing the country.

And it will end up badly in any case..

(In Spanish here)

The news that Dubai World, a private company owned by the Government of Dubai, shook the world’s financial markets this week. The move was surprising more than anything else. Everyone knew that Dubai World.founded in 2006, was overextended, it accumulated US$59 billion in debt, which was used mostly to develop spectacular real state projects in Dubai and buy properties across the world, including part of chip company AMD, of an MGM casino project and the Fontainebleau Hotel in Miami Beach.

The problem was that everyone assumed that Dubai World would not default despite the problems, because it was almost like sovereign (country) risk, a so called quasi-sovereign, implying that Dubai itself would bail out the company, which did not happen. But moreover, people also assumed that in the worst case Abu Dhabi, one of the seven Emirates (and the richest!) of the United Arab Emirates, would come to the rescue (which may still happen and I expect to happen).

Clearly, the Government of Dubai, with total debt of US$80-90 billion, decided not to back the company, a clear sign of discrepancies on how things were managed, letting the company function like one and forcing it to face the harsh realities of restructuring and asset selling.

But I don’t think it will come to that. This was a signal to Dubai World, but it is likely that Abu Dhabi will come to the rescue, the Arab world has too much at risk to let it go. To begin with, most of the bonds are so called “Islamic Bonds” (sukuks), structured to not pay interest, which is forbidden by Islam, by sharing in profits. Thus, the investors in most of these bonds come from the region and there will be pressure to do something and even other Arab countries beyond the Emirates make come in and help.

Then let’s look at size. The debt is large for Dubai. Dubai’s GDP is US$ 32 billion, so that the country’s debt and the company’s debt is large. The worst part is that it is too concentrated in real state projects which are not generating cash flow yet or have poor cash flow. Dubai produces a scant 250,000 barrels of oil a day, which represents 6% of revenues, so oil will not save the day as many think.

European banks have lent Dubai lots of money, but in terms of size this is not large, because Dubai is not saying it will not pay, but that it seeks to delay payment in two bonds, two Islamic bonds that come due on Dec. 14th. (US$ 3.5 billion) and in May (US$ 1.2 billion), so there will not be immediate impact on European banks.

It is thus a problem more of complacency than anything else. People thought Dubai Corp was like a sovereign and we all know sovereigns don’t default, unless …you are Argentina in 2002, Russia in 98, Ecuador in 2008 or now Dubai in 2009.

Or Greece in the next couple of years…

Because Greece’s problems are much larger (US$ 500 billion with Greece having a GDP of around US$ 360 billion) than Dubai’s and therefore they would have a much larger impact. But more importantly, only the European Community can continue saving Greece as the usual solutions for getting out of the problem don’t work: Greece can’t devalue or print euros as it would violate EC rules. The only way out would be a disaster: Leave the EC, which would give Ireland, Italy and Spain ideas. Having the EC aid them would create a bad precedent, more so when Eastern European countries also have problems. Damn if you do it, damn if you don’t.

So far, Greece has been solving the problem by issuing more and more short term debt and having the European Community fund it cheaply, but this can’t go on forever. Everyone thought Greece’s problems were much worse than Dubai’s and Dubai defaulted first. Thus, even if Abu Dhabi comes in and rescues Dubai this weekend, the bond markets will remain nervous for a while, as that possibility lingers in the air.

Which brings us to Venezuela. Venezuela’s dollar debt is around US$ 80-90 billion, smaller than its US$ 300 GDP, which gives us at first sight some comfort. Except that that GDP is measured at Bs.2.15 per US$ and we all know that is as artificial as you can get. It obviously is not Bs. 5.5 per US$ (which would give you US$ 117 billion for the GDP), but somewhere in between. which still looks comfortable, except that…

The Venezuela Government has huge financing needs unless oil goes up sharply, implying more and more debt will be coming down the pipeline. Thus, the size of the debt will look bigger and bigger compared to GDP and GDP is unlikely to grow in US$ in the next couple of years.

But the real problem is political. While people have grown accustomed to believe that sovereigns and quasi foreigners don’t default, Dubai World did, it was a political as well as financial decision. And Hugo Chavez could make a similar decision (PDVSA is quasi-sovereign), although I do not expect that yet.

First of all, PDVSA has CITGO, which generates a lot of cash flow for PDVSA and any default could tangle up CITGO in US Courts for years. Second, the Venezuelan Government can still save foreign currency in many places, like the travel allowance at the official rate (Please fellow countrymen, don’t scream at me) which amounts to US$ 4.5 billion a year sold at Bs.2.15 er dollar to well to do Venezuelans.(Debt service (interest) is only US$ 3 billion per year so far) Or it could devalue. But in the end the decision is a political one and Chavez could get up one morning in a bad mood. Nobody knows.

In the end, I expect the Dubai problem to go away as Abu Dhabi and others help Dubai or reach an agreement to help it as long as Dubai World gets rid of some properties. But the Greek problem will not go away anytime soon and that may the next real crisis. For Venezuela jittery markets make it more difficult for the Government go issue a new PDVSA or Sovereign bond this year.

As for Venezuela, I don’t see a debt crisis in the short term, there are too many quick solutions like a devaluation, removal of subsidies and the like that can still be implemented.

Unless Hugo realizes he can stir up the pot by threatening to default, but even that I don’t see coming any time soon, he still thinks he can achieve his local political goals without going that far. We shall see…

Thugs among thugs…

When Hugo Chavez said that he personally had ordered the intervention of the banks “belong to those filthy rich bankers”, he was playing the usual “Yo no fui” (It wasn’t me) card he uses for everything. Everything is someone else’s fault in Chavez’s world. He and his Government bear no responsibility for anything that goes bad or unsupervised in his fiefdom.

Except that this was clearly his fault and that of his Government. In May of last year, the Superintendent of Banks “discovered” the myriad (and billions) of “structured notes” in the Venezuelan banking system, most of which were subterfuges for funneling depositors money for other purposes, mostly buying other banks, but not restricted to that.

Recall that in June 2008, I wrote a series called Guisonomics on the many scams of Chavismo entrepreneurs (not all are Chavistas, many are simply opportunistic). In part III of that series, I explained how you buy  a bank without using your money and described “how the money disappears under the magical world of structured notes”.

At the time the authorities asked banks to remove those notes from their balance sheets, agreeing to “negotiate” in those cases where this could become problematic.

Some bankers, put their money in their pockets and covered the losses, others removed them magically and mysteriously from the balance sheets, others tried to get more creative an use them to buy even more banks and Fernandez Barruco or his front men had to negotiate. The reason was simple, all the banks were as broke then as they are today. Negative equity, worth zipo, zilch.

But Chavez and his Government allowed the beat to go on and Fernandez tried to go even further buying Digitel and Banco Canarias. He obviously felt untouchable, after all how many more businessmen have received the endorsement he got from Chavez on live TV?

So, Chavez is being his usual irresponsible self, blaming others while the whole affair is his fault, not only the lack of supervision, but the fact that his Government looked the other way. Billions have been ripped off from depositors via these structured notes and bank acquisitions. And some of those billions belong to the Government, as most of these banks are rich (or poor now) with Government deposits which were directed there because commissions were paid to have them diverted there. (Fernandez Barruecos’ banks had on average 30% of their deposits in Government deposits)

So, this was not new, something clearly had to happen, whether war between groups or simply a falling out as Barruecos got too powerful, we may never know.

What we do know is that this could get tricky going forward, intervening four banks is no easy matter anywhere, particularly if they are totally bankrupt. Moreover, there are similar cases out there, the whole thing is interrelated, all the actors are somehow connected. Fernandez could say so much, that may be the only defense left to him.

And Chavez may actually get away from his usual irresponsibility, unless the whole thing blows up in his face spreading further into the financial system. For the other “noveau” bankers, Chavez may have become a threat, no longer a friend. They may be now his biggest enemies.

What will they do now? Step back and watch or fight for their empires?

It will be interesting to watch.

While I wanted to write about other things the mysteries surrounding the Fernandez Barrueco case draw me back to it. Today, we were able to see the Official Gazette outlining how the Government justified the intervention of the four banks, Confederado, Bolivar, Banpro and Canarias, which all together have about 6% of the deposits in the Venezuelan banking system and about 30% of the deposits of the combined banks come from Government (so called “official”deposits) known to move according to the highest bidder.

As a preamble, I would like to point out a couple of things: First, Fernandez Barrueco became known when Hugo Chavez defended him in one of his Sunday Alo Presidentes. Fernandez had a fleet of trucks that he placed at the service of the Government during the 2002-2003 strike Then, when the Government began Mercal, Fernandez became the “King of Mercal” supplying Mercal with corn and wheat flour and becoming the leading importer of grains in Venezuela. So much so, that he purchased milling company Monaca.

When Eligio Cedeño is jailed, some people thought that he was fronting for Fernandez and that he was sent to jail, because Cedeño did not want to “sell” to Fernandez or they could not agree on the price.

But it was not until September 2008 that Feranndez took over Banpro, Bolovar and Confederado formally. This was after the structured notes that the Government said banks had to get rid of, but would have sent some of this banks into bankruptcy.

Around the banks, Fernandez was known as the “shareholder”, occupying the office of the Presidency of the banks, but mostly keeping a low profile. Instead, the banks were run by el “policia” a former military officer who ran things without consulting Fernandez much.

Fernandez was thought to be untouchable, even the confiscation of his jet plane in Ft. Lauderdale did not stop him locally, even if he shut down his office for a while.

Which is why yesterday’s decision came as such a surprise. Fernandez rose under Chavez and is now being persecuted fully. His banks have been intervened and tonight, the Prosecutors office has had him detained and he will be accused under the “organized delinquency” Law.

But, you may ask, what is it he is being accused of. I will try to explain and be brief.  Recall first, that Fernandez onli acquired Banco Canarias in October, so that this bank is the one that he has had the least time to fiddle with.

But this is what he is being accused formally of:

Banco Confederado:

-Owners have not complied with the recovery plan presented in September 23d. 2008

-Bank has not reserved sufficiently non-performing loans

-Bank financed companies owned by the “Ricardo Fernandez Barrueco” group which is not allowed by law.

-Bank purchased Bs. 400 million (US$ 186 million at the official rate of exchange, US$ 74 million at the swap rate) in rights of Inverfactoring, without approval from the Superintendent of Banks. (This violates the law and is likely a company related to Fernandez)

-Bank purchased rights issued by Activos Corporativos AG in the amount of Bs. 211 million or US$ 100 million at the official rate or US$ 39 million under an structured note, which was explicitly forbidden by current regulations.(This violates the law and is likely a company related to Fernandez)

-The bank failed to meet with the minimum ratio of Equity/Assets of 12% and the ratio Accounting Equity/Total Assets.

Banco Bolivar

-Failure to show the origin of funds when Galopy International and is shareholder Ricardo Fernandez Barrueco purchased the bank as well as the lack of banking experience.

-Failure to replace losses.

-Financing of companies of the Fernandez Barrueco Group (again)

-Acquiring Bs. 400 million in rights from Inverfactoring (same amount as done with Banco Confederado, for a total of Bs. 800 million, This violates the law and is likely a company related to Fernandez)

-Purchase of Bs. 180 million in rights from Activos Corporation (Bs 211 at Banco Confederado for a total of Bs. 310 million, This violates the law and is likely a company related to Fernandez)

Banco Provivienda (Banpro)

-Failure to achieve goals

-Financing of the Fernandez Baruueco group of companies (illegal)

-Acquired rights from Inverfactoring for Bs. 400 million (For a total of Bs. 1.2 billion with Confederado and Bolivar or US$ 558 million at the official rate or US$ 222 million at the swap rate. (This violates the law and is likely a company related to Fernandez)

-Purchased rights from Activos Corporativos AG for Bs. 223 million (For a total of Bs. 443 million or US$ 200 million at the official rate between the three banks or US$ 82 million at he swap rate, (This violates the law and is likely a company related to Fernandez)

-Violation of regulations with the purchase of Banco Canarias, operation which should be reverted.

-Failure to generate cash flow to sufficient to pay its obligations as stated in the recovery plan.

Banco Canarias

-It gave out loans and made operations with related companies, but the magnitude is smaller than those of the other three banks and Fernandez had been running it for less than a month.

In conclusion, using depositors money Fernandez lent his own personal companies Bs. 1.6 billion (US$ 744 million at the official rate, or US$ 296 million under the swap rate) according to the official accusation.

But this is not new. This has been going on for quite a while. Bolivar was purchased in 2003 for US$ 45 million. Then Bolivar bought Banpro and Bolivar bought Confederado forUS4 110 million and now Fernandez squeezes out of all three US$ 296 million to do whatever.

Obviously, nobody stopped Fernandez on the way so he got cocky, but something happened. We don’t know taht and we may never know. Fernandez was allowed to use people’s money at will, creating one of the top three fortunes in Venezuela.

And someone felt offended. That is the story to look at now, but we may never know.

The Devils Excrement has been relating schemes and rip offs for the last few years under the Government’s blind eyes. The cheerleaders of the robolution have defended them, suggesting this was the result of a hyperactive anti-Chavez imagination. The numbers give out today by the Ministry of Finance leave no room for error. This was allowed to go on and on, unsupervised until something happened. There are at least three similar groups doing this in competition with Fernandez. Same rip off, different names.This is coming out of people’s deposits. Fernandez should have never been allowed o buy or run even one bank.

The evidence is there, it is indeed a robolution and not a socialist one at that.

(In Spanish here)

(Rayma: Do you feel like eating another bank?)

It is a story typical of the revolution and we have now seen it a few times: The sudden rise of an unknown businessman in the last few years, protected by invisible forces and wheeling and dealing without any limitation. And just when you begin asking yourself whether there is a limit, the new bolibourgeois magnate is stopped on his tracks by an equally invisible hand and without explanation.

Yesterday, Descifrado reported that Conatel, the telecom regulator, had not allowed the sale of cellular operator to Ricardo Fernandez Barrueco. Then today the Superintendency of Banks asked that the sale of Banco Canarias to the same man be reverted. And then today, the Government officially (and earlier unofficially) announces the intervention of Fernandez’ four banks Bolivar, Banpro, Confederado and Canarias.

Fernandez Barrueco’s rise was as sudden as his apparent demise. According to Caracas Gringo, he has seen documents before the purchase of the these banks which gave him an audited value of US$ 1.6 billion in 2005. Then, he appears purchasing a bunch of banks, not precisely the darlings of the banking system. And it is not clear how he purchased them.But nothing happened.

Then, a few weeks ago, he purchases Banco Canarias for an absurd amount and Digitel for a high, but not a totally absurd price.

And through it all, everyone wondered where the money was coming from. It was clear that the banks were being purchased with depositors money, but how about Digitel? The company was reportedly being bought for US$ 700 million, how could someone amass so much money so fast? Hey! This is supposed to be a Socialist, not a Capitalist revolution.

And even then, why make so much noise? Why the need to spend the money so fast? Why buy into a sector where Chavez, the ultimate decision maker, had an interest in? Why buy a bunch of mediocre banks, rather than a good one all at once? Why buy Digitel which competes with CANTV?

And there was lots of speculation: They would one day flip the banks to the Government. They would flip them to someone else. They were planning for AH (After Hugo). They were accumulating wealth for the “process”. They were representing people close to Hugo. Take your pick.

And Fernandez was not alone, other groups were creating similar empires. Perhaps smaller ones. Or they started later. But Fernandez has (had?) at least three competitors in all of this. Descifrado claims all of them will be blocked. They are all in the doghouse. The problem is source of funds, where was all this money coming from? Have to see it to believe it. Maybe this is simply envy. A fight between groups. Bolivarian Mafia Wars in Facebook terminology.

To me, it is all very mysterious and I write about it today, because I don’t think it will be clearer three months from now. Like Fernandez’ rise, his fall is a story that will remain veiled in mystery and secrecy.

Economists like to measure GDP growth each quarter with respect to the previous year. I may not like it (many people don’t), but that is the custom. The alternative is to measure it with respect to the last quarters GDP and anualize it, somehow that seems more “real-time”, than to compare it to the same quarter last year. There are reasons for this, the main one that you know GDP is seasonal, so you want to compare it to the quarter a year ago, where the same seasonal factors came into play.

Thus, I had to laugh at the headline of the Central Bank report on this quarters growth (or lack of), which said:

“Venezuela’s GDP decreased by 2.2% between January and September 2009”

How is that for lying with statistics?

Because the reality is that this quarter’s GDP report is very ugly, as GDP was down 4.5%. Uglier than anybody expected. So much so, that the only positive you can find in it is that if the Central Bank is reporting it was so ugly, maybe they are not fudging the data as much as some people suspected.

But it is not the -4.5% in GDP that is ugly, it is some of the numbers behind it, which say Venezuela is in stagflation, precisely what Ali Rodriguez was telling us two months ago was not happening and would not happen thanks to the actions of the Government. I never believed Chavez’ BS that Venezuela was shielded against the world economic crisis, so I will not even go there.

Oil GDP was down 9.5%, while non-oil GDP was down 3%. But the numbers are ugly as public (Government) consumption was up 2.6%, but commerce was down 11.5%, private consumption was down 10.5%, as private investment was down 14.5%, imports declined 25.5% and exports were down 16.3%, the fourteenth consecutive quarter in which exports have gone down as the Venezuelan economy is no longer competitive due to the overvaluation of the currency. Manufacturing was down 9.5% for the quarter. Yes, -9.5%!!!

And despite all this, inflation barely abated during the year. Moreover, oil prices were up by the end of the second quarter. This all happens as the private sector has been completely intimidated as the Government believes it can do everything. But it obviously can’t.

And that is the problem, the infamous “funds” which accumulated wealth during the boom, were all consumed in sustaining current spending and not in investing. Money was used to needlessly nationalize working enterprises, rather than to back and fund companies with weak balance sheets and no investment. And the fact that there are elections in a year, does not contribute to good policy making in a Government without economic expertise.

So, only if  oil prices balloon, will the current administration be able to get us out of this. For the last three months we have all heard that we have touched bottom. Ali Rodriguez even dared say that this quarters growth would be almost zero and the year flat.

No more, stagflation is here to stay and funding social programs massively is going to get very hard over the next few quarters, let alone investing in water or electricity plants and maintenance just to keep supply normal.

Not a pretty picture.

Just too funny not to post…truly tragic, truly comic.

Since 2003 after the oil strike, the magnitude of Venezuela’s oil production has been quite controversial, with PDVSA insisting that it produces over 3 million barrels of oil a day and both OPEC and AIE reporting numbers around 20-30% below these levels.

You can argue forever about oil production, mor so if PDVSA does not give much details.

But it it is difficult to create or miscount oil drilling rigs. They are big, there are no more than 3,000 around the world and everyone knows who makes them, sells them or leases them.

In fact, Baker Hughes, an oil service company in the US keeps track of oil drilling rigs around the world. The number of oil drilling rigs in Venezuela given out by Baker Hughes in the last three or four years has disagreed with the official number of PDVSA, which PDVSA has always explained away by saying that Baker Hughes only counts private rigs and that PDVSA has its own. Baker Hughes makes no such differentiation and their only caveats as to their rig count is that they do not count inner Russia and China.

But today’s El Mundo (Which has become a business newspaper and is getting quite good, but needs a subscription on the Internet) compares PDVSA’s “official” rig count with that of OPEC and comes up with this graph:

As you can see, in the last few years, there are huge differences in the number of working oil rigs in Venezuela reported by OPEC and the last few years the difference has become simply huge, with PDVSA saying today that it has 150 active drilling rigs versus the 57 that OPEC reports.

And OPEC has no reason to lie, in fact, Venezuela is one of the most prominent members of OPEC, if the numbers were so far off, you would think Venezuela would complain and the number would be checked. Venezuela could even supply information if needed.

Thus, one has to assume bad faith or incompetence. Either PDVSA leaders are faking the data to attempt to continue to fool the world (few people believe them) or we have to ask the old question: How many “rojo-rojitos” PDVSA workers does it take to count one hundred drilling rigs, after all, PDVSA ahora es de todos (belongs to all of us).

The truth is that if PDVSA had that many active oil rigs, an all-time high in Venezuela, production should be going up steadily, instead PDVSA reports the same production, while OPEC and IEA report small drops almost yearly.

Ramirez thinks he can fool all of us, but the more you lie and fake numbers, the more they become unsustainable. And this one is simply unsustainable.