Archive for December 20th, 2010

The never ending Bandagro story comes back to haunt Chavez

December 20, 2010

(Tobias Nobrega, Waldemar Cordero and Marisol Plaza)

This weekend, once again, the Bandagro bond story came back to haunt the Chavez administration, when a badly written report by the New York Post, gave the impression that the Chavez administration would have to start paying up US$ 8 billion in Bandagro promisory notes, because an Appeals Court had ruled against the Venezuelan Government.

But this is just another step in a long series of a story that is remarkable. In the end you can say: Only in Venezuela! But the truth is that this story has been complex and what is amazing is that it has managed to survive this long.

Bandagro was a Government bank that went bankrupt in 1980. While it was in the middle of its bankruptcy process, the bank considered issuing some promisory notes that would guarantee a loan with a US bank. According to the then President of Bandagro Waldemar Cordero, he never signed them, as the deal was never completed.

Here it is important to note something. Today, bond trading and payment is electronic. At the time, bonds were issued in special paper that need to have the correct signatures and seals to be valid, they were also numbered.Well, in the 80’s the Venezuelan investigative police caught some people leaving the country with unsigned Bandagro bonds and accompanying seals. Everyone thought the issue would die there.

The promisory notes, which are issued at a discount but don’t pay interest, were supposedly issued in 1981 and were supposed to be paid in ten years. During Carlos Andres Perez’ Presidency the Comptroller researched the issue and determined that the Notes were never issued and once again that seemed to be the end of the story.

I first heard about the notes in the late nineties when some people asked me to check their veracity, it would be the first of dozens of such requests. By the end of it, people were surprised that I knew the details of the great deal they were being offered, even before they told me what they had. Finance Ministry officials in the late nineties during the Caldera Government ratified, once again, that they were fake and they had never been issued.

But when a racket has so many zeroes attached to it, lots of people are attracted by it, particularly in the land of “The Deal”, Venezuela. These fake bonds were being offered so much all over the place, particularly Italy, Panama and Switzerland, that then Minister of Finance during Caldera’s Government Maritza Izaguirre had to publish and ad in the paper telling the world (or trying to) that they were fake.

And here it is important to make a second stop about history. Venezuela defaulted in its debt in the 80’s during the first Mexican crisis. Earlier, it had stopped making foreign currency payments on debt after the 1982 devaluation. These Bandagro bonds were never part of any of the negotiations that followed in either case. In fact, Venezuela’s debt during Lusinchi’s Government defaulted and was renegotiated as  a package with the aid of the US Government when Nicholas Brady was Secretary of the Treasury. Brady bonds were issued to replace the country’s debt, guaranteed by US zero coupon bonds, the so called Brady bonds. The Bandagro bonds were not included in that, nor did anyone ask that they be included. Just think, you have US$ 50 million of a note from a Government that defaulted and there is a restructuring backed by US Treasuries and you don’t show up to be included!


But even worse, when Venezuela returns to markets in the second half of the nineties, both with multilaterals with Caldera’s IMF agreement in 1996, as well as with the issuing of the Venezuela 2018 bond with a 13.25% coupon (1997?), Venezuela agrees to cross default clauses with both and the Bandagro notes are never mentioned.

After Chavez takes over, the notes began resurfacing and sometime in 2001-2002, then Minister of Finance Rojas publishes another ad in the papers telling people the Notes are fake.

How much money are we talking about? Nobody knows. I have heard that originally there were 55 Promisory notes, each for US$ 50 million. The suit in Ohio is for two Notes, worth US$ 100 million, the one in Switzerland is for US$ 1.075 billion, but they are all asking for interest since 1991.

In 2002, a lawyer representing a group from Panama, called Triad, sent a letter to Chavez asking that US$ 600 million of the Notes be paid. And that is when things began to unravel.

Things start to get tricky here, according to pro-Chavez webpage aporrea, the investigation began at the Ministry of Finance, but in their effort to protect Hugo, they forget that Chavez asked the Finance Committee of the National Assembly and the Ministry of Finance if the Notes were legit.

It is then that Minister Tobias Nobrega asks his legal counsel Oscar Guzman to look into the matter. He sent experts to banks in Miami and Switzerland and they said the Notes were authentic, concluding that the claim was legitimate. That report is sent to Marisol Plaza the “Procuradora” (Government’s lawyer), she then issues a report saying that the Notes are valid and should be paid. Here I differ in my memory from aporrea. I recall the Procuradora saying that that first report was an internal one that was leaked, while she later reversed her opinion. Aporrea says that the Minister of Finance asked her to reverse her position and she refused.

In the middle of all this, Waldemar Cordero signed an affidavit, upon learning that the Notes could be paid, saying that they were false and he had never signed them. Nobrega reopens the case and Marisol Plaza reverses then her decision.

By then the Skye Group had introduced a suit in an Ohio Court and  separate suit was filed in Switzerland.

In a decision that I can’t find, on Sep. 13th. 2006, Judge John Holschuh ruled that the decision that matters is not whether the Notes are fake or not, but whether the opinion by Marisol Plaza was legal or not. Basically, if Skye purchased the Notes in good faith based on the opinion of Marisol Plaza, then Skye had the right to demand payment, at which point according to this document, the issue became one of jurisdiction and the Sixth Court in the US began investigating whether there was jurisdiction or not on the issue by a US Court.

And that my friends, is what the ruling last week was about. It is not about whether the Notes are fake or legit, it is whether Venezuela or Notes issued by a Sovereign country are immune or not from being issued in US Courts. The Court rejected the immunity agreement in September and on appeal, it rejected it again last week. The only document I have found was this one and all it says that the petition to review the case was denied.

Thus, now the case (I am not a lawyer) goes back to that Court for sentencing and that decision in itself I am sure can be appealed many times. All the Appeals Court said this week is that Venezuela’s argument that it was immune to US Courts were invalid. And even that  am sure can be appealed to the Supreme Court.

But what do I know. All I knows is that Venezuela’s bonds dropped today because of the article that said the payment could be as much as US$ 8 billion. But if Chavez refused to pay it, nobody could argue cross defaults, it is clear the bonds magically appeared at some point and have  a dubious history. If I were Hugo, or he asked me I would say: Don’t Pay!

If you ask me, they are fake, but the mishandling of the case has come back to haunt Chavez, that is what happened when you appoint political hacks to important positions like that of the Procurador.