When the development fund Fonden began, the idea behind it was to have PDVSA contribute foreign currency to the fund, together with larger transfers from the Venezuelan Central Banks’ (BCV) international reserves to create a fund that would spend abroad to back development projects in Venezuela. The reason was clear, since the main provider of foreign currency in Venezuela is PDVSA, when PDVSA hands over foreign currency to the BCV, it gets Bolivars. If you removed these dollars and spent it locally, you would be debasing the currency and creating inflation. Simply put, if you took Fonden dollars and spent them locally, you would have to change them into Bolivars, creating essentially more Bolivars with the same dollar that you already gave Bolivars to PDVSA for. It would be money printing on steroids.
Chavismo envisioned this money buying mostly equipment and machinery for development and infrastructure projects. This was quickly perverted, as Fonden became Chavez’ petty cash fund, used to fund his every whim and idea, with money thrown irresponsibly around, including using it locally in Bs. and for non-investment purposes. After US$ 105 billion spent, Fonden has become a black hole of waste, deceit and mismanagement, with its funds used to finance projects outside Venezuela, including US$ 6 billion in Cuba, to buy weapons, to buy a Russian bank, to buy buildings abroad, to give hand outs to people and to make dubious investments.
Recently, Reuters published an excellent investigative report on Fonden, you can find it in Spanish here and in English here. In this article, I pick up and look at in more detail at something mentioned in this report and which I had written about before: How Fonden began making financial investments, some of them of a dubious nature, and then proceeded to cover up the losses, hiding them behind accounting tricks and structured notes, with no accountability for the lost money.
The excellent Reuters report shows how many of the projects are sitting there unproductive, below I show how more than a billion dollars was lost and the losses are still hidden behind financial products in a fund that was managed directly by the Minister of Planning and Finance and the President of PDVSA.
In pages 11 and 12 of the “Informe de los Comisarios” of Fonden, which I discussed here, there were three transactions which were quite questionable:
1) Fonden had invested or purchased some form of notes from Lehman Brothers (point 6, page 11) in the amount of US$876 million. It has never been made clear what this investment was, but it was dumb to invest in a note issued by Lehman Brothers in such a large amount, If the purpose was to invest, it should have been made in a diversified portfolio in custody with Lehman Brothers. (Those who had custody did not lose a cent with Lehman, only those buying securities issued by Lehamn lost their shirt) Of course, this note in itself had some dubious purpose, which we do not know. The result was that Lehman Brothers went bankrupt and in the first few months after its bankruptcy, instruments issued by Lehman were trading around 20% (or less) of its face value, roughly US$ 175 million, yielding a loss to Fonden of approximately US$ 701 million.
2) Fonden invested US$ 494,600,000 in Ecuadorian bonds (point 8, page 12). This was clearly a political investment made to help President Correa and Ecuador. However, Ecuador decided not to keep paying these bonds. (Nice friends, no?) It is not clear which bonds Fonden purchased. But in December 2008, the Ecuador 2030 bond had a price of around 25%, giving Fonden a loss of US$ 370 million.
3) At some point Fonden bought US$ 50 million in dollar denominated bonds of Honduras. Given that this country has not issued bonds publicly, this was clearly a private issue made for Fonden simply as a way of Chavez helping prop up the Government of Manuel Zelaya. These bonds have no know market value, let’s generously assume a value of 20% and we get a loss of US$ 40 million. As we will see below it was much more.
Total loss in these three investments of US$ 1.42 billion: At least US$ 1.11 billion. So, we know what happened to at least one billion dollars of the US$ 105 billion given to fund: It was used politically to make questionable investments and in dubious fashion.
The timeline of all these investments and exchanges is as follows:
-In August 2008, Fonden exchanges the Lehman notes for Notes worth US$ 876 million and US$ 260 million.
-In December 2008, Fonden exchanges the Ecuador bonds for a note worth US$ 650 million
-In April 2009, the financial institution that issued the US$ 876 million note is cashed in by the financial institution that issued it, Fonden keeps the US$ 260 million note, as agreed in the right of the issuer to cash in the first US$ 876 million note.
Of course, there was no accountability, those that made these decisions and lost the money are still the same people running Fonden. But not only nobody was made accountable, but the losses were hidden on purpose, so that they would go unnoticed. And the proof is in this Prospectus from Emerald Capital, which was mentioned in the “Informe de los Comisarios” and which a friend has generously sent me to allow me to tie up most of the details
I don’t want to bore you with the details (maybe you already are bored). But in the Informe de los Comisarios, it says that (point 6, page 11) the Government exchanged the Lehman instruments for two zero coupon notes of US$ 650 million and a US$ 260 million which was apparently with Nomura, as later it says that Fonden maintained investments with Nomura and the Informe mentions only a “Japanese institution”. In point 4) page 9, it also says that “later it asked another financial institution to exchange the Notes for US$ 650 million and US$ 210 million and the US$ 50 million in bonds”.
And then, magically, Emerald Capital, also mentioned in the “Informe” as one place where Fonden kept investments, issues a note for US$ 310 million (US$ 260 million+US$ 50 million), which has as collateral a Nomura note (page 29) linked to the Venezuela 2024 bond and is apparently swapped for US$50 million of Honduras bonds (This is never specified above) and is referenced starting from that moment on to Venezuelan bonds. (If Venezuela defaults before 2024, Fonden gets nothing!)
And that is the key to hiding losses. A zero coupon note pays no interest until the end (2024). What Fonden does is give the securities of Lehman, Ecuador and Honduras, which have low values (20% or even less) and exchanges them for an equal amount of Venezuelan bonds which pay interest. With this interest, in 2024, the Emerald note will go up in value to almost 100% of what Fonden invested and because it is a Venezuelan bond, the Government recognizes it as being worth 100% or close to it, even if you have to wait until 2024 to have them be worth that much (There are many details not described in the Emerald note).
But as you can see in page 26 of the Emerald note, it is worth much less. In June 2012, for example, if Fonden had asked for the Note to be cashed in, it would have been worth only US$ 41 million. And since it was worth less than US$ 26 million during the first year, it means that the original $260 million which was left of the US$ 876 million invested in Lehman, was worth less than 10% when it began (and there are commissions too).
Somewhere else, there is the second note for US$ 650 million, I have not found it. If it is anything like this one, it is worth at most US$ 65 million. Thus, in the end, it appears that Fonden lost 90% of the investments, registers US$ 910 million in notes, but they will not get closed to it until 2024, cross your fingers.
By then these people will be long gone, never accounting for their lies and crimes against the people of Venezuela.
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November 11, 2012 at 9:47 am
Easy, Pdvsa goesto the Central Bank handsover dollars and gets bolivars, now these dollars are transferred to Fonden, which exchanges them for Bolivars to spend, thus the same dollar generatedbolivars twiceand is not part of reserves,but leaves thecountry. That is why reserves are the same as ten years ago but you thenumber of bolivars has soared. W ell, one reason why thisis true.
November 11, 2012 at 1:42 am
Hi Miguel, I am trying to understand the first paragraph of your post. How does spending dollars locally create inflation? I would have though that the opposite is true: if you sold the dollars locally for Bolivars, you would be reducing the demand for dollars, hence stabilizing the currency. What am I getting wrong here please. Many thanks.
October 4, 2012 at 9:07 am
OK, an interesting report from reuters which indeed puts into light some of the apparent mismanagement of fonden. You should take into account, analyze and provide data from more positive reports as well, however, such as this one: http://www.cepr.net/index.php/publications/reports/venezuelas-economic-recovery-is-it-sustainable
No government can be perfect in economic management. However the Chavez administration has proven to respect its pre election promises, namely redistribution of oil wealth for the benefit of the poor, uneducated majority which lives in the slums. Unfortunately this blog never takes into account their existence or the fact that they were always excluded from any political rights or benefits during the 4th republic except for the right to vote for AD or COPEI and remain always poor and misempowered.
October 4, 2012 at 9:14 am
I can not take seriously paid garbage. I am talking rampant corruption and no transparency, hundreds of investments with no production, stupid investements, to generate graft, hiding losses and all you can say is :
“No government can be perfect in economic management”
pleeeeease!!!!!!!!!!!!!!
October 3, 2012 at 5:58 pm
I have written a lot about that in the past, In fact, I think I was the first one to write about it. Basically, there is no reason for Venezuela to buy structured notes on your own risk, it makes no sense, their purpose is only to generate commissions and kick backs and hide what you are doing.
October 3, 2012 at 5:51 pm
Good work, however i recommend you go and do more research regarding the $8 billion in strucured notes sold by various us based investment banks through a Canadian bank and some small brokers in Miami. The notes were issued at a discount (below par) and sold at pa or premium to Fonden. Juicy commissions for banks and small miami based brokerages, where is the us treasury dept or the SEC to investigate this high profile corruption cases done outside and inside Venezuela? There is plenty of people who can talk about this basket of bond sold to fonden with massive corruption. Tal Cual named it “el robo del siglo 21″……anyone knos more about this?
October 1, 2012 at 7:29 pm
Dates. That’s what missing in this 6-month report, covering Jan 1, 2011 – June 30, 2011. With little circles over the i’s, Yony Albenis Medina, CPC, signs his name at the end of the report, with no date associated for that signature.
The language throughout the report is evasive.
Let’s look at point 6, page 11. Lehman Bros. is not mentioned by name, but you get the drift of what financial institution is involved by mention of its filing for Chapter 11. Again no date is mentioned regarding the transaction or the bankruptcy (I happen to know that the latter occurred in August 2008). Lehman Bros appears further down in point 7. So why wasn’t it mentioned in point 6?
The weird thing is, if Fonden was issuing periodic reports, why would an event that occurred in 2008 (of course, not mentioned by “Yony”) appear reported 3 years later?
Just wonderin’ ….
October 1, 2012 at 7:28 pm
It has to really suck to be a Russian Nationalist these days.
The decline of “influence” of the Soviet Union is staggering–yet some would have us believe that it’s the U.S. that is suffering from this same declining influence.
Yet ironically, it’s the Chavistas, day after day. who most complain about this unstoppable American Imperialism! And how harmful it is!
Chavez alienates the Americans, and invites Russia, China, Iran, and Syria in.
Seems like it’s the best thing he could have done for the U.S.
VZ is now a zero-commodity for the U.S.. They still sell us oil, and all of the rest of Hugo’s ramblings are just bullshit. And all of Hugo’s big dreams of Russian military assistance are even MORE bullshit.
Which is why Obama, rightfully so, has chosen to ignore this a-hole.
October 2, 2012 at 9:53 am
And, the Chinese will/are selling the oil to US.Most of it anyway.
Even thouogh Ramirez denied it, China got some very cheap oil and
loaded ontheir tankers and carried it across Gulf to US and sold
the crude for more than double for what they paid for it.
(Rumor was Chavez was furious, but, BUT he said nothing to Chinese
about it. That is the “fighter” for you, big chicken)
Anyway, Chinese will sell more crude from Venezuela to US, I betcha.
October 1, 2012 at 6:35 pm
I remember now seeing that bit about Emerald capital in Bloomberg a while back, well it is clear they have something to do with Citi. I understand they have an office in Caracas, but havent found where. I guess those commissions are quite juicy.
October 1, 2012 at 6:42 pm
While we’re on the subject of fraud and deceit, can someone tell me if there was any movement today of names being switched at the registery? (Adan for Hugo?) Isn’t today the last day that this can take place? I’ll sleep better tonight if someone, anyone (!), resonds to my inquiry…….er, with scotch in hand.
October 1, 2012 at 6:22 pm
Devil…… Excellent investigative report !!!
It really surprised me that that the authorized capital of Emerald Capital, Ltd. is just 1,000 shares @ 1 Euro per share !!! (page 47 of prospectus).
Also I found this comment in Bloomberg:
Emerald Capital, Ltd. does not have significant operations. The company is searching for assets and businesses to purchase that would provide significant shareholder value. Prior to July 2005, it was engaged in the distribution of technology products. The company, formerly known as New Opportunity Limited, is based in Subiaco, Australia.
53 Merrion Square
Dublin, 2
Ireland
3 Employees
http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=4493411
I agree with Capriles that we all venezuelans have to reconcile but the people involved in this type of scam, someday will stand before the venezuelan justice.
October 1, 2012 at 5:51 pm
In my view all people can see is what that is staring them in the face. Crime and their money not going as far as it needs to go is what will lose this election for the boss. What the boss does with the money that is stolen or how its stolen is far removed from their daily life although its a big part of the problem. He probably wishes he would have done a little more trickle down theory at this point.
October 1, 2012 at 5:41 pm
I write this financial posts because they should be there for the record, but the comments are always similar. A billion dollars is a lot of hospital beds and roadsm but I dont know if they are too dense or people dont care.
October 1, 2012 at 5:52 pm
I find the post fantastic, it treats an issue that should be thoroughly studied by investigative reporters, ending up being the core of a serious scandal in any decent country. The problem in Venezuela is that the issues that public opinion is interested in, and that are treated by the press, are either “amarillistas” or amazingly shallow.
October 1, 2012 at 5:31 pm
If the number of comments is directly proportional to people’s interest in an issue, it clearly shows why Chávez was able to do whatever he wanted with the fund..
October 1, 2012 at 3:50 pm
Great post. I was waiting till one of you guys would publish again about Fonden. Because everything what happens within fonden happens in the dark I wonder what we will see when the lid will come off this one..
105 billion.. this fund will probably be the global fraud of the century. And just think of the poor and uneducated people shouting ‘uh ah,.. ‘. Almost a horrific scenario I would say.
October 1, 2012 at 7:56 am
Wow! This is corruption, irresponsibility and everything else in the same basket, and probably just the tip of the iceberg! Thank you and Reuters for pulling it out.
October 1, 2012 at 7:55 am
Great work, Miguel.
I have written about this before in my blog but here it goes: if you google
“Фонден Венесуэла” simply, you will find a lot of official documents referring to the 400 million dollar purchase of the Russian bank plus some direct references to that being used for the purchase of weapons. There are further references on that in Russian business newspaper Kommersant, not a Novaja Gazeta kind of newspaper that could be critical of Putin and Chavez, but rather standard accepted stuff by Putin and his cronies.
The official newspapers in Russia talk over and over again about the use of FONDEN for the purchase of weapons.
And there is even a quote from “Russian official” of the department for the military cooperation that says it is of absolute interest for Russia that Chávez remains in power.
Y los pendejos hablan de soberanía…