The Devil's Excrement

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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.