The Devil's Excrement

Accion Democratica has announced that it will withdraw its candidate
from the upcoming Assembly elections due to the security loopholes still
in place. Reportedly Primero Justicia will announce the same soon. Only
Nuevo Tiempo, the party of Zulia Governor Manuel Rosales, who would win
easily in his state, may keep its candiadtes in the upcoming election
next Sunday. Two sources are confirming Primero Justicia is withdrawing.Proyecto Venezuela has also withdrawn. MAS has indicated
it will participate in the election. This evening, with half an hour to
go until the press conference of Primero Justicia to announce its
position, there are indications that they are now leaning towards participating again.

In a typical mystery of this Government a US Congressional delegation
was not allowed in the country, the trip had been arranged by the
Venezuelan Embassy in DC and had a scheduled meeting with Hugo himslef. The bipartisan delegation simply turned around and left.

Before the
developments of the last few days I was going to vote. For a very simple
reason: you gain very little by not voting unless everyone in the opposition
decides not to vote. What is clear is that if the CNE had not decided to back
down on the use of the fingerprint grabbing machines, everyone would have
called for voters to abstain, because in contrast with the observation missions
that came for the recall referendum, the two currently in Caracas, the one from
the OAS and the one from the EU have been saying in private what the OAS and
the Carter Center never said in the recall vote. And they are applying pressure
and it is showing, by now the CNE is absolutely embarrassed by their cynical
two-faced behavior and they know these observers can’t be fooled and they are
here to stay.

The negative side

Numerous
problems remain. Besides the “morochas” or twins, which will allow the Chavez
coalition to get a larger percentage of Deputies in the Assembly that their
votes should give them, there is the electoral registry, with its fake data,
duplicity and migrations that nobody can fix.

Then there
are little details like the President of the Electoral Board Jorge Rodriguez
suddenly appearing to become objective in the presence of the observers, threatening
to fine all those Government officials appearing on campaign literature or advertising,
forgetting that he had allowed the ultimate unfair advantage: the presence of
Chavez’ face on all of the ballots representing Chavez’ MVR, its twin party UVE
and others supporting it. There it is, on the ballot itself, the ultimate unfair
advantage that Rodriguez claims is absent from the process, approved, sealed
and ratified by the CNE, under protest form the opposition parties. And the
international observers have taken notice

Electronic voting in the past

This will
be the fourth process in a row in which electronic voting with the Smartmatic
machines and the Cogent fingerprint machines is used. In each case, there are
four basic components to the system: The Smartmatic voting machine, the
tallying system, the transmission and the fingerprint machines.

The Smartmatic machine is a windows based
machine with all of the file systems of windows, the same processes, controls
etc. It has USB ports, can transmit and can print. The Cogent AFIS system is
really a software system that looks at certain characteristic features of
fingerprints and matches it with a database, it comes with hardware like the
fingerprint reader and a laptop made by somebody else, mostly IBM. The tallying system is just a piece of
software that adds the votes according to the characteristics of the electoral
process going on, i.e., it is not the same for a recall vote than for a more
complex election for city councilmen or Deputies.

Recall Referendum: Despite claims to the contrary,
for the recall referendum the software was never tested or audited. Despite
promises that there would be no transmissions between the voting machines and
the servers during the day, there were not only transmissions all day, but in
some cases more material was transmitted in one direction than the other. There
were supposed to be 120 “hot audits” the night of the recall, only 30 of them
took place. (Curiously the vote against Chávez won in these, although
statistically it is not meaningful). There was a “cold” audit a few days later
under circumstances that leave a lot to be desired. The fingerprint machines
did not work well everywhere. In some locations they were not used, in others
they were used by choice of the voter.

Governor and Regional elections: The only improvement made was that
the machines were connected to the network only at the end of the day. However,
the totals were printed only after the transmission took place. The
fingerprint machines worked rather well. In fact, the suspicion is that the
Government used them as a real time exit poll, which combined with the data
from the recall referendum petition allowed them to know where they were doing
well, where they needed to go and get the voters out and where to concentrate
resources.

The Current elections: A group of technical people was
allowed this time to look at the machines and their software. They first looked
at the machines. Each vote becomes a file in the Windows system, with three
dates and times which correspond to its creation, modification and last save.
All three of these are erased and using a randomizer certified by Microsoft,
each vote is saved in a different location of the memory. In this manner all
traces of the sequence of the votes was supposed to be lost.

However,
the technicians noticed that if you used the type of file system tools, free in
the Internet, that are used for file examination and recovery on an NTFS disk
drive, you could locate a file that had a fourth date and time stamp associated
with each file and thus the sequence of voters could be known. If you then correlated this with the orders in
which people used the fingerprint capturing system, then each vote could be
exactly matched to each person.

Of course,
the CNE and Smartmatic technicians and officers had always denied the
possibility that this could be done. Last Wednesday in a mock up vote in
Caracas, in the presence of the international observers, ten people voted and
the technicians afterwards told each person which votes was his or hers, And as
they say “the you know what hit the fan” and the rest is now history. (Even
afterwards the President of the CNE denied this possibility with virulence).

But for
once, political parties were united, either the fingerprint machines were
eliminated or they would all withdraw. That is what is called a good way to
abstain, all or nothing. The President of the CNE offered then to disconnect
the fingerprint syetm, but under pressure from the observers and the fear that
the world would know the truth about Venezuelan elections (recall three elections,
including the recall vote were done with this very faulty system) forced the
CNE to yield the use of the fingerprint capturing machines on Sunday. (Some
parties are still doubtful of participating now).

The
technicians also checked and tested all other aspects of the software without
finding any possibility of changing, altering or manipulating the results. This
system is now activated by the use of three keys or passwords, one of which is
in the hands only of the opposition. Thus, an opposition member has to be
present to activate it.

Tallying and transmitting the
votes: The
technicians also looked at the process of printing, tallying and transmitting
the votes. In the previous processes, the tallying was performed and to the surprise
of the technicians, the machines not only send the totals, but also send the contents
of each one of the votes. This may seem weird at first, in Venezuelan elections
many parties may support a candidate and there are circuits, like the one where
I live, where there are two candidates to vote for. Now, according to
Venezuelan law, a party may change the candidate it supports up to five days
before an election, by that time all voting machines are out in the field, thus
the program can no longer be changed. Thus, all votes have to be transmitted so
that if this happens events like a person voting twice for the same candidate do
not take place.

Once the votes
are tallied, the machine is made to print the totals for each candidate in a
record that has a number (000) that certifies it as being pre-transmission. Once this is printed the machine is connected
to the network and the transmission
is allowed to begin and after that everyone present can get a copy of the
tally, which will now have a different number (001).

At this
point, the witnesses do a tally of the paper ballots in 45% of all voting
centers, another new
feature that was
not available in previous electoral processes. The law says 100% of the
paper ballots should be counted, but this will not be done. The rule of
law is not the CNE’s strength.

Can there be cheating
electronically? Yes,
it is possible to be at a polling station with no opposition witness, transmit
first and then manipulate the results before the tally is printed. This would obviously
be the opposition’s fault. But there are 27,000 machines out there.

But the
point is that the process has been cleaned, checked and certified sufficiently
that with the withdrawal of the fingerprint machines the process should be more
transparent, fairer and cleaner than it was a week ago.

The
absence of the fingerprint machine has many advantages besides eliminating the
possibility of reconstructing the sequence: it removes the fear people have of the
Government knowing how they vote and losing their jobs, contracts or otherwise
being the victims of another Tascon-like list. Besides this, the Government
will no longer have the real time exit poll that will allow it to mobilize
voters where needed, paying them and driving them to vote. Either they mobilize
everyone or else.

Of course,
there are thousands of fake ID cards and corresponding voters out there and
many other tricks in the Electoral Registry. But, we should not become like the
Chavistas that we want to win everything and hold all positions. To claim that
we have been cheated we have to vote. The Chavistas appear to be a majority at
this time, but they are not a happy majority, they do not like the way problems
in Venezuela are not solved while Chavez seems to be trying to solve everyone
else’s problem, while neglecting ours. Both sides are not motivated, so that if
the opposition can have less abstention, the Chavismo may be blocked from grabbing
TOTAL control of the National Assembly. This should be our goal at this time and
with the removal of the fingerprint machines it is doable. If in
August’s regional elections abstention was 80%, you can bet it will be much
larger with fewer local leaders to motivate the voters. Additionally, the whole
campaign has been lackluster for both sides.

Thus, next
Sunday I will be there. I do not believe in any plan to have an alternative
other than to have held a separate election and count how many we are. Nobody
can count how many people go or not to church. If you want to call for
abstention do it, while mix religion and politics? Some people do not even like
to go to church or may not be seeing doing so.

It is simply
too late, in my opinion, to start to improvise. It is time to vote, or not to
vote, there is still a little freedom in this country for this and for now, you have a choice. I have made mine.
I will vote and in the evening I will go help count and will make sure my copy of
the tally sheet has a 001 at the bottom. Hopefully, most of you will do the
same, no matter what your political ideas are. It’s called democracy and as
long as it has a chance, we should also give it a chance.

Just imagine browsing through the travel section of the Sunday New York Times and finding an article on Caracas with
two recommendantions a block from my home, I live a block away from an
entrance (the most popular one?) to El Avila National Park and the
Tarzilandia Restaurant. I must confess I have not been to Tarzilandia
in like 30 years. Read on!

If the
previous post describes a gift to the rich that I find somewhat obscene, there
are worse things going on which are incredibly obscene. In the bond offering I
described, the terms are known, everyone can put in an order and the National
Assembly approves the issue. This contrasts with using the same procedure but
assigning the bonds by having the Ministry of Finance “choose” by unknown
procedures just a few banks to participate. Then these banks are giving the
gift and we can not even know if the profit was 10% or 20% because no info is
revealed on these deals. But if they are anything like those of the current
bonds offering, we are talking tens of millions of dollars in profit handed out
by the Government to their friendly banks. This deals clearly involve
corruption. In fact, all of these more “private” deals have not been announced,
but have leaked slowly thru the financial system until someone in Government
has talked about it.

I
talked earlier about the case of the “structured notes” whereby US$ 662
million in these notes was sold to five banks chosen by unknown procedures at
the official exchange rate. These banks turned around and sold the notes in US$
making a mint. The fact that it was done privately raises suspicions that
corruption was involved, so does the fact that the transaction was revealed by
the President of Bandes who held a press conference to make clear that his
institution had not sold them, but that they had been sold to the Ministry of
Finance who turned around and sold it to the banks.

Well,
there were rumors of a similar transaction but with Argentinean bonds. You see Venezuela
bought US$ 950 million of that country’s debt as a way of helping that country
since there was little interest in purchasing them on the part of foreign
investors. Fortunately for the Venezuelan Government emerging market bonds have
kept rallying even as interest rates rise in the US and Europe. Well, the
Minister of Finance, former mathematician and now proud debt trader Nelson
Merentes gloated that the Government had sold some US$ 400 million of these
bonds at a profit of US$ 40 million. But you see the bonds were sold to two
local banks that made a nice piece of change in the transaction as they paid
them with Bolivars at the official rate of exchange. Then, they turned around
and sold them in the international markets at a tidy profit in Bolivars.

The
question is once again, why those two banks? Why the lack of transparency? Why
not sell them in the international markets? Was there a profit in the end for
the Government? Obviously these transactions are doubly obscene as there seems
to be some sort of corruption involved in the handpicking of the institution
that these are sold to. But I will let Teodoro Petkoff in his Tal Cual
Editorial give you his opinion:

Swap by Teodoro Petkoff in Tal Cual

 A few days
ago we described the shenanigans with the so called “structured notes” of Bandes.
Now is the turn of the operation with part of the Argentinean bonds that the Government
acquired.

With
those, there was also an operation in the secondary market that happens to be
of a suspicious nature, much like those of the structured notes. In the first
two weeks of October some US$ 300 million in Argentinean bonds were sold to two
local banks. They had been acquired by the Venezuelan Government with at a discount
at 76.85% of their value and were sold, also at discount, somewhere between 80
and 85%. Did we win one? Keep reading.

At the
time, the official controlled Exchange rate was Bs. 2,150 to the US$. With the
discount, the implicit price of the bonds was some Bs.2300 per dollar. Where is
the trick? In the black market the price was hovering around Bs. 2600 and Bs
2700.

Singing softly those US dollars
left the country and maybe they went to the recently bankrupt Refco, where many
Venezuelans of the boli-bourgeois -the Bolivarian bourgeoisie- had placed their
precious green bills, for which there is no valid exchange control.

Now comes the questions. Who
pocketed the differential between the effective Exchange rate (Bs. 2300 per
US$) and the black market exchange rate (2600/2700). Supposing a difference of
Bs. 300 between both prices, the profit from the operation is around Bs. 900
million. (Petkoff made a “slight” mistake, it is actually 90,000 bolivars or US
$ 34 million at the parallel rate he assumed)

How were the buyers selected? It was not done publicly and
transparently, that is very clear. There was no auction. What is also clear is
that the Merentes method is much more opaque that the Nobrega method, because the
latter, at least, covered appearances, holding auctions for the placement of
public debt bonds that the country would then issue.

Do you have to be a professional dirty minded person to imagine that the
beneficiaries, chosen using fingermocracy for this operation, split the profits
with those that put them there?

If we recall the operation with the structured notes, we now
have that between the US$ 600 million of the former and the US$300 million the
latter, US$ 900 million were placed in the market. The difference between the
real or implicit price and the black market is around 3,000 million Bs. Not bad
(Once again Petkoff is orders of magnitude off, this is 270,000 million Bs. or
a clean US$ 100 million at the pararlel market rate. Unparallelled levels of
corruption for Venezuela)

How much was there
for each participant? How was the bounty split? Even admitting the lowest differential
between the real price of the dollar, implicit in the operation and the black market)
there would be some 2,700 (again x 100) million Bs. “sweated” by the chosen
banks for the operation and their accomplices in the Government.

The gears of corruption have their own life. Chavez said
that there would be no more debt operations and, nevertheless, the Finance Ministry
announced an upcoming placement of US$ 1.5 billion. The problem is that the
genie of cheating is out of the bottle and nobody has any interest in putting
him back in it. Today, much like in the oil boom of the 70’s, the large foreign
investment banks pressure, so that Venezuela will maintain its
presence in the international markets, issuing debt continuously and on the
local side are those that know how to profit from this very easy ride.

A few months ago, the Electoral Board said that in the upcoming
electoral process, the traditional voting “notebooks” would be replaced
by electronic ones. What this means is that when you show up to vote,
instead of looking you up in a paper notebook and checking that you
voted, this would all be computerized. Sumate objected this vigorously,
arguing that if the electronic notebook kept the sequence of voters,
this could be compared to the sequence in the voting machines and the
vote would no longer be secret. This issue was so important to Sumate
that there is even a presentation on it at the Sumate website explaining the dangers.

There was the additional objection that the fingerprint machine would
also keep this sequence, thus there were two huge flaws in the process.
The Electoral Board objected this initially with as much vigor as
Sumate, insiting in the elctronic notebooks. For some reason that was never explained, the CNE insisted for
weeks that it would use the electornic notebooks. Their main argument
was that the voting machine itself did not keep the sequence, because
the order of the voting was randomized when it was placed in the memory
of the system. However, last week in a trial run, in the presnce of EU
and OAS observers, technical people helping the opposition in the audit
of the process discovered a file called “last MFT midification time”
that did indeed contain the sequence of voters.

While the electronic notebooks were eliminated in the negotiations
between the opposition and the Electoral Board, there will be only a
small scale trial of their use in this elections, the fingerprint
machines will be there and one could easily correlate each voter with
his or her vote, despite the earlier assurances by the CNE that this
was impossible.

Yesterday the CNE met and came out swinging. and so did Sumate.The CNE said that under no circumstances would the fingerprinte machines not be used, that it was impossible to know the sequence and that this was yet another attack on the institution. But the report
of last Wenesday’s audit is quite clear: “it is possible to reestablish
the sequence in which the votes originate if the flash memory or the
hard disks used by the machines are analyzed with a view and recovery
tool of the NTFS file system which keeps the information of the moment
(time) in which the change to the file was made”.

Why the arrogant defenseof the process in the face of a technical
report that the President of the CNE likely does not even understand?
Why the continuos effort to limit the transparency of the electoral
process? If the Governemnt is so popular, why does it have to deny,
block, violate the law and limit the verification of the results? Why
insist on the use of the fingerprint machines if reportedly the AFIS
software (which is supposed to compare them so that nobody votes twice)
is reportedly not functioning?

You tell me.

Politicians in Venezuela have always been fairly
ignorant about economics. In fact, it does not appear as they ever had a clear
idea about the difference between economics and economic policies, believing
you can violate well established economic principles in order to implement their
creative economic policies. Time and time again, one mistake in policy is built
on top of another leading inevitably to an economic crisis in the country.

Such is the case of the exchange controls currently in place
in Venezuela.
What should have been a temporary measure has now introduced so many
distortions that they become harder and harder to remove. The Government has
increased spending by over 40% from 2004 to 2005, and so has the monetary
liquidity, all of the circulating money in the country, creating problems of
various sorts, such as pressure on inflation and liquidity that has nowhere to
go as there is no demand for it.

Thus, this week, the Government resorted to a solution that
has been used already a few times in the last two and a half years, which
represents nothing but a huge gift to the wealthy of the country, the issuing
of a dollar denominated bond sold to local investors in Bolivars.

The idea is quite clever and simple: issue a bond in dollars
with a low coupon and offer it to Venezuelans who are hungry for foreign
currency which is restricted. Sell it to them at the official exchange rate of
Bs. 2150 then they turn around and sell the bonds to foreign investors, hedge
funds and the like at a discount, effectively purchasing dollars a rate
somewhere between the official rate of Bs. 2150 and the “parallel” rate which
is around Bs. 2650 at this time.

In the other bonds, not all conditions were clear when the bonds
were announced or the parallel rate and the official rate were sufficiently
close that there was an element of risk to it. Not so in this case, which is in
reality a combo of two bonds, one maturing in 2016 and the other one in 2020.

Because there is a Venezuelan sovereign bond which matures
in 2018, then it becomes very easy to predict what yield foreign investors
would want from the new ones being issued. From this, it is equally easy to
know at what discount you will be able to sell the dollar denominated bonds in the international markets. In
this case it is somewhere around 87% for the combination of the two bonds,
which tells you will be buying the foreign currency at Bs. (2150/.87) = Bs.
2471 per US$ or so.

While many companies and individuals will use this simply as
a mechanism for purchasing cheaper foreign currency, for many, this is simply
free money courtesy of the Venezuelan Government. You either have the money,
like the banks, or you borrow the money to purchase the bonds. You get the
bonds, sell them and turn around with the US dollars and sell them in the
parallel market at a tidy profit of 7.2% in just a few days using the numbers I
gave you above. Thus, the revolution is simply giving a gift of money to the
rich as a way of solving an economic problem they face.

Of course, the ideal solution would be to remove the
controls, which would simply reduce liquidity by itself. But because the
controls have been in effect so long, there are too many distortions in the system
and removing them would imply that some banks would be in trouble, interest
rates would have to go up to be above inflation and last but not least, the
Government would lose an important weapon of control over the people and the
private sector.

The example I gave above in terms of profits for the transaction will likely be even better than
described for those that buy the bonds. Because there are rumors that the
Government plans to use the funds raise in part to repurchase some of the
country’s debt, Venezuelan bonds went up after the announcement. If this rise
is sustained thru Monday then people will likely make more like 10% in this
quick, riskless and profitable trade. Nice gift, no?

This gift is well received by the banking system, which has
so much money from depositors, but can’t lend it all, so they use that excess
to participate in this as well as to lend to clients to purcahse the bonds. The other big players are obviously speculators.
Curiously, other distortions also help others in purchasing these bonds: The
Government regulates the rates at which banks lend money to agricultural and
tourism enterprises below market artes, some of them have excess credit which they are tapping this
week to make a little money in the side.

In the meantime, Venezuela’s external debt goes up, yearly
interest payments go up in foreign currency and the distortions in the economy
increase. Of course, this also means that one day it will blow up again and the
longer it goes on, the less oil prices will have to drop to create a crisis. Only
this week, President Chavez announced a five year US$ 100 billion investment
program to be financed by PDVSA (US$ 10 billion a year) Pequiven (US$ 2 billion
a year) Fonden (US$ 2 billion a year) and the Miranda Fund (US$ 3 billion) a
year. These are funds additional to the excess spending that is being carried
out by the Government in the regular budget which is an all time high in the
country’s history in real terms as well as a percentage o GDP..

Where the money will come from for this plan obody knows, what is clear
is that distortions and expenditures are being stretched to the limit, which
bodes badly for the country were oil prices to drop by even a relatively small
amount.

And as usual, it will be the poor that suffer with another
crisis as the rich can save these easy profits given to them by the revolutionary
Government for a rainy day. The poor just can’t.

Two days ago there was a somewhat distressing Editorial in the Boston Globe
entitled Venezuela’s largesse, thanking Venezuela for the cheap oil given to the poor of
Massachusetts. Distressing because we were surprised that that paper
could be fooled by Chavez’ strategy of self-promotion. Well, a Globe
staff reporter was not fooled and while I have yet to see any of the
letters written to the Globe that have circulated through my email, it
was quite satisfying to see that someone does get and was allowed to get
his point across in the same pages that praised Chavez ‘ donation in a sort of rebuttal entitled “Cost is high for largesse”. I
found two of the arguments quite compelling, one, that of the
differences in per capita income between Venezuela and some of the
beneficiaries of Chavez’ largesse, the second one, the examples of how
people would react to similar donations from poor African countries
which the average American understands quite clearly are too poor to give gifts to rich Massachusetts:

“We appreciate the help, of course. But Chavez has
plenty to do at home rather grandstanding in the United States.

For instance: Venezuela’s per capita income is
$4,768. Massachusetts, the object of Chavez’s largesse, has the nation’s
second-highest per capita income, $41,801.

According to the World Bank, 49 percent of all
Venezuelans lived in poverty in 2000 — meaning they got by on household income
of less than $2 a day. That’s $2 a day, the price of a gallon of gasoline here.
About 24 percent lived in extreme poverty — or on less than $1 a day. The
poverty numbers are up substantially from a decade ago.“

“Maybe Congressman William Delahunt could arrange
for Somalia to send discounted beef, the desperately poor African country’s
leading export. Its poor neighbor, Ethiopia, could help out by sending cheap
coffee. And Afghanistan could send heroin. (But, then, it already
is.)”