For crisis-hardened Venezuelans, the bland government announcement last month was a sure sign that something unpleasant was about to happen. “At the moment, the government is not examining the nationalization of these institutions,” declared Deputy Finance Minister Luis Xavier Grisanti, referring to three troubled banks that the authorities were trying to nurse back to health. Sure enough, two weeks ago, the banks–Banco Italo-Venezolano, Banco Profesional and Banco Principal–were declared insolvent, and the government took them over, assuming $330 million in bad debt.
The bank failures came seven weeks after the government seizure of another institution, Banco Progreso, with losses initially estimated at $635 million. After auditors took a close look at the books, the red ink nearly doubled; it may wind up totaling more than $2 billion.
The disasters surprised no one in Venezuela, where banking collapses have become periodic rituals, the economy has fallen into ruin and public cynicism is pervasive. Over the past 15 months, 16 private banks have failed and been nationalized. The government has picked up the tab for $7 billion in losses, equivalent to 16% of last year’s GDP. Charges of financial irresponsibility, corruption and outright theft are flying. Arrest warrants have been issued for more than 100 people in connection with the collapses, and dozens of financiers are believed to have fled the country. President Rafael Caldera has charged that the banking system has been systematically looted by “a den of thieves.” The debacle makes a strong bid to be, in the words of Francisco Faraco, a respected financial analyst in Caracas, “the world’s biggest financial crisis of the 20th century. ”
The impact on the country, which is the second largest exporter of oil to the U.S., has been nothing short of catastrophic. To accommodate the bad-debt burden it has assumed, the Caldera government sped up the money-printing presses; this in turn has driven the annual inflation rate above 70%, the highest in South America. Price controls and currency restrictions, imposed to check inflation and save foreign reserves, have virtually paralyzed business. Public services have been curtailed, and unemployment has climbed. Constitutional provisions protecting civil liberties and property rights have been in suspension since last July, ostensibly to aid investigators probing the scandal.
The government insists it is trying to get to the bottom of the issue, but its efforts are widely viewed as slow and inept–a perception that has grown since the first and biggest bank closed its doors. That institution was Banco Latino, Venezuela’s second largest, which at its peak claimed $1.4 billion in deposits. By the time the national banking superintendency took it over in January 1994, Latino’s deposits had been reduced $1 billion. In going over the books, government inspectors uncovered false entries, fraudulent accounting and insider lending.
The Banco Latino closure sparked runs on other banks. In an effort to quell the panic, the government pumped $3 billion into eight troubled financial institutions–a policy that many analysts believe helped expand the crisis. In June 1994 all the subsidized banks were declared insolvent and closed down; none reopened. Some of the rescue money was used to pay off depositors, whose savings accounts were insured up to $23,000, but much of it simply disappeared. William Davila, vice president of Venezuela’s Senate finance committee, charges that bank managers loaned themselves the money and shipped it to overseas accounts.
At the root of the disaster, analysts contend, are the politics of cronyism, a web of incestuous relationships between business and government that formed after the inauguration of President Carlos Andres Perez in 1989. If during his first term as President, from 1974 to 1979, Perez had turned the economy into a state-dominated behemoth, he moved in the opposite direction during his second: toward privatization, deregulation and free- market economics.
One man who took advantage of the shift was Pedro Tinoco, president of Banco Latino and an old friend of Perez’s. The President made the extraordinary move of naming him head of the central bank, even as Tinoco remained Banco Latino’s largest shareholder. Soon millions of dollars in government funds were deposited in Banco Latino, which used them to help launch a major expansion. By 1993, the year in which Tinoco died of cancer, Banco Latino had blossomed from the country’s eighth largest bank into its second largest.
Other businessmen, many of them cronies of Perez’s or supporters of his Accion Democratica party, followed suit by taking over banks or starting new ones. In some cases the new banks were merely divisions of larger industrial or financial groups, which meant that when the parent companies were strapped for money, they frequently turned to their in-house banks for loans. According to government and congressional investigators, hundreds of other loans went to relatives and friends of bank managers and directors, as well as to real-estate operators who had the appropriate political connections. Laissez-faire took on new meaning as bankers used their institutions as personal cajas chicas, or petty-cash drawers. One oft-cited example of banker extravagance: only weeks before its collapse, Banco Latino chartered an Air France Concorde supersonic jetliner to speed friends of the bank to a party celebrating the opening of a Paris branch. The estimated cost of the Concorde rental: $300,000.
While the bankers played, government oversight was, to put it mildly, minimal. Wearing his central-banker hat, Tinoco ensured that new regulations governing the industry did not take effect and that oversight remained inadequate. According to later investigations, regulatory officials were paid to look the other way or lacked the authority or manpower to intervene.
Then things changed. In May 1993 Perez was impeached for corruption involving the misuse of public funds; he is currently on trial. In early 1993 the economy also took a sharp downturn. The crunch hit hardest at real- estate and construction companies. As they started to default, the banks attempted to compensate by offering sky-high interest rates–up to 18 percentage points above going levels–to attract new depositors and fresh funds. The most aggressive was Banco Latino. Within weeks of Banco Latino’s takeover by the government, arrest warrants were issued for 82 of its directors and managers; many were believed to have fled the country. As bank after bank failed, the wanted list swelled. While some of the bankers turned themselves in and were released on bail to await formal indictments and trials, several set up in Miami. Among them: – Ricardo Cisneros, a former Banco Latino director who with his brother Gustavo runs Grupo Cisneros, a multibillion-dollar conglomerate that owns, among other things, the Spalding sporting-goods company. Cisneros, who is charged with fraud, contends that he did not serve on the management team that ran the bank’s daily business and thus knew nothing of any improprieties. Gustavo, who has not been implicated in the scandal, told that his brother was “an outside director who got minimal information and wasn’t a member of any loan committee.” Nonetheless a second arrest warrant was issued last week for Ricardo and 18 other former Banco Latino directors, this time for embezzling public funds. The new charges carry a prison sentence of two to 10 years. – Orlando Castro, a Cuban refugee who owned businesses in half a dozen countries, including the failed Banco Progreso and Banco Republica and 42 Venezuelan radio stations. He has lost all his Venezuelan holdings, which he had pledged as collateral for government loans to the banks. Charged with having violated an order not to leave Venezuela, Castro says he departed because the Caldera government’s suspension of civil liberties denies him a fair hearing. He claims to be the victim of a vendetta by Investment Minister Carlos Bernardez, an old political enemy with whom he vied for control of Banco de Venezuela, one of the country’s oldest banks, which is now in government hands. -Gustavo Gomez Lopez, Tinoco’s successor as president of Banco Latino. He insists he is innocent and claims he is being targeted by Caldera, who, he says, is determined to punish the friends of his old foe Perez. Gomez Lopez says most of Banco Latino’s losses can be attributed to the deteriorating economy, mismanagement and bad loans, not to theft and fraud. He was charged last week with embezzling public funds.
Will anyone wind up in jail? A year has elapsed since the scandal broke, and not a single individual has been formally indicted. Norys Aguirre, president of the State Deposits Guarantee Fund, which runs the nationalized banks, insists that charges will indeed be brought against those accused of fraud. Most of the money will never be recovered, she says, adding that in the long run, “the people of Venezuela will pay, with inflation and more taxes. We’re all going to pay.” Reported by Greg Aunapu/Miami and Mary Matheson/Caracas
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