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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.