Chavez Guisonomics 101, part IV: Why did the Government stop the use of structured notes to buy a bank?

June 22, 2008

For a few weeks, there had been rumors that one of the
largest banks in Venezuela, Banco de Venezuela, owned by Banco Santander of
Spain, would be bought off by one of the largest banks at #5 in the country
Banco Occidental de Descuento (BOD), creating the countrys largest bank. What
was not clear was how the deal could be pulled off.

Then, at the beginning of this week, someone explained to me
that the transaction would simply be a hand off of the structured notes
denominated in Bolivars in the hands of BOD. Such notes are worth slightly above the half of the US$ 2.4 billion registered on the books. Santander would receive them and
ask the Government for the dollars at the official rate of exchange.

While I havent seen the numbers, it made some sense if the
regulator (the Government) allowed the transaction like it has allowed the
others that have taken place. For Santander, it would be an elegant way out of
the country (the bank has been rumored to be for sale for ages) and BOD would
get rid of the notes in its balance sheet, acquiring a very healthy bank with
the largest branch network in the country. Of course, the purchase would still
be suspicious in the sense that those notes were purchased with depositors
money.

That si why I started this series.

But then on Thursday there was a bombshell, the Government
issued a very strict resolution essentially banning any bank or financial institution
or even anyone currently owning more than 5% of any such institution from buying another
one, reaching an agreement to buy another one, without prior permission from
the Government. Moreover, the resolution bans the transfer of the structured
notes without the financial institution having prior approval from the
Government.

Lawyers are still arguing whether the resolution banks the
BOD/Banco de Venezuela acquisition as described, but most think the
Governments resolution is airtight. But whatever interpretation anyone may
give it, to me it expresses in no uncertain terms that the Chavez
administration does not want the transaction. Thus, unless Chavez himself gives
the green light I dont think the acquirer or the subject of the acquisition
will go ahead with it.

The puzzle is why it was blocked. All sorts of rumors are
flying around Caracas about this. There are basically two ways of thinking:
One, that blocking the transaction originates, as has become customary in the
robolution, in some parallel racket (guiso) being set up by someone else who wants to
by the same bank. The second one is that this reflects the arrival of the more
fundamentalist Ali Rodriguez to the Ministry of Finance and that he stopped it.
I would lean towards the first explanation, because it has always worked so far
when you are trying to find a rationale to some act by the Government that does
not make sense.

But the same resolution contained what to me is a somewhat
worrisome proposition: It orders auditors of banks to reflect as of June 30th.
2008 the quantitative impact of the notes being valued at its true worth.
Additionally, it bans any bank from divesting itself of the notes until the
Government approves it.

The problem with this is that June 30th is this
week and I doubt any bank is ready to divest. This means that the auditors will
look at he notes and calculate their value at the only exchange rate accepted
by the Government Bs. 2.15 per US$. But these notes are worth more than that
since the guarantees behind it are US$ which can be sold in the parallel swap
market currently around Bs 3.4 to the US$.. So, if you look at what the auditors will say, it will exaggerate the
loss incurred by these banks to the point that many will look absolutely
bankrupt.

Today the Minister of Finance complained
about this situation
, saying bankers will have to capitalize their
institutions because they bought the notes with the depositors money. (Will all
of them?) And he is right. However, he fails to say that it was Chavista
Government officials that allowed this to happen without any action.

For a Government that likes to blame the 40 years of the
Fourth Republic for everything, this time around, it cant use that excuse,
exchange controls have been in place since 2003 and all of these structured
notes were created since then.

Who is to blame?

I am pretty sure that not only will the Government not do
anything about prosecuting those buddies responsible for it, but I am sure all of them can run
for office in the November regional elections.

And will we see if the guisos continue now that Rodriguez
Araque is in the Ministry of Finance? He is supposed to be extreme radical, but
a straight arrow. His tenure at Finance will tell us if the latter is true.

More guisos, as they show up. Stay tuned.

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