A very Royal and autocratic Hugo Chavez announces his latest whim of nationalizing Banco de Venezuela, Grupo Santander, just because…

July 31, 2008

Using the very royal and regal I Hugo Chavez announced
that when he found out that Banco de Venezuela, part of Grupo
Santander, was for sale, then in his own words I say, I
am interested in buying it and we are going to nationalize Banco de

It was a curious, if not surprising, end to a series of
moves that began in May when the Government ordered all banks with Bolivar-denominated
structured notes to sell them, probably not realizing its implications. In this
May 21st.
, I explained the order to sell the notes as a way of getting banks,
not only to obey the law that limits how much they can have in foreign
currency, but also pointed out the possibility that this could all be an excuse
to take over part (or all!) of the Venezuelan banking system as well as having
them help in forcing the parallel swap market to go down as ordered by Chavez.

Except that the Government did not appear to understand the
implications of forcing the sale of these structured notes. Some banks will have
huge losses, if forced to sell, and if the owners were not willing to
capitalize them, then the Government would be forced to take them over. But
even worse, some of these notes were backed by Venezuelan Sovereign bonds,
which the Government was at the time attempting to prop up, in order to be able
to issue new ones in the future.

As officials in the Ministry of Finance began understanding
the problem and the dangers associated with their strategy, one of the bankers
involved with the structured notes came up with a brilliant strategy, he
negotiated with Banco Santander in Spain the sale of Banco de Venezuela to him
in exchange for US$ 1.2 billion in structured notes owned by his bank Banco
Occidental de Descuento, as I explained in part
IV of the Guisonomics series
. (Banco de Venezuela itself had no structured
notes in its balance sheet)

When I first heard of the possible deal, I wrote the first part of the
Guisonomics series, thinking that I could leisurely explain to the readers
the whole deal. I had to speed up part II, not
because the deal was completed, but rather because the Government decided to
stop the deal in which Banco de Venezuela would merge with Occidental de
Descuento to become Venezuelas largest bank by far. In part III I
explained how to buy a bank with no money. And then I rushed into part IV to ask
why would the Government stop the use of the structured notes to buy a bank.

And today we know the answer, because: I wanted to buy it

And what is the reason for his desire?

Chavez gave some, but none of them are at the heart of the

Chavez said first that the bank was privatized in the past
by the Government, but this happened only after the bank had been private for
over one hundred years and became part of a fierce battle over its control,
which eventually led to its bankruptcy in 1994. Then FOGADE, the equivalent of
Venezuelas deposit insurance, sold it to Grupo Santander in an auction.

Chavez also used as a second excuse the fact that the name
was Banco de Venezuela, because the robolution runs on symbolism rather than

But beyond these, there are in my mind two reasons for this:
First, Chavez likes to control and if there is one sector that had not been
part of any Government effort at direct (not indirect) intervention and control,
was the financial sector. Profits at banks have been spectacular in the last
few years, as arbitrage in an atmosphere of controls, funny shenanigans
involving the Governments guisos, a huge increase in monetary liquidity and
exchange controls, allowed them to make piles of money.

Separately, the Government has never hidden its desire to
owning a network of bank branches that would cover as much of Venezuela as
possible. In fact, Banfoandes has been setting up a network that reaches where
the Venezuelan financial system does not. This would complement it.

Why would you want such a network?

Simple, because the distribution of the money for the
Governments Misiones is not easy, how do you get money to members of Mision
Ribas in a town where the Government has no bank?

But in the end, it also reflects the failure of the
Government to expand well its banking system over the last few years. It has
been a another failed priority of the revolution, as it has been slow and
cumbersome, as Government -owned banks have traditionally been badly run and
have not been run with any sense of purpose as its Presidents and Directors
have been changed every time a new Minister of Finance has been appointed.
(Chavez has had a different one every 18 months of his Presidency)

And therein lies the problem, Chavez think that he will get
a well-run bank and will be able to maintain it running as such under the
Governments management, when in fact, the way the nationalization was
implemented by Chief Economist Hugo Chavez, implies that the bank may be in
shambles even before he agrees on a price for it!

You see, tomorrow corporations and individuals will begin
withdrawing their funds from Banco de Venezuela, taking them to other banks or
diverting the money to the swap market to buy US dollars. At the same time, the
CVs of the people who run and manage Banco de Venezuela, from managers to
clerks, will be flying via faxes and email to the banks at the receiving end of
the funds leaving it.

Part of the money will be gone and so will be part of the

And Chavez implied today that all he has done is express an
interest in the bank. It has not been nationalized, it will be nationalized.
There is no agreement on price, as he explicitly invited the owners of Banco
Santander to come to Venezuela and negotiate a price. While all these matters and
details are finalized, the bank may become a shell, as only its branch networks
will be left and the Government will be forced to accelerate the takeover or
move Government funds to Banco de Venezuela to prop it up, even before it takes
it over. (An excuse to pay less?)

Negotiating a price should not be too difficult, Chavez said
that he had a copy of the agreement between BOD and Banco Santander. I understand
the agreed purchase price was US$ 1.2 billion; Santander will certainly put up
a fight if the Government does not match the offer, which will only prolong the

In the end, I dont think Banco de Venezuela is the optimum
bank for the Governments purposes. It has traditionally been the bank for the
corporate world, together with Citibank Venezuela. It paid little attention to
the middle and small businessmen and while strong in retail, there were better

Which leads me to believe that this is not the end of a
strategy, but only the beginning. Other banks will soon become the target of
the Government, as Chavez desires and whims, do not materialize in the reality
of running a financial institution and business efficiently.

At that time, he will want more with the customary
inefficiency, voracity and destructive powers of the revolution, which has yet
to learn how to build or run anything effectively beyond political strategy.

But in the end, this may be remembered as the day Chavez
started a run on a bank, which somehow managed to have an impact in the
countrys financial system and later on inflation, and the whole thing may go beyond
what anyone is capable of imagining today.

(Note added: I did not mention that Chavez made the announcement while meeting with a group of Catholic women, while TV stations were showing Leopoldo Lopez at the Supreme Court arguing why he should not be banned or disqualified from running. Chavez’ speech preempted the Supreme Court transmission by law. Manny Ramirez was traded from the Boston Red Sox to the LA Dodgers at exactly the same time, but this appears to be coincidental)

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