Archive for March 26th, 2009

As expected swap market ground to a halt, here is why…

March 26, 2009

traders

First off the bat, I want to  clarify that I did not raise the stir in the swap market with my post last night, the stir was coming anyway. All I wanted to do with that post was warn people that the swap market that everyone follows so closely was likely to be complex for a few days, due to the freezing of accounts in the US of a few dozen local brokers.

Obviously, I knew more than I posted, but that was not the objective of what I wrote, but it clearly became that, as I seemed to have the only published rational explanation as to why the swap market opened at Bid: Bs. 6 per US$, Ask Bs. 7 per US$ even if few transactions were being done at either end.

Some of that information is now public, so it is easier to write about it.

Essentially, banking will never be the same in the post 9/11 world, as the Patriots Act imposed very stringent conditions on money flows, particularly when there is a suspicion of money laundering, corruption or terrorism behind it.

The consequences for those that live or operate a business abroad, is that opening an account has become ever more difficult, as many institutions know that they will have a hard time checking you out and at the same time checking out where the money moving into your account is going or coming from.

As the swap market in Bolivars developed, many people set up new brokerage houses, which either because they don’t have capital, or a track record,or  systems, or goodwill or whatever, were having a hard time finding a bank that would open an account for them, particularly for the swap business, where you have to know your client well, particularly with respect to money laundering or politically exposed persons in a country with the risks of Venezuela.

In the swap market, you swap (i.e. exchange) securities (bonds) in both Bolivars and US$ and in the end deliver either the securities or the money at either end. Each transaction requires the receipt of, for example, foreign currency to buy the bond at your account. If you do retail business (small individual clients), this could mean many transfers into and out of your accounts every day. Many banks simply don’t like that, particularly if they are all small, as the banks have no way of checking the source of the money. Other brokers work more at the institutional levels, with companies, where if you are careful, it is much easier to check that the proceeds come from legitimate business operations.

Since the exchange controls were implemented, the smaller brokers in the market have had accounts in various banks in the Caribbean, but since these are mostly frowned upon by the authorities, they are not the best solution.

Then, some time in the last couple of years, I am not sure of the time frame, but think it was last year, a company showed up, willing to provide these services. The name is Rosemont, aw Florida company with a wire transmittal license, and a friend was kind enough to send me their presentation when selling their services, which you can download here, as a Powerpoint presentation.

Essentially Rosemont provided these local brokers with sub-accounts, in Rosemont’s name at a US bank, to move the flows from the swap business when they sold the securities or received funds to buy them. Rosemont would even provide settlement services, if my understanding is correct, such that if brokers did business between them, they could net their accounts there.

Apparently, the DEA was tracking the activity of an account that made some transfers in or out of Rosemont (I have no idea in which direction). This had been going on for a while, but it was not until two days ago that an indictment came down, of all places in Massachusetts, against one of the principals of Rosemont. (Note that if you have a wire transmittal license, you are not supposed to keep cash in deposit on a regular basis, so I am surprised people thought this could work)

What the indictment charges is that one of the principals in Rosemont somehow collaborated with this money laundering, which amounted to US$ 900,000 in three tranfers.

When the indictments came down, all of Rosemonts accounts were frozen until the whole thing can be investigated. The result is that those brokers that had their accounts there can not move their funds and if they don’t have another account (with money!), they can not pay the bonds and/or trades agreed on.

Thus, today, nobody was willing to swap with anybody until you saw whether people delivered or not the bonds or the money for operations, not so much because you don’t trust your counterpart, but because you don’t know who they were trading with down the line.

So, as I expected the market opened with a huge spread and most people did very little. With time, the market will normalize, people will look more carefully who they work with from now on and life will go back to normal.

In the meantime, there were a lot of nervous people in Caracas today and the effect will be felt tomorrow, as swaps take two days to be completed.

Chavez’ lies about salaries of high Government officials

March 26, 2009

I was a little surprised when Hugo Chavez began talking about his salary, saying he would b ashamed if it was  too high like Bs. 10,000 per month (US$ 1,666 at the swap rate) and that the poor Deputies of the National Assembly made only Bs. 4,300 (US$ 716) per month. Surprised, because I had heard that high Venezuelan Government officials were making around Bs. 30,000 a month (US$ 5,000) at the swap rate, plus juicy bonuses and perks.

Then I thought I was really clever and I would get into the webpage of the Social Security administration and check the payments made into the system by Government officials, which would give me a glimpse into salaries.Essentially, you go to the IVSS webpage, input the ID number and birth date and it gives you all of the details of the account. How would I get the ID and birth date? Well, I could not think of  a better way to use the Maisanta/Chavez database than this, using its convenient reverse function look up table, insert a last and first name and it gives you all I need.

Unfortunately, nothing is simple in Venzuela. It turns out that lwayers do not contribute to Social Security and nether do the military. So, forget about the Supreme Court, one of the places I was curious about.

I did find a couple of interesting things. First, I looked up Hugo the Dictator himself. Guess what? The data is fine, he did not contribute (as military) until he got elected President and then in 1999, he did:

chavez

Funny thing is he never contributed after that. Weird, no? He is not military, he contributed his first year as President and then, nothing…

In fact, Chavez lied today saying that he did not make enough money to pay taxes. If he makes Bs.10,000, he has to pay taxes and with much less social security taxes. Something smells funny here.

Maybe a reader can enlighten me.

The only other interesting fact I found, was when I checked the new Minister of Commerce, Eduardo Saman, the same one that yesterday was telling people you had to pay taxes and all of those glorious things, like sacrificing profits,  that revolutionaries are saying, as if they had discovered warm water.

Well, the curious thing is, that Mr. Saman will turn 45 next week and either he was unemployed until 2001 or did not pay his social securty taxes, because he does not appear in the registry until 2001..

saman

Fortunately others have begun doing the same job but with better access to information. While Chavze talked bout his salary or that of the National Assembly, El Nacional gave us a whole list:

Rafael Ramirez Bs. 60,000 a month

CNE Directors Bs. 25,000 to 35,000 a month

Central Bank President Bs. 42,000 a month

Supreme Court judges 40,000 a month, 5 to 8 months bonuses

Now, I have no objection to people in these positions making good money. What I object to is these lying bleeding hearts saying they care so much for the poor and then increasing their salaries to 50 times the minimum salary.

The Assembly approved now a Bill to put a cap on salaries. That Bill was introduced in 2007 but even though the Assembly did nothing last year as Chavez legislated by decree, the Bill never moved. Now that the Dictator wants it, it is rushed through the Assembly.

To me this Bill violates Venezuelan Labor laws. The Government can put a cap on salsries, but according to Venezuela’s Labor legislation you can not decrease anybody’s salary, the law is even more general than that, you can not “worsen” the working conditions of a salried worker. This applies to all of these positions. But I am sure they will genuflect and give thanks to Chavez for the privilege of working for him.

Will the swap market get all tangled up tomorrow?

March 26, 2009

42-18122069I am hearing that US authorities froze some accounts used by local brokers in the swap market in the US today and that at least three dozen brokers may be involved. The amount of money frozen may be in the hundred millions and clearly nobody knows how long the process may last.

What this means is that in the upcoming days, the swap market may become all tangled up, soaring one day, down the next or whatever, as many of these brokers appear to be some of those PDVSA sells foreign currency directly to. This means that a lot of the settlements in this market will not take place and there will be defaults all over the place, possibly creating a sort of domino effect.

As brokers default, the market is likely to become somewhat dysfunctional, as PDVSA will also have trouble supplying the market with foreign currency. Note that at the same time, PDVSA itself will be affected as some brokers may not receive their payment in Bolivars, when they do not deliver the foreign currency and thus PDVSA will not be paid either.

So, prepare for a few wild days in the swap market…

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