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FailureofHighFlyingBanksShakesVenezuelan
Economy
ByJAMESBROOKE,
Published:May16,1994

CARACAS,VenezuelaInLatinAmerica'sworstbankingcrisisof
thefreemarket1990's,astringoffailuressinceJanuaryhaslefthalf
ofVenezuela'sbankingindustryinthehandsoftheGovernment.

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Venezuelantaxpayersfacea$6.1billionbailoutbill,asthe
Governmentpropsupninebanks,includingBancoLatino,the
nation'ssecondlargest.Morebanksmayfailasinspectorsunravela
fiveyearlongbankingspreegeneratedbyderegulatedinterestrates
andminimalGovernmentsupervision.Thisoftenresultedinbanks
offeringratesfordepositsthatwerefarhigherthanwerejustifiedby
loandemand.

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"Eightyto90percentofthebankingsystemiscompromisedinthiscatastrophe,"said
OscarGarciaMendoza,presidentofoneofthestrongestbankshere,BancoVenezolanode
Credito."Ifyoudon'thavepolicemenonstreetcorners,bankerswillrunredlights."

2. AmidFlamesandSuspicionsinIsrael,Acts
ofJewishArabCooperation

Thecostlybailoutiscontributingtopoliticalinstability.Andwhilefugitivebankdirectors
enjoycomfortableoverseasexile,Venezuelansarepayingforthebankfailureswithhigh
inflation,reducedgovernmentservicesandshrinkingeconomicactivity.
ForVenezuela'seconomy,today'sfinancialcrisisisroughly10timesassevereasthefailure
ofsavingsandloansinstitutionsintheearly1990'swastotheUnitedStates.The$105
billionsavingsandloansbailoutrepresents1.6percentoftheUnitedStates'grossdomestic
productand7percentoftheprojected1995Federalbudget.
Bycontrast,Venezuela's$6.1billionbailoutrepresents11percentofVenezuela'sgross
nationalproductand75percentoftheGovernment's1994nationalbudget.BancoLatino
had1.2milliondepositorsabout10percentofVenezuela'sadultpopulation.

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Bysettinginterestratesfarhigherthansoundbanks,BancoLatinoluredmanydepositors,
thenusedthefundstobuildalavishheadquarters,charterjetsforeachdirectorofthe
bank,throwlavishpartiesandmakeloanstoinsiders.

8. ChapecoenseSoccerTeamsPlaneCrashes,
LeavingBrazilDevastated

"Therewasabsolutelynosupervision,"oneAmericanbankerheresaid,reviewingthe
collapse."Theregulatorsweren'ttrained.Theydidn'thaveabudget."
Latelastfall,whenBancoLatinoofficialsbegantorealizethattheirhouseofcardswas
collapsing,theystartedtransferringhundredsofmillionofdollarsoverseas.Inthefinal
freneticdays,onebankdirectorforesawjudicialordersonfreezingassetsandsoldhis
milliondollarmansion,Anotherofficer,FolcoFalchi,thebank'scoordinatorfor
internationalinvestments,wasreportedlyseenloadingsuitcasesstuffedwithdollarsinto
hiscorporatejetontheCaribbeanislandofCuracao.

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FailureofHighFlyingBanksShakesVenezuelanEconomyNYTimes.com

AftertheauthoritiespadlockedBancoLatinoonJan.14,bankofficers,operatingfrom
offshorerefuges,enteredthebank'scomputerelecronicallywithamodemanderasedand
alteredthousandsofrecords.
Atthetime,Venezuela'sSuperintendentofBanks,RogerUrbina,wasbuyingracehorses
inArgentina.Hedecidednottocomehome.GuidelinesIgnored
AttheDepositGuaranteeFund,Venezuela'sequivalentoftheFederalDepositInsurance
Corporation,EsperanzaMartino,thepresident,apparentlygotthejobin1990becauseshe
wasmarriedtothechiefbodyguardofPresidentCarlosAndresPerez,whowasimpeached
lastyearformisuseofGovernmentfunds.Despitehertrainingasalawyer,thedirector
ignoredguidelinesandconcentratedalmosthalfofthemoneyforbankingemergenciesin
onlytwoofVenezuela's47banks:BancoLatinoandabankthatcollapsedinFebruary.
ThetworegulatorsresignedonJan.21.Withoutdisplayinganyurgency,Venezuela's
Senatewaitedforthreemonthstoratifytheirreplacements.Onelegislator,PabloMedina,
chargedthatCongress'sreluctancetoinvestigateBancoLatinostemmedfrompast
generositybythebank'spublicrelationsdepartment.Witha$3millionamonthbudget,
thedepartmentreportedlypaidthebillsofBancoLatinocreditcardsfurnishedfreeof
chargeto36congressmen.
Venezuelahasnotraditionofpunishingwhitecollarcrime.Threebankfailuresinthelate
1970'sresultedinoneofficerbeingjailedforoneyear.
IntheBancoLatinocase,acriminalcourtjudgeissued83arrestwarrantsinearlyMarch.
Thelistwasapparentlypreparedbycopyingnamesoutofthebank'smostrecentannual
report.Thefollowingweek,thejudgeexcusedherselffromthecase,butleftthearrest
warrantsstanding.
Fourmonthslater,only6of83suspectshavesurrendered.Virtuallyalltheothersare
believedtobeabroad.
Venezuelans,displayinglittleconfidenceintheirbanking,legalorpoliticalsystems,keep
some$50billioninforeignbanks.DepositsinVenezuelanbankstotalonly$12.7billion.
Venezuela'sdollarreserveshavedroppedby25percentsincethestartofthisyear,a
hemorrhagingthatwasworsenedbytheBancoLatinocrisis.
ThegiganticproblemsinVenezuela'ssmallbankingsectorhavetheirrootsinafree
marketchangeadoptedbyMr.Perezwhenhewaspresident:thefreeingofGovernment
regulatedinterestrates.
"Freeinterestrateswereadoptedin1989,butbankingsupervisionwasnotadopteduntil
1994,"TesalioCadenas,Venezuela'snewSuperintendentofBanks,saidinaninterview
here."ThatgapwasresponsiblefortheBancoLatinocrisis."
WitharelationshipbetweentheGovernmentandthebank,ministriesmovedtheir
accountstoLatino.ThearmyandtheGovernmentownedoilcompanyputtheirpension
fundsinthehandsofLatinotrustmanagers.
Flushwithmoney,Latinobuiltalavishhighriseheadquartershereanddecorateditwith
expensiveoilpaintingsandsculpture.Expandingaggressively,thebankbecamea
ubiquitouspresenceinthiscountry,operating101branches,includingoneintheUnited
StatesEmbassyhere.AffiliatebankswereopenedinColombia,inCuracao(BancoLatino
N.V.)andinMiami(BancoLatinoInternational).
WhenaBancoLatinorepresentativeofficewasopenedinParis,thebankfilleda
ConcordewithguestsforanexpensepaidweekendinParis.Thebankalsoboughta
corporatejetforvirtuallyeverybankdirector.LaxLoanPolicies
Strugglingtokeepupwithrocketingdeposits,Latinobankersmadeincreasinglypoor
qualityloans.Thesamecollateralwasusedformultipleloans.Loansweremadetobank
officers.
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"YoucannotapplySwissstandardstoSpain,"onedirector,RicardoCisnerosRendiles,
saidfromMiamiinatelephoneinterview."Venezuelansarelikesomeregionalbanksin
theU.S.15yearsagothereisalotofcommunityinterest,everybodyknowseachother."
Buildingarealestateempire,thebankbought500officebuildings,onlytoseethemarket
fall.Speculatinginthestockmarket,itinvestedheavilyinCaracas'sstateelectricity
companyat$10asharein1992.Today,thestocksellsfor$2ashare.
WithoutinformingtheirVenezuelandepositors,Latinoofficerstransferredmillionsof
dollarsindepositstotheCuracaoaffiliatebank.There,thebankdidnothavetomeet
Venezuelanreserverequirementsorpaydepositinsurancetaxes.
Eventually,BancoLatinobecameamultibilliondollarPonzischeme,afinancialoperation
thatcouldbemaintainedonlybyattractingmoreandmoreinvestors.Lastyear,thebank
paid105percentinterestononeyearcertificatesofdeposit,morethandoubleVenezuela's
1993inflationrateof46percent.Depositorsover60yearsofagereceivedinterest
premiumsof3percentagepoints.
ButwhenMr.GarciaoftheBancoVenezolanodeCreditopubliclyurgedbankingofficials
toinvestigateBancoLatino'shighinterestrates,theonlyreactionwasathreatbythe
NationalBankingCounciltoexpelhim.(Thisindustrygrouphappenstobehousedin
BancoLatino'sheadquartersbuilding.)'DoingDumbThings'
"Theyweredoingdumbthings,butallthebankswere,"saidMr.Cisneros,aminority
shareholderwhosaidhewasonlyactivelyinvolvedinBancoLatinoaffairswhen
shareholdersmountedalastditchattempttosavethebankinearlyJanuary."Ifithadn't
beenBancoLatino,itwouldhavebeenanyotherbank.Theproofisthateightotherbanks
areunderreceivership."
WhenthecollapsecameinmidJanuary,theGovernmentsuddenlyhadmorethanone
millionangrydepositorsonitshands.Afteronehugestreetdemonstration,several
depositorsinvadedajudge'slegalchambers,wheretheywavedtoyguillotines.
Seekingtobuypoliticalpeace,Venezuela'snewPresident,RafaelCaldera,signedintolaw
anemergencybankingbillonMarch10.Thislawretroactivelyraiseddepositors'insurance
from$9,000to$35,000.With99.8percentofsavingsaccountsand94.3percentof
checkingaccountsfullycovered,BancoLatinoreopeneduneventfullyonApril4asa
Governmentrunbank.
Toplacatesome2,000depositorsinLatino'sCuracaobranch,Governmentofficials
announcedinearlyMaythattheGovernmentwouldextendthe$35,000coveragetotheir
previouslyuninsureddeposits.ThebanksinMiamiandColombiaaretobesold,andthe
GovernmenthopestosellBancoLatino,aswellastheothereightotherbanksnowunder
Governmentcontrol:BancodeAmazonas,Bancor,BancoBarinas,Bancodela
Construccion,BancoLaGuaira,BancoMetropolitano,BancodeMaracaiboandFiveca.
Tokeepthesebanksafloat,theGovernmenthaspumpedin$3.3billion,morethanthe
$2.8billioninGovernmentaidextendedtoBancoLatino.
"TheideaistoprivatizeBancoLatino,thesoonerthebetter,"EdgarDao,amemberofthe
Governmentinterveningboard,saidinaninterviewatBancoLatino'sheadquarters.
ButmanyanalystsbelievethatVenezuela'smarketneedsonlyabout10banksandthatthe
restwilleitherhavetobeliquidatedormergedwithstrongerbanks."They'llputBanco
Latinoontheblock,butIdoubttheywillgetanibble,"saidMarcoA.Gomez,presidentof
the78memberForeignBankersAssociationofVenezuela."Idon'tknowofanyonewho
wantsabankofthatmagnitude."
TopreventfurtherbankfraudsofBancoLatino'ssize,theBankSuperintendent'sofficeis
quadruplingitsbudget,isexpandingitsinvestigativeteambyonethirdandisseeking
technicalassistancefromtheUnitedStatesGovernment.

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Asfortheperpetratorsofthemultibilliondollarcollapse,prospectsseemtobedimthat
theywilleverbetriedandconvicted.
"ImaintainthatthepresidentsofmanybanksinVenezuelahavesignedmanymore
balanceswithfalsefiguresthanIeverhave,"GustavoGomezLopez,BancoLatino's
presidentuntilthreeweeksbeforethefall,wroteinMarchinastatementdefending
himselfagainstchargesoffraud,criminalconspiracyandundueappropriation.
Photos:DemonstratorsinCaracas,Venezuela,onMarch16urgedtheGovernmentto
reopenBancoLatino.Anemergencylawretroactivelyraiseddepositors'insurance
coverageandthebankreopenedinApril.(AssociatedPressforTheNewYorkTimes)
BankfailuresinVenezuelasinceJanuaryhaveputhalfoftheindustryinthehandsofthe
GovernmentNationalGuardmemberswerepostedatBankoLatinoinCaracas,padlocked
byauthoritiesonJan.14.(AssociatesPress)(pg.D3)
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