President Promises "No Problem" Ordering State Takeover of Banks

Late last month, President Hugo Chavez threatened to nationalize Venezuelan banks that had violated banking regulations. "Do you want me to nationalize the banks," he demanded in his weekly radio and television program entitled Alo Presidente? The Venezuelan banking sector had approximately 248 billion bolivars ($115.5 billion) in deposits spread out amongst 50 banking institutions both privately-owned and state-operated at the end of October 2009, according to Softline Consultores, a banking consulting firm in Caracas, Venezuela.

President Chavez stated that he would do whatever was necessary to prevent irregularities amid a scandal that has already prompted the Venezuelan government to take over management of four private Venezuelan banks. The four banks are Banco Confederado SA, Banco Canarias de Venezuela CA, Banco ProVivienda a/k/a Banpro Banco Universal, and Bolivar Banco CA, which collectively account for approximately 6% of Venezuela's banking sector. This month the Venezuelan government took over four additional banks, which brings the total nationalized banks to eight, and their collective deposits represents 9% of the Venezuelan banking sector.

Last week, the Venezuelan government closed down and will nationalize the eighth banking institution in less than three weeks in a growing government intervention to control fraud and greed in the Venezuelan banking sector. A state-run banking agency has appointed officials to oversee operations of the banks. The Venezuelan National Banking Council and the Venezuelan Banking Association, both privately operated entities, have voiced their support for the government’s takeover, saying the initiative is aimed at protecting depositors.

The four private banks that were nationalized last month were all purchased in September and October 2009 by a group of investors headed by Ricardo Fernandez Barrueco, who is involved in the food industry and sells products to a network of state-run subsidized food markets known as Mercal. Allegations amongst banking officials and private bank owners include widespread violations that have allegedly led to Venezuela’s financial problems. Banking officials, private bank owners, and in certain cases their attorneys have been arrested and jailed on charges of misappropriating or assisting to misappropriate deposits, failing to meet lending targets, making unauthorized share transactions and diverting deposits by providing loans to other businesses in which bank owners were investors. Apparently, corporate governance fiduciary duties which prohibit directors and controlling shareholders from engaging in transactions, in which there would be a conflict of interest or self-dealing, were not of paramount concern.

Additionally, Venezuelan Attorney General Luisa Ortega Diaz has barred 16 bank executives from leaving Venezuela. President Chavez has sent a very strong warning to the Venezuelan private banking sector, “[t]o all private bankers in the country, he who slips, loses, independent of the size of the bank.” As a result, at least 10 people have been jailed, including the recently dismissed president of the Venezuelan National Securities Commission, Antonio Marquez Sanchez. Mr. Sanchez allegedly allowed a transfer of bank shares on the Caracas Stock Exchange without approval from the Venezuelan banking regulatory agency. In particular, Mr. Marquez authorized a transfer of Banco Canarias shares (one of the private banks that was nationalized in November) to another bank, Banco ProVivienda (BanPro) (another private bank that was nationalized in November). Venezuelan securities and banking authorities stated that BanPro owner Barrueco, was arrested last month for fraud because he illegally used depositor funds to purchase Canarias bank.

Earlier this year, President Chavez purchased Banco de Venezuela, a unit of Spain based Banco Santander SA, for $1.05 billion to expand the Venezuelan government’s presence in the banking sector. Currently, the Venezuelan government controls 21 percent of the Venezuelan banking sector. The Venezuelan banking sector would not be the first sector to be nationalized. President Chavez has ordered the nationalization of major business entities in the steel, electricity, oil, metal and cement industries. The Venezuelan government this year, has already taken control of Stanford Bank SA, Banco Comercial, and closed the local offices of Antigua based Stanford International Bank Ltd. after the majority shareholder, R. Allen Stanford, a Texan financier was accused by U.S. regulators of defrauding investors of $8 billion. Approximately $3 billion came from Venezuelan investors.

During the past ten years, President Chavez has nationalized a number of privately-owned businesses such as coffee processing plants, sugarcane mills, and cattle ranches. In part, it is these “takings” of privately operated businesses that has brought a lot criticism of President Chavez’s nationalization policy. The current scandal regarding Mr. Barrueco and the banking sector has prompted opponents of President Chavez to point to the scandal as evidence that President Chavez has failed to control corruption and cronyism involving government officials and certain individuals in the private-sector. However, the issue may go deeper than cronyism or corruption. It goes to the historical relationship between certain government officials and the often unrestrainable need to “capitalize” on their position by engaging in “private” transactions with certain members of the private sector. It is a dark dichotomy that has plagued numerous governments, including the American government, in the developmental stages of their economies from a local to global economies, and also when certain business sectors remain unregulated tradable markets that are vulnerable to speculators. President Chavez stated that "[w]e aren't here to make money." This philosophy must seem very bizarre from the perspective of capitalistic driven economies. Where the maximization of profit and aquisition of money is often the predominant focus.

President Chavez’s nationalization measures are a major cause of concern for multinational banks. At least four international banks have a very strong presence in the Venezuela banking sector, including Spain based Banco Bilbao and Vizcaya Argentaria SA, Amsterdam based ABN Amro Holding NV and U.S. based Citigroup Inc.