1) You're in the banking world in your country. You are rich and well-connected.
2) Another country decides it wants to sell its bonds to your people.
3) The bonds are in dollars, and because your country operates strict capital controls there is an enormous demand for access to dollars from banks and the general public.
But then, instead of running a transparent public auction for the whole package, the gov't says to you, "Hey dude....go and choose some banks and sell these for us will you, please?"
So suddenly you're in charge of, let's say, one point five billion dollars (yes, with a "B") in bonds, and it's you offering all this money to a bunch of banks at an exchange rate of, let's say, 2,150 to the dollar. And the banks that get their hands on these bonds will be able to sell the dollars at, let's say, 4,300 to the dollar.
Or in other words, you'd be able to offer free money to a banker. A lot of free money (if you need an analogy, offer heroin to a junkie and see what the reaction is). And because it's a non-public tendering process, nobody but nobody is going to bother you with questions or ask you why you choose to give bank X U$300m of the bonds and bank Y only U$30m worth. Think about how thankful the banks would be if you handed out a larger chunk of those sexy bonds to them. And because you manage to run the whole bonds emission smoothly, the government likes you too, and you become a powerful and influential person with the national administration.
Meet Moris Beracha, the go-to guy in Venezuela financial matters. Since 2002, Beracha has been one of the inner banking/intermediary circle that has moved from the ranks of rich to oh-my-stars rich (various luxury properties, private helicopter, stuff like that etc etc). But since previous go-to guy Eligio Cedeño got himself in a real mess last year by allegedly helping a Chávez enemy escape from prison (landing him in jail himself), Beracha has moved up to be main-man-that-matters in the Venezuelan netherworld between socialism and capitalism.
In 2007, the Argentina dollar bonds sold to Venezuelan banks and then on to the public were the responsibility of Beracha. Of course it was a little more complicated than outlined above, for one thing the Venezulan goverment piggybacked its own local currecy bonds issuance on the back of the coveted dollar bonds, but all the same it was a really, REALLY easy sell for Moris. And now that the local VEF currency has appreciated and stands at 3.6 to the dollar (equivalent to 3600 in last year's VEB currency), the whole game is a win for the guys in suits. Think about this:
- You buy a dollar for 2.15 VEF
- You sell that dollar the next day for 4.3VEF (or even more..the parallel rate went to 6.7 at one point last year)
- You then watch the VEF appreciate, and now you can buy back that dollar from the same guy you sold it to last year for 3.6VEF in the parallel market.
A small number of people becoming very rich via financial deals isn't a new story, of course. However, it does seem strange that so much money is sticking in the hands of so few people in a country where socialism is the order of the day. Also intriguing is how Beracha now has the ear of gov't finance people (being referred to as a 'consultant' to new Finance Minister Rafael Isea), at the very moment all talk is about what to do with Venezuela's fixed exchange rate.
A recent report in the London Financial Times about a possible dual currency system brought quick denials from the Finance ministry, but then Chávez himself brought the subject of exchange rates up again at his weekly Aló Presidente lovefest, saying that the fixed currency could become "more flexible", without really explaining what kind of flexibility he was talking about. Right now, this Otto is betting that whichever way they decide to jump with the fixed currency problem, it'll be something that the banking community will be prepared for.........
Moris Beracha and the Venezuelan parallel exchange rate (August 24 2008)