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Tuesday, March 8, 2011

PDVSA, its Pension Funds and the SEC freezing a US Investment Fund « The Devil’s Excrement

PDVSA, its Pension Funds and the SEC freezing a US Investment Fund

This post dedicated to Setty. My friend, if this stuff was fiction, nobody would believe it…

I will not bore you with the details, Setty has done an outstanding job in covering (and uncovering!) them, but basically a fund in the US, a very capitalistic hedge-like fund, is halted from operations by the SEC. It turns out that 90% of the money in the fund is money from PDVSA's employee pensions funds. Then, it turns out that the fund was involved in illegal foreign exchange operations. But with whose money?  PDVSA or the PDVSA pension funds? And when the investment funds are stopped from functioning, two private companies in which the funds invested (the very reason for the SEC intervening) need money that was coming to them, but the money is trapped in the funds.

Who comes to the rescue?

None other than PDVSA, who is willing to "help" on demand, just like that

So, what gives?

The funds are managed by a Venezuelan, Francisco Illaramendi, who acted as an adviser to PDVSA in the past. But these days, he seems to be a vehicle for PDVSA acting. Except that initially PDVSA was hiding behind its pension funds. Or so it seems.

This leads me to ask a simple question: Who was PDVSA acting for, the funds or PDVSA? Who made money from the deals, PDVSA or its employee funds? Why did the funds invest in a company developing small nuclear reactors? Was Illaramendi simply acting on PDVSA's orders? How was he being paid? (Other than getting US$ 482 million into his funds)

The funny (not funny ha, ha, just weird) thing is that Minister Ramirez said last week in the National Assembly that PDVSA had nothing to do with the managing of the funds. Union workers and pensioners say they have seen no information on how the funds are managed for years, ever since PDVSA's Treasury Depratment took over its management.

And Ramirez looked very uncomfortable answering these questions. And he should. What the funds/or PDVSA/or Illaramendi were doing was simply illegal in Venezuela and the details of the flow of money could be even more illegal.

But nobody knows. Nobody answers, nobody says anything. Nobody questions it. The Comptroller is nowhere to be seen. Ditto the Prosecutor.

But this memo from the fund's lawyer shown by Setty is simply priceless, almost as good as a suitcase with $800,000 in cash, opened at customs in a Buenos Aires airport.

It reads:

"As MKG has indicated, in order for STLF (Short Term Liquidity Fund) to conduct Venezuelan currency transactions in the permuta market, it must furnish its own Bolivars…"

Except the permuta market has been illegal since May, so what the hell is this lawyer talking about?

but then, this same memo, dated Jan. 04th. of this year says:

"MKG has stated that the Bolivar providers need to be paid, in no small part to assure that they will be willing participants to future transactions requiring Bolivars"

This says, we have been involved in transactions which are illegal in Venezuela and need to pay our counterparties in order to keep participating in them.

And PDVSA was right in the middle of things. And this is all managed from PDVSA's Treasury Department and PDVSA's pension fund contributed 90% of the money to the investment fund.

Not clear enough for you? How about:

"STLF purchased Bolivars from non-US participants at an agreed exchange rate, to be paid at this point in the transactions"

Jeez, last year in May, the Chavez Government shut down 46 brokers and jailed people who were doing legal transactions and banned currency exchange transactions and these guys are doing them now, with PDVSA money to boot?

As far as I know, the only country that trades and accepts Bolivars is Venezuela, where any of these transactions is illegal. Where do these Bolivars flow? In Belaruss? Or Zimbawe? Or is it Lybia? I bet it is more likely to be in Caracas.

And PDVSA is in the middle of all this?

No wonder Ramirez and Giordani talked openly about lowering the parallel market! They are apparently running it!

The revolution never ceases to amaze me!

(P.S. And don't forget, these same funds invested US$ 1.15 billion dollars in the PDVSA 2017 bond earlier this year. Add it up: US$ 1.15 billion plus 482 billion is 1.632 billion. How much money do these funds have? Is this the revolutionary idea of "diversification"?)

This entry was posted on  March 1, 2011 at 10:52 pm  and is filed under Venezuela.

Page 2 of 2

Two years ago, I wrote a careful post on the health of the Venezuelan Central Bank entitled: Central Bank Musings: Printing Money and going bankrupt. I spent a few days working on it because I wanted to explain to the non-expert what the balance sheet of a Central Bank looks like. I remember this quite well, because I was sitting on another story, the Stanford Bank story, as Alex Dalmady had written his now famous "Duck tales", but I kept putting it off to devote time to my Central Bank post which barely generated a beep, while the Stanford story was one of the biggest ones ever covered by this blog. But the story of the financial state of the Venezuelan Central Bank, may one day be bigger.

Some of you may want to look back at that post now, because things are much worse than they were then. That is why a group of 26 Economists a week ago published this open letter to the Board of the Venezuelan Central Bank (BCV), asking ten very simple questions:

1.- Can you explain how it is possible that an asset that has been transferred from the BCV to Development Fund (Fonden), in this case US$ 39 billion in international reserves, continues to be reflected simultaneously in the balance sheet of both the BCV and Fonden as an asset? Is this consistent with the generally accepted  accounting rules?

2.- Could you make public the detailed methodology in the calculation of what you call "an adequate level of international reserves"?

3.- Why is it that the BCV has stopped publishing, for more than a year now, the table with the monetary base according to its different sources, where one would be able to appreciate the main factors of primary money creation by the BCV?

4.- Since 2004, there has been an item in the equity of the BCV denominated "adequate level of international reserves" which subtracts Bs. 9.186 billion (US$ 2.136 billion) to the overall equity. At the close of December 31st. there is in the assets of the BCV an account denominated "diverse assets in national currency" (Note 12 in the balance sheet) under the concept "adequate level of reserves" for Bs. 61.155 billion (US$ 14.222 billion). Shouldn't this account be subtracted from the equity of the BCV in order to be coherent?

5.- Article 5 of the Central Bank law establishes that "the fundamental objective of the Venezuelan Central Bank is to achieve price stability and preserve the value of the currency". Since the primary obligation of the BCV is the control of inflation, how do you explain that we have the world's highest level of inflation?

6.- Can you explain why the backing of monetary issuance (International Reserves/M2) has deteriorated by 111%? Such backing was US$ 0.10 for each Bolivar in 2010, when in 1999 it was US$ 1.21 for each Bs.

7.- On July 20th. 2005, the account "Funds transferred to Fonden" was created in the amount of Bs. 12.453 billion (US$ 2.896 billion), which according to Note 11 of the balance sheet of the BCV had to be amortized by creating voluntary reserves. Why is it that after five years, this has yet to be amortized?

8.- What is the  content of of the item "Diverse assets in national currency", noted in Note 12 of the balance sheet of the BCV? What are these so called financial instruments in the amount of Bs. 15.05 billion (US$ 3.5 billion)?

9.- What was the economic cost of the monetary reconversion?

10.- What have been the benefits to the citizens of the creation of the strong Bolivar, since its introduction on January 1st. 2008?

The country demands sincere answers

This entry was posted on  March 2, 2011 at 11:22 pm  and is filed under Uncategorized.

1 comment:

  1. This is the same Modus Operandi as when the Venezuelan ministry of technology provided the seed money for a small software startup that had a residence in Florida as an address. That software company coincidentally ended up getting the contract from Smartmatic to be used in their election machines. Smartmatic, also a startup at te time, coincidentally got the contract to run the Venezuelan elections. The rest is history.


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