Headline: Bankers accused of dirty tricks in Argentina Source: euromoney.com Date: January 28 2002 Author: Jules Evans <http://www.euromoney.com/public/markets/banking/news/30jan02-1.html>
Some of the most senior members of Argentina's financial community, as well as several foreign investment banks, are facing judicial investigations into accusations of financial wrong-doing in Buenos Aires.
Among those facing judicial investigations are Domingo Cavallo, former minister of the economy; his deputy minister, Daniel Marx; the seven investment banks which managed Cavallo's mega-swap in June 2001; and the Rohm brothers, chairmen of Banco General de Negocios [1] and two of the most powerful financiers in Argentina.
Cavallo, Marx and the seven investment banks involved in the mega-swap are facing accusations that the swap was illegal, and that the terms of the swap were manipulated to benefit the banks involved. The Rohm brothers have been arrested for illegally taking money out of the country in December.
When combined with the charges of corruption being pressed against former-president Carlos Menem, the new charges represent a serious condemnation of the financial probity of a whole regime and those who profited from it.
Domingo Cavallo was President Menem's foreign minister and then minister of the economy from 1991 to 1996. He returned to office under President de la Rua in April 2001, in a bid to rescue the economy from the debt crisis built up in the years under Menem.
The day he returned to office, Cavallo discussed the possibility of a debt swap with his friend David Mulford [2], chairman of CSFB International. Half an hour after discussing it, they had assembled the other managers for the deal - JP Morgan Chase, BSCH, Banco De Galicia, Banco Frances, SSSB and HSBC.
In June 2001, the seven banks undertook one of the largest debt swaps ever - the so-called mega-swap, in which $29.5 billion of old Argentine government bonds were swapped for new bonds. The swap was declared a success by the capital markets, though academics said it did not make sense for a country coping with a debt crisis to make itself more indebted. Mohammad El-Erian, head of emerging market debt at the US fund manager Pimco, and a former IMF adviser, says: "The mega-exchange was unfortunate, because it didn't take into account the longer-term interests of the country." El-Erian thinks the debt swap may have even accelerated Argentina's default.
Some bankers say Argentina should have declared a moratorium on its debt. Other bankers were critical of the 0.55% commission charged by the lead-managers, which amounted to a total fee of around $125 million.
However, the judicial charges brought by members of the Argentine house of deputies allege that, these reservations about the swap aside, the lead-managers were also sold new bonds at discount rates which were not approved by the Argentine parliament.
According to the accusation filed by deputy Mario Cafiero to the Argentine federal court, Cavallo and other government officials met with representatives of the seven investment banks in a meeting on Saturday June 2. In this meeting, according to the court accusation, the price terms of the swap were altered - the price of the old government bonds was raised, and the price of the new government bonds was lowered. This gave the lead managers of the deal a total profit of around $150 million, according to the court accusation. This was in addition to the official commission. While the official terms of the swap were approved by the Argentine government, the accusation says that these separate terms were not approved and so are illegal.
None of the banks commented on the record, but one spokesman claimed that political enemies of Cavallo are behind the accusations. Cavallo himself has told Argentine press that the documents in the investigation are false and that the investigation aims to destabilize the economy. He and Daniel Marx are expected to appear in court in front of Judge Ballestro in the next few days.
Also facing accusations of corruption are Jose and Carlos Rohm, chairmen of Banco General de Negocios, a bank which played a crucial role in the liberalization of the national economy under Menem's presidency. A judicial investigation is looking into allegations that the Rohm brothers helped ship around $30 million out of the country in December 2001. Carlos Rohm was arrested last week boarding a plane to Switzerland. Jose 'Puchi' Rohm has yet to be apprehended but is thought to be in the US.
The accusations against the Rohm brothers are a further embarrassment for the international banking community, on top of the investigation into the mega-swap, which they are accused of helping to arrange. On the board of the Rohm's bank, Banco General de Negocios, is William Harrison junior, CEO of JP Morgan Chase, and David Mulford of CSFB. The Rohm brothers are very well-connected internationally - they are friends of Carlos Menem, Henry Kissinger, David Mulford, and George Bush senior. Jose Rohm is on the advisory council of David Rockefeller's Americas Society [3].
The charges against Menem and his regime are also another embarrassment for the Bush family, already hit by links to the unfolding Enron scandal. Mulford was Bush senior's under-secretary of the treasury, responsible for the implementation of the Brady debt plan in Latin America in the early 1990s. Bush senior himself had very close links with the Menem regime. He visited Menem eight times during and after his presidency. Menem was a frequent guest of the Bush family. When he was awarded an honorary degree by the University of Houston, Bush introduced him to the audience as a "visionary". Menem was the only Latin American politician to attend George W. Bush's inauguration. Neil Bush, brother of George W. Bush, has also stayed with Menem in Argentina.
Friends of Bush and members of his administration have clearly done well from Menem and Cavallo's rapid programme of privatization. A close friend of the Bush family - Tom Hicks - who was one of the largest donors to Bush junior's presidential campaign, ran a company called Citicorp Equity Investment (CEI) which for a time was the most active private equity firm in Argentina's telecom and media industries. One of the partners in the firm, Raul Moneta, has since been accused of money laundering by a US senate investigation [4], though he has yet to face official charges. Moneta's bank is also accused of laundering millions of dollars in bribes made by IBM to the Rohm brothers' bank in the IBM-BGN scandal of 1994. Moneta's activities with CEI are detailed in the report's supplementary case histories [5].
The woman behind many of the charges and the investigations that led to them is Elisa Carrio [6], leader of the ARI opposition party in Argentina, and one of the most popular politicians in the country. Carrio, a 44-year-old mother of four, affectionately nicknamed 'La Gorda' (the fat one) by her followers, has led an anti-corruption investigation into the Menem government for several years.
It was Carrio and fellow deputy Gustavo Gutierrez's investigation into money laundering that brought down the former governor of the Central Bank of Argentina, Pedro Pou, in 2001. Carrio and Gutierrez, brought their findings to the US senate, which used them for one of the biggest investigations into money laundering ever in 2001.
It was also partly through her findings of electronic transfers of money that Carlos Menem was arrested for illegal arms sales to Ecuador and Croatia. Menem claimed the US knew about the arms sales to Croatia, which the US denies. Menem now faces accusations that he transferred to a Swiss bank account a $10 million bribe made by Middle-Eastern terrorist organizations to cover up a bombing of a Jewish centre in Argentina in 1994, which killed 84 people. The Swiss judiciary is investigating the charges, which Menem denies.
Menem is also facing a judicial investigation based on accusations made by Carrio that 80% of the money which put him in the presidency was from Gaith Pharaon, the Saudi billionaire and one-time partner of the Bank of Credit and Commerce International, the Arab bank which was engulfed in scandals and law suits in 1991. BCCI has since been identified by the US senate banking committee as having been an important link in the financing network of Osama bin Laden. The link to Pharaon and BCCI will be another embarrassment for the Bushes - BCCI had many close links to the Bush family. As the Wall Street Journal has noted, there are "numerous links among Harken [a Texan energy company of which Bush junior was a director and major share-holder] ... and individuals close to the Bank of Credit and Commerce International". The links of various Bush government officials and family members to the emerging scandal in Argentina are potentially more embarrassing than the links of the present Bush government to the Enron affair.
It is possible to dismiss Carrio and her party as politically motivated enemies of Cavallo et al. Supporters of Cavallo and Menem claim the Argentine economy could have recovered by now were it not for the destabilizing influence of her party's investigations on the economy.
However, Cavallo was happy to use Carrio's money laundering investigation to topple Pedro Pou, the former governor of the Central Bank of Argentina, when Pou opposed Cavallo's proposed changes to the currency regime in 2001. And the US senate sub-committee upheld and incorporated her findings on money laundering into their own report.
If the many different charges are upheld in court, they pose grave questions not only on Menem's regime, but of the wisdom of the policy of rapid economic liberalization at any cost which Menem pursued, and the support of this policy by the IMF, various neo-liberal economists and international banks. Both Menem and Cavallo were until very recently firmly supported by the IMF, who used the Argentine regime's whole-hearted embrace of the capital markets as an example to other developing countries. As Horst Koehler, head of the IMF, said last week, the current predicament of Argentina's economy is a "failure" for the IMF and the international financial community. Koelher said: "We did not pay enough attention to the drifting in the policies of Menem."
The danger apparent in the case of Argentina is that too hasty liberalization of developing economies, if carried out in the absence of sound and transparent institutions or government, can encourage corruption, bribery, capital flight, money laundering, profit for a handful of well-connected bankers and international banks, and loss for ordinary people.
The presence of foreign banks do not necessarily improve the functioning of this process, as has been argued by some neo-liberal economists - on the contrary foreign banks are often well-positioned to enable capital flight and money laundering, and to profit from the mandates from excessive government borrowing and over-hasty sell-offs of state assets.
The role of many ex-public servants in using the influence and contacts made while in public office must also be scrutinized, if only to dispel the perception of crony capitalism. Likewise, the wide-spread support by governments and multi-laterals for Menem and Cavallo is cause for concern - the policy of rapid liberalization and privatization which Menem and Cavallo pursued obviously profited foreign business interests. It is less obvious that it benefited the people of Argentina.
Mario Cafiero, the deputy bringing the charges against Cavallo and the seven investment banks, sums it up: "Argentina was a chicken that laid golden eggs for the foreign banks. But the reality is that Argentina has defaulted and is in serious trouble. The chicken has finally died."
Links: [1] <http://www.bancobgn.com> [2] <http://www.csfb.com/news/html/1997/february_19_1997.shtml> [3] <http://www.americas-society.org/as/about/chairman_adv_councl.html> [4] <http://www.senate.gov/~gov_affairs/psi_finalreport.pdf> [5] <http://www.senate.gov/~gov_affairs/022801_psi_case_contents.htm> [6] <http://www.elisacarrio.com.ar>