Foresight is one of the most important skills an executive can wield to predict the future course of events without needing a crystal ball and much less knowledge of the details of the developing situations and operations. It’s not easy and sometimes it will run counter, but the success of a company depends on foresight.
I was the president of a major bank for many years. In my early days I witnessed a previously unknown and chaotic event: Friday, February, 1983, or Black Friday. It was the first major devaluation in years, a situation that bewildered everyone.
Devaluations are never sudden; they do not unfold directly but with the “subtleties” that are governments’ trademark. International reserves drop, oil production falls, the liquidity of public spending is reduced and then a minister or senior official appears to vehemently deny that it will happen, when it is precisely the opposite.
Back then, the writing began to appear on the wall. The banks’ channel to purchase dollars was through the Central Bank. When a financial institution needed currency, it would request it of the Central Bank, which in turn would immediately sell it at Bs. 4,2925 per dollar for the commercial bank to resell it at Bs. 4,30 per $1.00. (The difference of 0075 now seems ludicrous but it was satisfactory then for the banks and their customers).
At the end of 1982 and early 1983, a major reduction in bank liquidity became obvious. There was little money in circulation and the Central Bank started to delay the remittances to foreign correspondent banks. This was the first sign of alarm. The Central Bank was lagging and I became suspicious. I instructed our exchange division to only sell the currency available in our New York correspondent bank, which would send us a telex in the morning indicating the activity of the account.
With each passing day the pressure on the dollar continued to spiral and often we didn’t have any currency to sell. The banks continued to sell currency even though they had none, and continued to trust the government. A colleague and close friend called me and said: “Oscar, you’re crazy; you’re implementing a private exchange control. Government officials are startled with your decision because the Central Bank will never halt payments.” I replied that we had made the right decision and would stick to it.
There were many pressures in those days and I have to admit that I was greatly relieved when the government declared a bank holiday to impose the exchange controls.
The Superintendence of Banks requested the financial institutions to submit an external audit indicating their holdings in dollars. I still keep ours for reference. We were the only bank that closed in the black, though it was a very small amount. Thus I prevented the bank, its directors and shareholders from experiencing the enormous difficulties and losses that the other banks faced due to the devaluation.
The purpose of this lengthy introduction is to explain my present position. Undoubtedly, the situation in 1983 was much less dire than the situation the financial system faces under the Castro-Chavez dictatorship. It is hard to imagine it because the regime has not nationalized the banks, but nevertheless it might be leading them along a path of no return.
The mandatory portfolios by sectors, such as agriculture, housing and light industries with very high percentages not only show a very unsatisfactory performance, but have an obvious chance of never getting paid. In addition, they use the issuance of government instruments in large volumes without payment provisions. To cover this, the government has maintained (and for other reasons also) enormous liquidity levels that allow banks to charge high rates and pay little or nothing, which represents some gains. However, they have created an unsolvable, monstrous problem.
Large, irregular credit portfolios that are impossible to recover weigh heavily in a recovery. If measures of a liquidity squeeze were adopted, or the economy were to be based on the dollar –both especially correct measures- the financial system would have no way out.
The situation is not financial. It’s political. Only a change of regime could protect the private property of the depositors and banks.