Too Corrupt To Fail [Updated]

After nine years of work, $330 Billion in treasure, and nearly 1,300 American fatalities, bankers might ultimately do in Afghanistan what the Taliban could never accomplish.

Even as it battles a resurgent and spreading Taliban, the beleaguered government of Afghan President Hamid Karzai is facing a more immediate threat: a run on the country’s largest banks.
This week, droves of depositors rushed offices of Afghanistan’s Kabul Bank, pulling out their money amid concerns that bank has lost millions of dollars. BBC News broadcast images of Hummers and SUV’s racing to the bank, a troubling sign of growing mistrust for Mr. Karzai’s already heavily criticized government.

Something in the neighborhood of $200 to $300 million in deposits have been withdrawn in just a couple days, about half of all the bank's assets. If the stampede continues for just a few more days the bank will fail.

So why is this important? Because the Kabul Bank is what the government uses to pay its teachers, police, and soldiers.

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“I have $15,000 deposited and now they are telling me they are out of money, and I was able to take only $1,000.”
- Haji Tamim Sohraby

The fallout from Kabul Bank's problems could extend beyond the economy. The Post reported Thursday that "an unchecked run on Kabul Bank, which could spread alarm to other banks, would jeopardize not only depositors' savings but President Obama's Afghan strategy, which is built around efforts to rally the public against the Taliban."

American officials, security analysts, and Afghan businessmen also see it as a security threat....

“If this goes on, we won’t survive,” Khalilullah Frozi, one of the two largest shareholders of Kabul Bank, told The New York Times. “If people lose trust in the banks, there will be a revolution in the financial system.”

The bank run began on August 31 when the Central Bank of Afghanistan moved to take over Kabul Bank. Two top executives were then forced out.
The reason for the move was simple and clear.

The Wall Street Journal, in a follow-up, described “a massive portfolio of off-the-books loans by the bank’s chairman to himself and to other politically connected Afghans.” The bank has also, according to the Journal, used hawala, a less-than-regulated money-exchange system, “to clandestinely transfer almost $1 billion out of Afghanistan in the past few years.” It was mixed up with New Ansari, a firm that, as the Journal put it, “allegedly helped Afghan politicians, drug barons and even the Taliban move billions of dollars out of the country.” (Karzai recently intervened to get one of his aides, who was accused of taking a bribe to stop an investigation of Al Ansari, out of jail.)

The bank has been used to funnel campaign contributions to Karsai's presidential campaigns. As this chart shows, the bank and Karsai's inner circle are practically one and the same.
And that's a big problem, considering just how corrupt the bank is.

Farnood and Fruzi, who are also among the banks' top shareholders, helped themselves to loans for real estate ventures - which both men defended as solid investments.
Farnood used about $160 million from the bank's coffers to buy 16 seafront properties and two towers under construction in Dubai, where the real estate market has fluctuated wildly in recent years.
Fruzi, Farnood and fellow bank shareholder Mahmoud Karzai, a brother of the Afghan president, have been occupying three of the Dubai villas rent-free. Other residents at the Palm Jumeirah villas are politically connected Afghans. The properties are registered to Farnood and his wife - not the bank.

If these loans sound vaguely familiar to should, they should. It is roughly similar to the “Friends of Angelo” Mozillo mortgage scheme that Countrywide gave U.S. Congressmen just a few years ago.
It appears that the Afghani bankers learned a great deal from our bankers.

To the rescue

A banking scandal involving massive corruption. What is a government to do, except to prevent reforms at all cost?

Officials in Afghanistan are resisting US pressure for a wide-ranging clean-up of Kabul Bank, which is mired in allegations of corruption that have engulfed some of the wealthiest and most powerful people in the country.

The answer, of course, is to bail out the politically-connected thieves. And who else is more willing and eager to bail out thieves than the American taxpayer?

In a bid to fend off the threat of a nationwide financial crisis, the Afghan and United States governments tentatively agreed Saturday to bail out Afghanistan’s largest bank, according to Afghan and American officials.

Details of the deal, including how much each government would contribute, were still being worked out on Saturday between the Central Bank of Afghanistan and the United States Treasury Department, officials said.

Meanwhile, thousands of nervous Afghan depositors, unaware of the bailout and unconvinced of the bank’s solvency, stampeded the central branch of the beleaguered Kabul Bank to withdraw their savings. But the teller drawers were largely empty and most customers left empty-handed.

“America could support Kabul Bank to the last penny. The full faith and credit of the U.S. government behind the Kabul Bank–what more could you want?”
- Mahmood Karzai, the Afghan president’s brother and largest bank investor

In a news conference, President Karzai has said that all deposits will be guaranteed at the bank. Karzai blamed the western media for the crisis. He then went on to make a statement aimed at reassuring the financial sector, but sounds more disturbing than anything else written about the crisis.

“Even if the whole financial system in Afghanistan collapses, we have enough money to support it,” he said.

Uh, yeah. That makes me feel all warm and fuzzy. Not.

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Comments

unbelievable

I'm so glad you covered this. Absolute outrage and yet again Americans are supposed to pay their money for someone else's outright theft. With government like this, is anyone surprised at a rise in popularity like the tea party? Seems like the two parties in the U.S. are really playing swing set. Nothing changes but the two of them saying "it's my turn".

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Blackwater, shell companies

What a surprise, Blackwater created 30 shell companies in order to get millions of government money under the radar.

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Afgan Bank Bail out approved US will give funds

The money has already been approved by the feds. Just proves the American voter means nothing to any party. They will continue to do as they please. Didn't Obama say yesterday No plans to help bank, will just send regulators.Go to the New York Times today and find out how the people of America's views are really regarded by our elected officials.. Here is the start of the article:
New York Times
Asia Pacific

U.S. to Help Bail Out Afghan Bank to Avert a Crisis
S. Sabawoon/European Pressphoto Agency

Afghans in Kabul lined up Saturday to withdraw their savings from Kabul Bank amid fears of the bank's imminent collapse.
By ADAM B. ELLICK
Published: September 4, 2010

KABUL, Afghanistan — In a bid to fend off the threat of a nationwide financial crisis, the Afghan and United States governments tentatively agreed Saturday to bail out Afghanistan’s largest bank, according to Afghan and American officials.

Details of the deal, including how much each government would contribute, were still being worked out on Saturday between the Central Bank of Afghanistan and the United States Treasury Department, officials said.

Meanwhile, thousands of nervous Afghan depositors, unaware of the bailout and unconvinced of the bank’s solvency, stampeded the central branch of the beleaguered Kabul Bank to withdraw their savings. But the teller drawers were largely empty and most customers left empty-handed.

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Normally I don't do updates

But the fact that America is now bailing out Afghanistan banks that won't reform and are deeply corrupt, I had to update the essay.

[snark]No moral hazard here! [/snark]

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corruption

the corruption is so bad, they don't seem to bother to hide it much anymore.

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Colonial Bancorp $1 Billion UnderWater

The FDIC has to be getting funds from somewhere to be covering these losses.

Whatever happened to the missing $200 billion in cash that was airlifted to Iraq and then went missing? They used one of those cargo planes normally used for moving heavy equipment.

No real Fed audit, the list goes on.

Who owns and controls the Fed? It's a quasi corp with shareholders - Are they all US banks? I used to think all that was just pie in the sky BS, now I believe there is really something there. Not enough time to push that in anyone's lifetime.

Have to love how they say no taxpayer money is being used to support Kabul Bank. Sure they are just printing some Deutschmarks instead of dollars this month.

I'm still expecting to be seeing $100 small pizzas in the not too distant future.

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good question

We haven't written up a FDIC deposit insurance fund report lately, but the Fed, as far as I know, still has ~$2 trillion out to banks.

If you're up for doing one of these accounting posts, feel free. It's a lot of work though, need to make sure the numbers are accurate.

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