Global Crisis

Afghanistan's "Too Big to Fail" Bank Is Failing --

Posted on Monday, February 7, 2011

Guess Our System Doesn't Work There, Either
The collapse of Afghanistan's largest bank will seem familiar to Americans, and so will the upcoming reports of its bailout. We've heard the story before: Unheeded warnings. Lax (or nonexistent) law enforcement. An American auditor who said nothing as the books imploded. Sloppy, reckless, and greedy lending. Politicians in bed with banks. And a corporate crime wave led by bankers who can break the law with impunity, knowing they won't be punished even if they're caught.
The Kabul Bank story is a sad inversion of nation-building. It might have provided some moments of black humor for the recession-ravaged middle class, if only Americans and Afghans weren't paying for it with their lives. We promised to teach the Afghans everything we know about running a modern economy.
Apparently we did.
Exporting hypocrisy

The financial collapse of 2008 discredited an economic philosophy which had dominated both political parties for decades. That philosophy created a toxic cocktail of deregulation, ineffective oversight, concentrated wealth, and incentives to cheat. The end result cost the economy trillions in lost wealth, ongoing hardship for tens of millions of people, and a bailout whose true cost is still being hidden from the public. And what did we learn from all of that?
Not very much, judging by the evidence. The list of institutions advising the Afghans includes the US Treasury Department and the Department of Justice -- both of whom have, shall we say, underperformed when it comes to regulating banks and prosecuting financial crimes. And the consulting group that was awarded nearly $100 million to help the Afghans develop sound financial practices went bankrupt in the middle of its assignment. That's right -- bankrupt.
But the source of our failure in Afghanistan isn't in the government's choice of advisors or its failure to manage its developmental efforts properly, as harmful as those things have been. The real problems in Afghanistan are philosophical, not managerial, and they're the same ones that have plagued us at home: a continued belief in failed economic theories; indifference or hostility toward regulation and regulatory agencies; a too-cozy relationship between banks and politicians; and, worst of all, the willingness to tolerate (and therefore condone) a list of bank crimes that includes fraud, forgery, and laundering drug money.
"Thin Tightrope"
Cables released by WikiLeaks reveal that U.S. Ambassador Karl Eikenberry considered it necessary to walk a "thin tightrope" when working with corrupt officials. The cable indicated that Eikenberry collaborated with an "allegedly corrupt official because he could serve as a "stabilizing... force" (militarily, in this case.) This official's "illicit (drug) trafficking" was not to be tolerated in the interests of security.
That philosophy extended to banking, where the now-failing Kabul Bank and other banks were widely understood to be helping Afghans get illicit drug money out of the country. Kabul Bank is no different from Wells Fargo, either in its willingness to handle drug money or its apparent impunity from the law. As Bloomberg News originally reported, Wells Fargo's internal screening unit repeatedly turned a blind eye to money laundering on behalf of mass-murdering Mexican drug cartels.
Regarding these drug laundering charges,Bloomberg reported that "no big U.S. bank -- Wells Fargo included -- has ever been indicted. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again." As Bloomberg explains, "Large banks are protected from indictments by a variant of the too-big-to-fail theory."
In other words, once a bank is big enough to pose a threat to the economy it receives effective immunity for past and future criminal behavior -- a license to commit crime. Yet "too big to fail" provisions were removed from last year's US financial reform law by lawmakers on Capitol Hill whose own favorite investments included Bank of America, Goldman Sachs, and JPMorgan Chase. And Afghanistan's largest bank, a corrupt collaboration between its president and the bank's principal owners, grew large enough to become a "systemic risk" to the nation's economy... as our own government stood and watched.
Meanwhile, here at home, corporate lawbreakers like Bank of America, Wells Fargo, Goldman Sachs, and JPMorgan Chase are apparently still considered a "stabilizing force."
Too big to fail
As the New York Times reported this week:
Fraud and mismanagement at Afghanistan's largest bank have resulted in potential losses of as much as $900 million -- three times previous estimates -- heightening concerns that the bank could collapse and trigger a broad financial panic in Afghanistan, according to American, European and Afghan officials.

The extent of these losses make it clear that keeping the bank afloat -- something the government has said it is determined to do -- would require large infusions of cash from an already strained budget.
The crisis was a long time coming. As the Times reported last September, Afghan President Hamid Kharzai has family ties and a personal financial interest in the bank, and agreed to bring the brother of one of the bank's principals into the government as his Vice Presidential running mate. (But then, American Administrations from both parties (including the current one) have hired a string of senior bank officials and watched others leave government to join big banks -- not as egregious, perhaps, but a clear conflict of interest.)
If an institution is allowed to become "too big to fail," it's rarely an accident. The corruption has already taken place somewhere along the line.

Austerity and Deregulation
We're told that Deloitte, the auditor in place at Kabul Bank, was not specifically tasked with reviewing its accounts. Deloitte apparently acquired the contract when it purchased BearingPoint, the consulting firm that went bankrupt. But unless there are more contracts being awarded than have been widely reported, the original BearingPoint contract (worth a reported $98 million) was designed to help banks "improve economic governance." There were reports as far back as 2005 that some of the consultants on the project were "subpar" and that US contractors were receiving widespread criticism locally.
BearingPoint has promoted a privatization-oriented approach during its richly (and, let's not forget, publicly) funded tenure in Afghanistan, as it has in other countries. The firm and its successor unit within Deloitte have done some good work, but remain part of a well-paid consultant nexus that emphasizes the same set of shared values that undermined the US economy. In other words, BearingPoint and like-minded vendors have been faithful in the execution of an austerity-minded philosophy -- a philosophy that can sometimes become anti-government in many ways, and whose philosophy of "austerity" rarely extends to its own practitioners.
The Afghan Research and Evaluation unit, a group set up by the international aid community in Afghanistan, assessed Afghan aid as follows:
"Consistent with the current consensus on development held by the donor community and international financial institutions (IFIs), the privatisation process has gained increased momentum in Afghanistan ... Fifty four fully state-owned enterprises (SOEs) have been slated for privatisation as going concerns or through liquidation by the end of 2009."
In BearingPoint's case, their sympathy for this downsizing-government approach isn't surprising. Alice Rivlin, the economist best-known for relentlessly advocated Social Security cuts, was a member of the Board and the company's leading economic figure -- before it went bankrupt.
They say they weren't doing the bank's books. But if they were there to "improve the economic governance" of Kabul Bank, an institution whose misdeeds were well-known and whose implosion could topple the economy, then it's certainly fair to say that their work has been "subpar."
Toxic Assets
A report commissioned by the International Monetary Fund got the problems right. "As of March 2008," the report noted, "the two largest domestic private banks accounted for almost 50 percent of total banking system assets. The combined loans of these two banks were 70 percent of total commercial bank lending."
The mayor of Kabul was indicted by the Afghan government on corruption charges, but U.S. officials wound his explanation credible: He was arrested by corrupt officials after he exposed their own misdeeds. Specifically, he told officials that he found files for more than 30,000 applicants who paid for "nonexistent plots of land in Kabul." These toxic assets were part of a larger get-rich-quick schemes for officials who apparently found his investigations inconvenient.
The IMF report also included this observation: "Most banks did not attach particular importance to analysis of borrowers' balance sheets, cash flow, or business plans." That kind of lax underwriting will be familiar to observers of American lending practices. The report also noted, somewhat laconically, that "banks that lend extensively domestically engage in extra-judicial, non-traditional contract enforcement."
Extra-judicial? As in illegal? It sounds like we've exported foreclosure fraud, too.
Do as we say, not as we do
The procurement process for USAID projects in Afghanistan seems to be a mess. Sen. McCaskill was surprised to learn that major contractors there were not being asked to file the usual tracking reports. The Obama Administration was criticized for awarding a major contract to a Democratic party donor, and for using the "no-bid" process it has criticized in the election campaign to do it.
After Kabul Bank's impending failure was reported, the US government insisted that the Times update its story to include a quote from a Treasury Department spokesperson saying that "no American taxpayer funds will be used to prop up Kabul Bank." But that doesn't have any more credibility than Treasury Department claims that bank bailouts in this country have been fully repaid -- a claim that doesn't count aid funneled through the Federal Reserve, the cash value of low- and zero-interest bank loans, and other taxpayer-funded measures.
Ninety percent of Afghanistan's national budget was financed by foreign countries last year, with the US assuming a significant chunk of the cost. When the Afghans conduct their first bank bailout, under United States supervision, the funds will undoubtedly come from the Afghan treasury. And then funds from ours will help make up the shortfall elsewhere.
Yes, corruption among politicians and other officials is a much greater problem there. They're a drug-based economy whose principal export is poppies. Their country is divided, impoverished, and largely illiterate. But economic behavior is universal. Their bankers are subject to the same "moral hazard" as bankers everywhere: When "too big to fail" banks can gamble with absolute certainty that they'll be rescued, that's exactly what they'll do. When bankers know they can commit crimes go unpunished, they'll commit crimes. And they won't stop until people start going to jail -- in both countries.
"You complete me ..."
A jargon-laden report from the Congressional Research Service addressed what it called "ROL," an acronym that stands for the "rule of law," and concluded:
"Helping Afghanistan build its justice sector ... suffers from the same difficulties that have complicated all efforts to expand and reform governance in that country: lack of trained human capital; traditional affiliation patterns that undermine the professionalism, neutrality, and impartiality of official institutions; and complications from the broader lack of security and stability in Afghanistan."
In other words, they're saying that Afghans are too tribal and primitive to do things the American way. But that's not true. Yes, education and training is needed. But their lack of law enforcement, especially in the financial sector, directly reflects the level of emphasis we've placed on it ourselves -- in their country and here at home. We've lavishly funded privatization efforts and the unrestrained growth of private and morally corrupt banks, while at the same time devaluing the role of regulation and law enforcement.
The problem with the Afghans isn't that they're not like us. The problem is that we're too much alike. People everywhere are, pretty much, especially where money's concerned. So until we change the way we govern, the results are likely to be the same wherever we go. Crimes will still be committed, banks will still fail, and we'll all keep paying the price for a moral, legal, and economic blindness that keeps leading us off the same cliff over and over again.

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