Part 26 (1/2)

In broad outline, there are two types of emerging solutions. One type is market oriented - and the other, interventionist. The first type calls for free markets, specially designed financial instruments (see the example of the Brady bonds) and a global ”laissez faire”

environment to solve the issue of financial crises. The second approach regards the free markets as the SOURCE of the problem, rather than its solution. It calls for domestic and where necessary international intervention and a.s.sistance in resolving financial crises.

Both approaches have their merits and both should be applied in varying combinations on a case by case basis.

Indeed, this is the greatest lesson of all:

There are NO magic bullets, final solutions, right ways and only recipes. This is a trial and error process and in war one should not limit one's a.r.s.enal. Let us employ all the weapons at our disposal to achieve the best results for everyone involved.

(Article written on August 18, 1999)

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The Shadowy World of International Finance

Strange, penumbral, characters roam the boardrooms of banks in the countries in transition. Some of them pop apparently from nowhere, others are very well connected and equipped with the most excellent introductions. They all peddle financial transaction,s which are too good to be true and often are. In the unctuously perfumed propinquity of their Mercedesed, Rolex waving entourage - the polydipsic natives dissolve in their irresistible charm and the temptations of the cash: mountainous returns on capital, effulgent profits, no collaterals, track record, or business plan required. Total security is cloyingly a.s.sured.

These Fausts roughly belong to four tribes:

The Shoppers

These are the shabby operators of the marginal shadows of the world of finance. They broker financial deals with meretricious sweat only to be rewarded their meagre, humiliated fees. Most of their deals do not materialize. The principle is very simple:

They approach a bank, a financial inst.i.tution, or a borrower and say: ”We are connected to banks or financial inst.i.tutions in the West. We can bring you money in the form of credits. But to do that - you must first express interest in getting this money. You must furnish us with a bank guarantee/promissory note/letter of intent that indicates that you desire the credit and that you are willing to provide a liquid financial instrument to back it up.” Having obtained such instruments, the shoppers begin to ”shop around”. They approach banks and financial inst.i.tutions (usually, in the West). This time, they reverse their text: ”We have an excellent client, a good borrower. Are you willing to lend to it?” An informal process of tendering ensues. Sometimes it ends in a transaction and the shopper collects a small commission (between one quarter of a percentage point and two percentage points - depending on the amount). Mostly it doesn't -and the Flying Dutchman resumes his wanderings looking for more venal gulosity and less legal probity.

The Con-Men

These are crooks who set up elaborate schemes (”sting operations”) to extract money from unsuspecting people and financial inst.i.tutions. They establish ”front” or ”phantom” firms and offices throughout the world.

They tempt the gullible by offering them enormous, immediate, tax-free, effort-free, profits. They let the victims profit in the first round or two of the scam. Then, they sting: the victims invest money and it evaporates together with the dishonest operators. The ”offices” are deserted, the fake ident.i.ties, the forged bank references, the falsified guarantees are all exposed (often with the help of an inside informant).

Probably the most famous and enduring scam is the ”Nigerian-type Connection”. Letters - allegedly composed by very influential and highly placed officials - are sent out to unsuspecting businessmen. The latter are asked to make their bank accounts available to the former, who profess to need the third party bank accounts through which to funnel the sweet fruits of corruption. The account owners are promised huge financial rewards if they collaborate and if they bear some minor-by-comparison upfront costs. The con-men pocket these ”expenses”

and vanish. Sometimes, they even empty the accounts of their entire balance as they evaporate.

The Launderers

A lot of cash goes undeclared to tax authorities in countries in transition. The informal economy (the daughter of both criminal and legitimate parents) comprises between 15% (Slovenia) and 50% (Russia, Macedonia) of the official one. Some say these figures are a deliberate and ferocious understatement. These are mind boggling amounts, which circulate between financial centres and off sh.o.r.e havens in the world: Cyprus, the Cayman Islands, Liechtenstein (Vaduz), Panama and dozens of aspiring laundrettes.

The money thus smuggled is kept in low-yielding cash deposits. To escape the cruel fate of inflationary corrosion, it has to be reinvested. It is stealthily re-introduced to the very economy that it so sought to evade, in the form of investment capital or other financial a.s.sets (loans and credits). Its anxious owners are preoccupied with legitimising their stillborn cash through the conduit of tax-fearing enterprises, or with lending it to same. The emphasis is on the word: ”legitimate”. The money surges in through mysterious and anonymous foreign corporations, via off-sh.o.r.e banking centres, even through respectable financial inst.i.tutions (the Bank of New York we mentioned?). It is easy to recognize a laundering operation. Its hallmark is a p.r.o.nounced lack of selectivity. The money is invested in anything and everything, as long as it appears legitimate.

Diversification is not sought by these nouveau tyc.o.o.ns and they have no core investment strategy. They spread their illicit funds among dozens of disparate economic activities and show not the slightest interest in the putative yields on their investments, the maturity of their a.s.sets, the quality of their newly acquired businesses, their history, or real value. Never the sedulous, they pay exorbitantly for all manner of prestidigital endeavours. The future prospects and other normal investment criteria are beyond them. All they are after is a mirage of lapidarity.