Venezuelan Bank Collapse Threatens Nation’s Future : Finance: Banco Latino’s failure is worst ever in South America. Analysts fear a social explosion.

CARACAS, Venezuela —  Banco Latino seemed a depositor’s heaven. It had more branches here than anyone, more services, far higher interest rates and, best of all, the confidence that comes from being an institution closely connected to this country’s most powerful industrialists and politicians.

Using all of these advantages and some of the most modern, incessant advertising seen in Venezuela, Banco Latino attracted almost a million depositors, including the pension funds of the armed forces and the national electric and oil companies, as well as the funds of the government’s bank insurer.

Banco Latino bought several other banks and invested millions of dollars in office buildings (at last count, it owned 493), farms and hundreds of other businesses. It became the second-largest bank in Venezuela and held 20% of the market. Its officers owned executive jets--three for bank Chairman Gustavo Gomez Lopez alone.

When a Paris office was opened last fall, important clients and depositors were treated to an all-expenses-paid, three-day trip to France to celebrate.

But one month ago, the exultation about the bank turned to grief: In the worst failure of its kind in South America, Banco Latino collapsed, endangering not only its depositors’ fortunes but the entire Venezuelan financial system and this nation’s economic and political future.

Immediately at risk is more than $1.5 billion in Venezuela and subsidiary banks throughout the world, including $243 million in Miami’s Banco Latino International that is not protected by the U.S. Federal Deposit Insurance Corp.

According to experts here, that’s far from the worst of it.

“The total cost of bailing out Banco Latino could reach $5 billion,” said one of Venezuela’s most respected bankers.

That multibillion-dollar bailout, experts say, is far more than the government and the banking system can absorb without setting off a social explosion that could seriously endanger Venezuela’s already tattered democracy.

Venezuelan officials have said little about Banco Latino’s calamities. Bank officials have either declined to comment or were unavailable in Venezuela.

The story of Banco Latino’s rise and fall begins in the late 1970s, when what had been a small bank was taken over by some of the country’s most powerful industrialists.

They were so close to Carlos Andres Perez, then serving his first term as Venezuelan president, that Banco Latino was dubbed by many the “Bank of the 12 Apostles” because of its support and connections.

Banco Latino’s president was Pedro Tinoco. He was so close to Perez that he was named the Venezuelan central bank’s chief when Perez won a second term as president in 1989.

Other bank “apostles” included members of the Gustavo Cisneros clan, considered one of the two richest families in the country, and Francisco Perez, the president’s brother.

Even with all of this power, Banco Latino remained relatively insignificant until four or five years ago, when it began a big push to capture at least a 20% market share.

It launched a creative, wide-ranging advertising campaign. It accepted smaller minimum deposits to attract clients. It put up automated teller machines and dozens of branches.

Above all, it offered high interest rates. In an economic system already rife with inflation, many Venezuelan banks were offering interest rates reaching 70%; Banco Latino gave 8% beyond that and sometimes even 12% more. When certificates of deposit paid 50%, Banco Latino paid nearly twice that.

As a growth strategy, this plan worked.

Banco Latino moved from eighth place in savings deposits in 1989 to No. 1 last year and was clearly Venezuela’s No. 2 bank overall. Its marketing efforts were so seductive that the U.S. Embassy here even deposited funds with Banco Latino at a time when American economic experts were beginning to worry about the bank’s stability.

According to banking experts--who asked not to be identified--Banco Latino’s problems began in the early 1990s, when Venezuela’s economy went into deep recession.

“Prices dropped,” said an analyst who sits on the board of another bank, “and the investments Banco Latino (made) stopped producing cash income. It became impossible for Banco Latino to generate enough liquidity to keep up its interest to depositors.”

Another banking source called the bank’s investments “improvident to begin with.” The bank had sunk its money into long-range investments and, “even in good times, (these) couldn’t have provided the cash needed” more immediately.

But instead of retrenching and ridding itself of its bad investments, Banco Latino began what one expert labeled “a Ponzi game,” named for the American confidence man who bilked investors of millions in the 1920s.

“As it became harder to pay its interest, the bank raised its rates even higher to attract (more) funds,” the source said. “At one point, it even paid 100% when the normal rate was 70%.”

By last October, insiders had caught on to what was happening, sources said, particularly when Banco Latino once paid 1,000% interest on an overnight, inter-bank loan used to maintain liquidity in its system.

But even at this point in Banco Latino’s problem-filled life, experts said, the government declined to act, partially because of a fear that intervention would bring down the entire banking system by creating a panic.

Also playing a part was the political situation. Although Perez was in trouble and ultimately would be forced from the Venezuelan presidency, his power was real, as was that of his appointees.

“You also have to realize,” one banking source said “that many people just couldn’t believe that a bank as powerful as Banco Latino could collapse. People would say that the No. 2 bank, the ‘Bank of the 12 Apostles,’ would not be allowed to fail.”

By January, however, there wasn’t much that could be done. Even employees began pulling out deposits, setting off a run against the bank.

Most of its directors fled, many to Miami. About $900 million was pulled from Banco Latino and sent to its bank in Curacao, the largest island in the Netherlands Antilles, just north of Venezuela.

Finally, on Jan. 13, the Venezuelan government intervened, freezing all of Banco Latino’s funds. The Curacao bank was shut by Dutch officials; the Miami operation was closed when depositors clogged the bank, demanding money from uninsured accounts.

In Venezuela, government regulators found a financial nightmare as they investigated the Banco Latino collapse.

They found that the bank could not cover its accounts; its assets had been misstated; its capital was backed by undervalued or fraudulent bonds; its reserves for bad loans were woefully short.

Government agents who took over the bank began on Jan. 28 paying back some customers--those with certain savings accounts--up to $9,300, a figure that doubled as of Feb. 7.

But that covers only a tiny percentage of deposits. It does not apply to checking accounts or the other, enormous investments held by the bank.

All the armed forces pension funds in Venezuela, for example, are frozen, as are parts of pensions for the government-owned electrical and petroleum monopolies. The total value of the Venezuelan government accounts held by Banco Latino is estimated at almost $1.2 billion.

Worse, and as an example of the cozy relationship between the bank and the government, are funds deposited in Banco Latino by the Deposit Guarantee Fund.

The fund, known as Fogades, is the Venezuelan equivalent of the U.S. Federal Deposit Insurance Corp. Government records show that Fogades had put 33.6% of its resources in Banco Latino and 13% more in another bank largely owned by Banco Latino.

“It would be as if the FDIC had given half of its money to the worst of the (American) savings and loans,” one diplomat said.

There is still more bad news. The Fogades money, as well as other government funds, was not kept in highly liquid accounts, as the law requires. Instead, it was put into investments that, even if they are sound, will not pay returns for years.

Some sources blamed these gaffes on the inexperience of Esperanza Martino, the Fogades chief, who is the wife of the onetime head of Perez’s personal security force.

More important, the question now is what to do to salvage the Banco Latino wreckage.

To the consternation of some experts, not much appears to be happening.

The government and several large Venezuelan banks are pooling their reserves to pay off savings account holders.

They are also offering other temporary support to troubled institutions that, in exchange, must increase their capital, take write-offs on bad loans and investments, limit their new credits and pledge to live up to the new regulations.

The central bank, for example, has reduced its reserve requirement to help other troubled banks avert a general run.

Some analysts see hope in the implementation of a new banking law that took effect Jan. 1. It calls for tighter regulations and stronger enforcement in the industry.

Meantime, the government has made broadcasts three or four times a day in an attempt to assure the public of the banking system’s stability. Officials hope to prevent a panic and to keep Venezuelans from turning to foreign currency, particularly U.S. dollars, as an investment haven.

“If nothing goes wrong and there isn’t a run . . . it might work, at least for the short run,” one economist said.

Venezuela’s stability has already taken a series of hits, what with two serious coup attempts in 1992, criminal charges that forced Perez to resign last year and a criminal indictment of another former president, Jaime Lusinchi.

Ultimately, of course, resolving the current crisis will rest with the new government of Rafael Caldera, said one economist, who noted that the president is “perceived as honest and incorruptible. If he acts quickly and decisively, there may be time to reform the system and save it.”