Lehman Brothers' fallout hits the Venezuelan banking; deadline to trade structured notes expired on September 24th

The bankruptcy of Lehman Brothers, the fourth largest US bank and Wall Street icon, with 158 years in the business, makes an impact on the Venezuelan financial sector. The audited balance sheets as of the end of December 2007 reveal that nine domestic financial institutions, including Banco del Tesoro, held time deposits, structured notes and other instruments in Lehman Brothers amounting to USD 2 billion. Little has been disclosed to the public; in fact, audited balance sheets as of the end of the first half of 2008 have not been published yet. Consequently, accurate information on whether Venezuelan banks withdrew part of their resources held at Lehman throughout 2008 is unavailable. The balance sheets of Banco del Tesoro show that, as of December 2007, structured notes, presumed to pertain to Fonden, had a fair value equivalent to USD 872 million. Nevertheless, the government has declared that Fonden holds notes with Lehman Brothers amounting only to USD 300 million, an assertion that implies having traded a significant portion of those commercial papers in the first half of 2008. Unofficially, it is rumored in the financial market that only two banks still have funds placed in Lehman and that the sum still stumped amounts to USD 400 million. Limited by legal restrictions on holding dollars and foreign-currency bonds in sums in excess of 30 percent of their stockholders' equity, Venezuelan banks resorted to financial engineering. After purchasing dollars in the parallel market, foreign-currency bonds or notes in dollars structured by the Ministry of Finance using Ecuadorian or Argentinean securities, local banks deposited them in offshore institutions which, according to financial sources, included Deutsche Bank, HSBC, Lehman Brothers and Merill Lynch. Those institutions, in turn, issued notes in bolivars secured by dollars and papers held in deposit and delivered them to Venezuelan banks. Therefore, their balance sheets show commercial papers in bolivars and not in foreign currency. The Ministry of Finance, however, found that this infringes upon legal restrictions on dollar positions. According to a report prepared by BBO Servicios Financieros, based on the audited balance sheets of banks as of 31 December 2007, notes in bolivars, at the official exchange rate, account for USD 5.4 billion. This amount is equivalent to 70 percent of the stockholders' equity of the entire private banking system and 171 percent of the stockholders' equity of the 12 banks, taken as a whole, that have included these notes in the balance sheets. The Ministry of Finance ordered the trade of structured notes and granted a term that, according to a statement by Minister Alí Rodríguez Araque on August 19th, expired on September 24th. Even if Alí Rodríguez has not publicly announced a new date, bank sources point out that in conversations the minister has displayed a willingness to be more flexible and grant extensions, if required. Venezuelan banks find it hard to trade those notes in bolivars appearing on their balance sheets since, in so doing, they would also have to let go dollars and commercial papers in foreign currency originally supporting the structured notes. Both the parallel-market exchange rate and the Venezuelan debt bonds have recorded significant falls, and the alienation of structured notes may translate into losses.