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Crime and Corruption: Banks, Government, and Enterprises - PowerPoint PPT Presentation


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Soo Keun Kim and Kelly Nguyen. Crime and Corruption: Banks, Government, and Enterprises. Overview. Ersatz Banks Insider Lending Loans for Shares Credit Collapse Crime and Corruption Conclusion. Ersatz Banks. State-centered Subsidies Government debt

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overview
Overview

Ersatz Banks

Insider Lending

Loans for Shares

Credit Collapse

Crime and Corruption

Conclusion

ersatz banks
Ersatz Banks
  • State-centered
    • Subsidies
    • Government debt
  • Do not make loans to businesses, ie. restaurants, hotels, retail buildings
  • Also focus on privatized assets
    • Insider information
    • Capital flight
  • Capital flight: when assets/money move out of the country due to loss in value (instability), causes decreased exchanged rate and purchasing power
  • “Privatizing of gains and the socializing of losses”
outside source ersatz capitalism
Outside Source: Ersatz Capitalism
  • http://wallstreetpit.com/3621-joseph-stiglitz-on-the-administrations-ersatz-capitalism
  • 500 billion-dollar proposal to help banks
  • Allow market to price options on “toxic assets”
  • "Win, win, lose: Banks win, investors win, taxpayers lose“
diversion of resources
Diversion of Resources
  • Private banks established in 1991: created by large enterprises in order to pursue special benefits
  • Types of private banks:
    • 1. "wildcat": intermediaries between central bank and businesses
    • 2. domestic: dealers in government bonds and nonlending activities
    • 3. joint-venture: hostile banks, limited presence
insider lending
Insider Lending

"Russia formed a banking system unfit for survival." -Makarevich, 1995

hold major stakes and are sole lenders

own banks outright and are principal borrowers

double moral hazard
Double Moral Hazard
  • 1. Banks not independent
    • Cannot reject risky loans
    • Risky for depositors
  • 2. Government pressured to protect depositors
    • Prevent financial collapse
government finance
Government Finance
  • Budget deficit financed by central bank caused inflation and decreased exchange rate
  • Central bank power limited
    • Answer: sell T-bills--covered 70% deficit
  • Banks interested in government bonds due to existence of higher interest rates
  • 1996: Yields decline
    • Causes banks to collapse
    • Stock market keeps some afloat
  • "Russian stock market best-performing market in the world in percentage terms"
privatization
Privatization
  • Vouchers with cash value
    • Collected in large quantities from vulnerable holders
  • Money privatization
    • Artificially lower/raise selling prices of enterprises
    • Intended buyers get these enterprises
  • Most enterprises privatized by the mid-1990s
    • Employees and managers hold over 50 %of all shares
  • Corrupt privatization worsens Russia’s financial woes as the state disposes valuable assets at extremely low prices
  • “Loans-for-share” program established
slide10

Loans for Shares

options in state-owned businesses

loaned funds

  • Public

DEFICIT

reloaned funds

portfolios offered to bank, not public

loans for shares cont d
Loans for Shares cont'd
  • Banks interested:
    • Resell assets to foreign investors
    • Use profit to buy more government bonds
  • Government bond market open to foreign countries, makes ruble convertible to foreign currency via assets
  • Exchanged one form of financing for another (private banks & foreign countries vs. central bank)
  • Increased liquidity kept system afloat
financial industrial groups figs
Financial-Industrial Groups (FIGs)
  • At first, businesses owned banks
  • Government reversion: wants banks to control businesses and force firms to enter the market
  • Goals:
    • Get firms to be run by able hands
    • Hire Western managers in order to be efficient
  • Unsuccessful: politically-loyal banks still intermediaries between government and firms
  • Many banks "overextend" themselves
    • Try to gain hold of too many assets too fast
secret swaps
Secret Swaps
  • Rise of interest rates and liquidity crisis cause banks to not have enough funds to purchase enterprise shares
  • Swapped holdings of banks for government stake in oil corporations
  • Did not hold out, Asian debt crisis caused foreign investors to avoid markets
  • Russian banks collapse
  • During stabilization:
    • Bank activity declines
    • Number of loans fall 20%
    • Government debt triples
credit collapse
Credit Collapse
  • Banks did not create liquidity or create additional deposits (1991-95)
  • Real credit decline: 75% (1992-93)
  • Real interest rates on deposits : -93%
  • Ratio of money supply to cash normally 12 to 1—1991: 2.7 to 1
  • Russian banks become irrelevant to households and enterprises
  • Lack of retail banking leads to lack of mortgages, consumer credit, and other forms of credit that offer growth

- Sergei Yelkin

veksels
Veksels
  • Bank-issued checks redeemable for cash at later date
  • Cause: fixed exchange rate
  • Meant to solve liquidity problem
  • No real value
  • Added liability to financial system
  • Banks unable to pay off debts
  • Exceeded value of central bank reserves by 1997, made liquidity problem worse
  • Interest rate by 1997: 40%
crime and corruption soviet roots
Crime and Corruption: Soviet Roots
  • 1950s: loosening of state control leads to illegal activities in Russia
  • Under Khrushchev, limited autonomy granted to local officials and managers
    • Managers and local bureaucrats powerful through bribery
  • Executives quickly discover black marketand, thus, greater opportunities for profit
  • 1965: Central “branch ministries” reestablished
    • Managers and local bureaucrats still have considerable authority
  • End of Khrushchev’s regime: Communist Party begins to take their place
shock therapy
Shock Therapy
  • Gaidar Reforms
    • Quickly lift most government controls
    • Give government officials and top managers even more opportunities to collude
  • Political conflict leads to bloodshed
    • 1993: Parliament loses power
    • Presidency is only power that remains
slide18

Organized Crime

  • Embezzlement
  • Mishandling of funds
  • Burglary
  • Mafia
  • Business D

Investments

Clients

  • Business A
  • Business C
  • Business B
the oligarchs
The Oligarchs
  • Corrupt young group that controls Russian economy
  • Control banks and government through:
    • Bribes
    • Blackmailing
  • Interfered in Yeltsin campaign
  • Profit from the weakness of the legal system and corrupt officials
  • Use state funds for their own agendas
    • Central bank settles debts
  • Don’t allow growth of wealth in Russia
    • Capital flight
conclusion
Conclusion
  • Banks reinforce financial repression
  • No role between saving and investment
  • Lack of credit prevents growth
    • Private firms deduced to schemes
  • Must fix FIGs
  • Crime and corruption thrives if banks and government continue to interfere with market economy