Afghan bank caught in huge ponzi scheme

Historian Juan Cole writes informed and insightful commentary on events in the Middle East, important political developments in the US, and much more, on his award-winning blog, Informed Comment. On today's blog, his first post deals with another case of corruption among friends of President Karzai. (See below.) The focus of the article is on the present crisis of Da Kabul Bank, which is embroiled in financial irregularities, suggesting a ponzi scheme, having a debt of $300 million, and facing a run on the bank by depositors. Cole writes that this corruption "could be catastrophic for the country." He is angered by the thought that so many troops from the US, NATO, and Afghanistan have given their lives for what is a corrupt and illegitimate government and for the rich thieves associated with it.

From our perspective, this is yet more evidence that we are on a fool's errand in Afghanistan, compounded immensely by a US military policy that lurches from one strategy to another and calls for extending the US-led occupation of Afghanistan for years into the future. In the meantime, there are profound costs to US taxpayers, in Afghan and US lives, and to the waning credibility of the US in Central Asia, the Middle East and around the world.


Collapse of Kabul Bank Points to Fatal Corruption of Karzai Government
Posted on September 3, 2010 by Juan Cole at http://juancole.com


I write in anger. Not blind rage, mind you. A cool, searing, steady anger. I think it is a righteous anger. It is not consequential, but it is my reality. I am angry about the 1,172 US troops dead in the Afghanistan War, and all the other brave NATO and Afghan soldiers who gave their lives for a new Afghanistan. Because they haven’t gotten a new Afghanistan. They have paid the ultimate sacrifice for a ponzi scheme masquerading as a reformist government. And, as usual, you and I may well get stuck with the bill for the economic damage done by the fraud.

The house of cards that is the Hamid Karzai government in Kabul may be falling before our eyes, as vast, globe-spanning webs of corruption, formerly hidden in shadows, have suddenly had a spotlight thrown on them. The crisis raises the severest questions about whether the Obama administration can plausibly hope to stand up a stable government in Afghanistan before US troops depart.

As with the second phase of the Great Depression in the United States, the crisis begins with a run on Da Kabul Bank. Depositors took out $85 million on Wednesday, after a damning story appeared in the Washington Post. They took out another $70 million on Thursday. The bank, which owes $300 million, may now have as little as $120 million left in the kitty, though it had once been worth over a billion. But the problem is not just a run on one bank. Can Afghanistan’s whole financial system and economy emerge unscathed?

Pajhwok News Service reports,

‘The immediate concern was that news of the bank’s financial irregularities, already spreading through the capital, would prompt a run on the bank itself and that the panic would spread to other financial institutions. Bank deposits in Afghanistan are not guaranteed by the central government, officials here said. “This could be catastrophic for the country,” a senior Afghan banking official said. “The next few days are critical. I am worried.” ‘

The same world-wide real estate crisis that abruptly revealed the ponzi scheme of Bernie Madoff has undone Da Bank Kabul. But imagine if Madoff had not merely been a criminal who preyed on the wealthy, but had bankrolled a president’s political campaign with his ill-gotten gains and had brought the president’s brother and the brother of the vice-president into his inner circle. And imagine if he had been only one of a handful of financiers in New York with substantial capital.

The story begins with Sherkhan Farnood, a financier who founded Da Kabul Bank after the fall of the Taliban. Over the years he appears to have used the institution for patronage for politicians and their families. Farnood gave millions to the presidential campaign of Hamid Karzai last summer, a campaign that Karzai was accused of only winning through substantial ballot fraud. (Hint: a vote wouldn’t cost much to buy in Afghanistan, and ‘millions’ would buy a lot). The other top executive at the bank, Khalilu’llah Frozi, was a campaign adviser to Karzai. Hamid Karzai’s brother Mahmoud has a 9% share in the bank.

Instead of wiring money overseas, as banks typically do, Farnood used a traditional money-transfer or hawala service, the New Ansari, which is also alleged to have been resorted to by drug smugglers, some of whose proceeds go to the Taliban and other insurgents that kill US troops. Money transferred by hawala cannot be traced electronically. The New Ansari itself is under investigation by US authorities. Persistent news reports suggest that billions of dollars in cash are being flown out of Afghanistan to Dubai, and that, let us say, irregularities are involved.
Farnood often gave out loans without proper collateral or other formalities. He loaned $100 million to Haseen Fahim, the brother of Marshal Mohammad Fahim (an old-time Northern Alliance warlord whom Karzai brought back into government as his vice-presidential running mate in summer of 2009). Haseen Fahim has substantial investments in Afghanistan’s small natural gas sector.

Farnood also apparently loaned himself $140 million to invest in real estate in Dubai, including in villas on the world islands off Jumeirah. These artificial islands made of landfill were to resemble the map of the globe once constructed, and were intended to give the wealthy the opportunity to own an entire faux country. Farnood has been flying out connected people like Mahmoud Karzai and Haseen Fahim and putting them up in the fancy chalets. Afghanistan is the fifth-poorest country in the world, with 36% of the population under the poverty line.

With the world economic downturn and real estate crash of 2008-2009, the Dubai world project largely fell apart, with investors going bankrupt in droves. Indeed, Dubai itself had to be bailed out by its rich sibling Abu Dhabi (which has petroleum; Dubai just has a financial sector). The artificial islands appear from NASA photos to have been abandoned since late 2009 when the own, Nakheel Properties, asked for a delay in repaying $29 billion in debt. Some seem to be sinking back into the lagoon or their boundaries are blurring. Close-up pictures of some of them show an eyesore.

So Farnood’s $140 million investment was suddenly not worth anything at all, and his bank began spiraling down. The details of his other bad investments have not yet emerged. The bank went from having over $1 billion in capital to now having only $120 million and owing $300 million.

President Hamid Karzai is notorious for running interference for his corrupt cronies, and that Farnood and Frozi were out of control appears to have been known for some time but nothing was allowed to be done about it. The two have now been forced out, but the question is whether it is in time to save not only the bank (doubtful) but also the entire Afghan financial system, rebuilt after the fall of the Taliban.

The Karzai government is corrupt and rotten to the core. Not a single US soldier should die to prop it up. The lie that we are fighting “al-Qaeda” in Afghanistan needs to be exposed. The US and NATO are fighting four or five groups of Pashtun insurgents, some of them until fairly recently US allies. The goal of the fighting is to keep the Karzai government from falling to the guerrillas and to train up an army and police force that could go on defending Kabul. The Afghanistan National Army from all accounts has poor morale. No wonder. What Afghan soldier or policeman would die for a ponzi scheme?

NATO should not have allowed Karzai to steal the presidential election. (At least now we have more of an idea how the theft was accomplished). It should not have allowed him to block corruption investigations.

You have to wonder if the Afghanistan parliament is up to impeaching Karzai. One thing is certain. He is part of the problem, not the solution, and as long as he is at the helm, the situation is highly unlikely to get better.

And our troops will go on dying for a vague and probably unattainable goal that the politicians dress up in idealistic flourishes, and worse, dying for a lie.