The Beginning of the End?

February 1st, 2011

There are a few types of professionals who should probably not become bankers later in life.  Professional skydivers.  Football players.  And world-class poker players.  The reason for this is not because these individuals are not admirable or intelligent or honest.  It has more to do with risk.  As I have noted before, some professions lend themselves to individuals who are risk preferers, which means they get more utility (gratification) from each additional dollar than they did from the dollar before it.  Football players tend to be risk preferers. Other risk preferers include Bernie Madoff, Marc S. Drier, and James M. Davis, who all used schemes to generate untold amounts of wealth for themselves at their investors’ expense.  And of course, Sherkhan Farnood, a world-renowed poker player.   Oh, he’s also the man that was at the head of Kabul Bank until he was dismissed by Hamid Karzi during the bank’s meltdown last September.  Coincidence?

To give an extremely abbreviated version of the history, here’s what happened.  Allegations of large-scale corruption prompted President Karzi, whose official response to government corruption has been to sit on his hands, to dismiss Farnood.  Farnood and other executives, including President’s Karzi’s brother Mahmood Karzi, were allegedly involved in extensive corruption, fraud, bribery, and plundering of the bank’s cash.  Other executives purportedly doled out millions of dollars to cabinet members in Karzi’s government and used bank money to finance Karzai’s 2009 election campaign.

At the time, I wondered if this was partly a product of a “too big to fail” mentality.  The Bank hit a crisis point, which forced Afghanistan’s Central Bank to take control of the institution and pump about $500 million into its reserves, to keep it solvent.  For some perspective, $500 million is about half of the Afghani government’s total government revenue.

But as it would turn out we hadn’t seen nothing yet.  Yesterday Mahmood Karzi revealed the bank may owe over twice as much as originally anticipated, which renders the $500 million bailout utterly inadequate to solve the bank’s financial crisis.  In this midst of this whirlwind and several domestic and international investigations into the matter, the chief financial officer of the Bank of Kabul did the most admirable thing anyone could expect in the situation.  He fled to Pakistan.  His colleagues in the finance department went with him.

This is an alarming story for many reasons, not least of which because of the melodrama that has unfolded in front of the international community’s eyes.  But corruption isn’t just a tabloid problem that lives in big numbers splashed across alarming headlines.  Corruption has significant consequences for citizens and it can play a massively destabilizing role for governments and economics.  I think Egypt has proved that already this week.

The Bank of Kabul is a key pillar in the Afghan’s still-weak economy.  At the very least this situtation puts Afghanistan’s international aid position in an extremely precarious place.  As officials have noted “Most of the donor nations Afghanistan relies on to finance more than half its annual budget and billions more in development programs could be forced to delay aid because their own rules require aid recipients to be in good standing with the International Monetary Fund.”

In the worst case scenario, this is the beginning of the end.  This situation could completely undo any progress that has been made since the U.S.-led coalition toppled the Taliban in 2001.  It could signal the beginning of the end of the West’s presence in Afghanistan, an exit which will not be accompanied with a “Mission Accomplished” banner, but rather the sobering realization that Afghanistan cannot and will not have a stable, democratic government.  Kabul Bank handles the salaries of Afghanistan’s soldiers, policemen, and teachers. It holds $1.3 billion in deposits from Afghan citizens.  If the Bank of Kabul fails as a result of the bad choices of a few risk-taking employees, it will leave Afghan security forces without pay.  It would also trigger a financial meltdown, which would have disastrous consequences for the political system and President Obama’s strategy to stabilize Afghanistan.

But shareholders are still insisting that Kabul Bank is solvent.  Well, that’s good at least.  With everything else falling apart, at least we have the Bank’s word.

Written by Ann Hollingshead

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