CASO BANCO LATINO MIAMI - TESTIMONIO DEL PROFESOR EMMANUEL N. ROUSSAKIS, PH.D

The central bank, which should have responded — and ironically enough, your client should have stepped in and played a more important role and offered assurance and cover like the fdic does here. And when i say «poor regulatory controls,» i mean also the – you know, let me use the fdic analogy… When the institution develops problems, you can buy loans and you pump funds, you make loans to the institution. You assist them to try to merge… None of this was done by fogade. Central bank stayed apathetic

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA (MIAMI DIVISION)

C.A. NO. 95-1300-CIV-HIGHSMITH

(Magistrate Judge Garber)

BANCO LATINO INTERNATIONAL, VOLUME II OF II PAGES 116 TO 209

5 Plaintiff, vs.GUSTAVO A. GOMEZ LOPEZ, et al.,

Defendants.

AKERMAN, SENTERFITT & EIDSON, P.A.

SunTrust International Center

One Southeast Third Avenue

28th Floor Miami, Florida 33131-1704

February 11, 2000

10:00 a.m. to 3:30 p.m.

Deposition of Emmanuel N. Roussakis, Ph.D

A. Emmanuel Roussakis. I’m a Professor of Finance and Acting Chairman of the Department of

Finance and the College of Business. I’m an LMN (phonetic) scholar, and I am Director of Certificate Programs in Banking.

Q. What is your understanding of the direct cause of why BLI had to file for bankruptcy protection?

A. Well, first of all, I have to tell you what was happening in Venezuela in the early ’90’s.The price of oil was reaching a high level, it was generating important revenue for Venezuela. The economy was under Carlos Andres Perez, the president, was transforming the economy from state control to an open economy; therefore, all of a sudden, new opportunities developed for businesses to expand, for businesses to grow; and banks, trying to capitalize on this by making loans, by trying to preserve a niche, or even increase the niche. And here you have an institution that, over the years — I believe it was 15th or so institution years before, and then over the years, climbed up and became the second largest institution in Venezuela because of the aggressiveness and the efforts they did to penetrate the market and build a niche overall. So here you have a competitive climate among banks to generate business as the economy opens up; however, at the same time, this expansion creates inflationary pressures which raised concerns about the soundness of the monetary policy, the soundness of the currency, the prospects, perhaps, of a devaluation of the currency.Consider the fact that, of course, banks are making loans, they’re making investments. At the time of this growth, there is significant momentum, and there is financing by banks. Now it creates, of course, an equity problem. At some point, this expansion, where there’s a point that it has to be sustained, there’s an over-building of offices, over building of apartments, and their investments in securities, banks trying to build the profitabilities. However, from the political perspective, Carlos Andres Perez was president, and he’s considered to have —

THE COURT REPORTER: I’m sorry?

THE WITNESS: The president of Venezuela, he’s brought in sitting on the Board of Directors of Banco Latino. Apparently, they were more — they were acquainted with the president, and then some charges are being brought against the President of Venezuela for corruption. The Supreme Court orders him under some kind of house arrest, and there are investigations. And there’s a provisional government taking over in Venezuela in May, Ramon Velasquez, to guide the country through the elections.

So, on top of the inflationary pressures, on top of the concerns for devaluation of the currency, you have also political instability precipitated by the entry of a lame duck government, transitional government in place. About the banking system, there were, as I mentioned before, there are — regulators are understaffed, they didn’t have any computer to monitor the banks, to monitor the performance. There was — the regulatory environment was fairly lax, and as the economic pressures are mounting, as the political instability increases, at some point, concern that the incoming government will be — is not affiliated institution, is not related to the institution, is creating concerns about the ramifications that this will have on the bank. Some investors become concerned, some depositors start withdrawing deposits.

They’re converting into dollars. There is a liquidity pressure. The Central Bank, which should have responded — and ironically enough, your client should have stepped in and played a more important role and offered assurance and cover like the FDIC does here when an institution is having financial problems, the FDIC steps in immediately and announces all the deposits are guaranteed.

In the case of Continental Illinois National Bank and Trust, the FDIC offered guarantees to the creditors, all the creditors. And, of course, in 1984, the run on the bank was diverted.

Same thing with First Pennsylvania and Bank of Boston, the FDIC, over the weekend, came up with an announcement, made the guarantees and the run stopped.

Therefore, one would expect that your client, who is, ironically, to be plain, a culprit in this situation, instead of taking the necessary actions and offering protection to the depositors, it allowed a run to be sustained.

Moreover, when the bank has financial problems, the Central Bank should extend lines of credit to — are you from Florida?

BY MR. FULTZ:

Q. No.

A. Southeast Bank had similar runs, initial runs, and the Federal Reserve extended its $545 million credit facility to be able to meet drains.

So, if you take the American pattern of quick response by the FDIC to ensure the depositors, if you compare it to the Central Bank’s role to provide liquidity to an institution in trouble — and I’m talking about Southeast, I’m talking about First Pennsylvania, about Continental New York, Republic Bank of Dallas, and you name it, the only thing you can say is that these people, the ones that mismanaged are they, themselves, because they are responsible for the crisis that precipitated.

So, within a few days, from reading one of these articles, there was a panic and people started withdrawing funds, and the bank had to pay out $500 million in cash.

Now, when we started the discussion this morning, you asked me about cash assets. This is what I was measuring. What is the cash that a bank would maintain available to meet deposit withdrawals? And the national standards in the U.S. is about three to four percent of its assets.

Three to four percent.

Banco Latino had to meet withdrawals of what amounted to ten percent of its assets, so they managed to provide $500 million in withdrawals, ten percent, and the rest based in loans and investments, which you cannot call in because you have withdrawals. It is illegal for you to terminate a loan that you have made a contractural agreement. So it’s called a liquidity crisis.

They were not assisted by the Central Bank or the FDIC and, of course, the bank couldn’t stand alone. It creates a panic. The government intervenes, it assures the public that everything is under control; but nevertheless, the run started extending to other institutions which were just as suffering from the same pressures, social and economic and political pressures. And then you have a domino effect. Fifteen banks were taken over by the government.

So, under this scenario, you have political and economic pressures, you have devaluation prospects, you have a government that was ineffective because it was a transitional government, you have a government that was to take over a month later, but who is responsible?

Apparently, the regulators did not do their job.

Q. Can you tell me a little bit about the bases for all that?

A. The bases for all of what?

Q. The bases for your knowledge in that area.

A. Poor regulatory controls. And when I say «poor regulatory controls,» I mean also the — you know, let me use the FDIC analogy.

There are preventative and remedial controls. What is a preventive? You monitor the institution through audits, through electronic surveillance. When the institution develops problems, you can buy loans and you pump funds, you make loans to the institution. You assist them to try to merge. All of these are preventative. None of this was done by Fogade. Central Bank stayed apathetic.

Then, when everything fails and you cannot save the institution — in the case of Continental Illinois, the FDIC took it over. In other cases, they try to find buyers. If they don’t succeed and liquidation is the ultimate, the solution is, FDIC should pay off the depositors up to $100,000.

So, again, if the blame is to be placed somewhere, is that the regulators did not act immediately. They did not take the necessary measures. Instead, they were, I suppose, complacent, and the crisis became something that came to haunt them.

Q. Okay. I just want to know —

A. Let me tell you one thing. With this scenario developing in Venezuela, clearly, depositors who have deposits here, they panic and they fly over here to withdraw their funds.

So this was an extension of the domestic crisis. So they come here to withdraw their deposits, and then they proceed —

THE COURT REPORTER: I’m sorry?

THE WITNESS: — the run on the institution in Miami, which was monitored efficiently, according to Federal Reserve statements.

I remember reading in the Miami Herald that the institution was sound, however, they didn’t expect the size of withdrawals that they had to meet, and they had to close the doors, and eventually they filed for bankruptcy, and only to be protected from the creditors, and permit for an orderly liquidation of its assets.

I believe some of the deposits were sold to SunTrust, another institution here. There was an orderly liquidation, and eventually all the deposits were paid before it fell victim of the political and economic circumstances that prevailed in Venezuela and the lack of any — or the absence of any effective measures to prevent it.

BY MR. FULTZ:

Q. Are you familiar with those events, actually, in January of 1994?

A. I’m sorry?

Q. Do you know when BLCA was intervened?

A. I don’t remember the date. Must have been January.

Q. I believe it was January 16th.

A. Yes, mid January.

Q. And I think other testimony has indicate that, the next day BLI was open for business it experienced that run on deposits.

A. Exactly. Because the people who had deposits there, they are concerned. They came to withdraw their deposits. This is a natural reaction.

We had it here in the depression. We had it in 1991 in New England with the Bank of New England when there was a recession. People are concerned about their deposits. You may tell them that their deposits are insured, but nevertheless, they worry. If you are a large depositor, then FDIC or Fogade, what they pay you is a drop in the bucket.

Q. Putting aside what caused BLCA to have problems, would it be correct to say that the run on BLI was — the direct cause of that was the intervention of BLCA?

MR. DORTA: Object to the form.

THE WITNESS: Well, I don’t see the relevance, because if you have the government take over an institution, why would you have concerns as a depositor?

BY MR. FULTZ:

Q. I’m just saying, is it your understanding that the intervention of BLCA is what prompted the run on deposits at BLI?

A. I think it was the general atmosphere, the nervousness, the lack of confidence by depositors who started being concerned, because the moment a government steps in and takes an institution, essentially, they froze the assets.

They froze the deposits. So what are you going to do if you have deposits which you cannot withdraw?

Q. Right. But there wasn’t a run on BLI —

A. Yes.

Q. — in the day after BLCA —

A. Okay. Concern of the effects of the freezing of the deposits, how do you inform the masses that their deposits are fine? There is no FDIC coverage for deposits. The FDIC was not there to cover their deposits, therefore, their concern is: What happened to our deposits? And they come over here to withdraw, and therefore, that creates pressure under BLI here.

Q. Can you tell me how you came to have this knowledge about what happened in Venezuela?

A. I mentioned to you before that I was lecturing in Venezuela. When you go and you lecture, you have to know the country as much as you can, you have to know about the system; otherwise, you cannot come and tell them that:This is what they do in the United States; the auditors, the bankers, you have to relate this to their own practices, to their own institutions so they can benefit from the experience you’re bringing. Therefore, I felt a responsibility, and of course, they expected me, also, to be familiar with the conditions.

This is what I do in Peru. I keep monitoring Peru, just like you saw cutouts about Venezuela, I have one about Peru; therefore, I’m not an expert, but I’m aware of the trends and changes of what’s happening.

Plus, I talk in the class, because my students in banking, I want to make the courses current, and ask them to review the current developments and make presentations in class.

And I remember, this was also a subject of presentation in my class, simply to get students to become aware. There’s no textbook that can be current, therefore, I incorporate current events through these presentations.

Q. Have you ever conducted any review into what was going on at BLCA specifically at that time?

A. I could not engage in any review because I had no official capacity with BLCA. As a professor, I visited, I talked with some of the bankers from BLCA who were in my courses. I remember individually that I asked them about the rates of profitability, rates of return of major institutions.

And I remember a banker who brought me a list and said: These are the institutions we have, these are the rates of equity, returns of equity, these are the rate of returns and assets; and BLI was simply standing on the top in terms of performance, profitability.

MR. HOMER: Do you mean BLI or BLCA?

THE WITNESS: I’m sorry, BLCA was standing among the profitable institutions of Venezuela; therefore, for a profitable institution to go under, obviously, you cannot attribute the blame on the management, and by extension, to its subsidiaries in Miami.