[Marxism] How Corruption and Cronyism in Banking Fueled Iran’s Protests

Louis Proyect lnp3 at panix.com
Sun Jan 21 09:21:11 MST 2018


NY Times, Jan. 21, 2018
How Corruption and Cronyism in Banking Fueled Iran’s Protests
By THOMAS ERDBRINK, DAVID D. KIRKPATRICK and NILO TABRIZY

TEHRAN — At 25 percent, the interest rate paid on a savings account at 
the Caspian Finance and Credit Institution in Tehran was a better return 
than Mehrdad Asgari could earn investing in his own business renting out 
construction equipment. So in December 2016, he jumped at the chance, 
depositing $42,000 in a savings account.

Before long though, Caspian stopped allowing withdrawals. After three 
months, it stopped paying interest. Finally, in May, it shut its doors 
for good — becoming one of the largest in a long series of failures of 
Iranian financial institutions in recent years. The closings have 
destroyed the savings of thousands of people, imperiled the banking 
system and helped fuel the antigovernment protests that roiled the 
country late last year.

The weeklong demonstrations across Iran, centered in religiously 
conservative, working class towns and cities rather than Tehran, were 
the broadest display of discontent since the Green Movement protests in 
2009, following a disputed presidential election. The outpouring of 
anger was directed not only at President Hassan Rouhani, who won 
re-election promising to revitalize the economy, but also the country’s 
supreme leader, Ayatollah Ali Khamenei. Thousands of people were 
arrested and 25 were killed, some of them, families of the victims say, 
at the hands of their jailers.

“I got angry and swore at them,” Mr. Asgari said recently, referring to 
Caspian, adding that he joined other jilted depositors in demonstrations 
that he had learned about on social media.

The cascade of defaults, economists say, was not just the result of 
risky banking practices, but also a case study in official corruption — 
a major reason Iranians found their losses so infuriating. Adding to 
their outrage, Iranian officials made a series of statements blaming the 
victims for not being more careful with their money.

Many of the institutions, including those that merged in 2016 to form 
Caspian, were allowed to gamble with deposits or run Ponzi schemes with 
impunity for years, in part because they were owned by well-connected 
elites: religious foundations, the Islamic Revolutionary Guards Corps or 
other semiofficial investment funds in the Iranian state.

“If there is a little less corruption, our problems will be solved,” 
demonstrators have chanted at protests against the financial failures.

Bijan Khajehpour, an Iranian economist based in Vienna, estimated that 
as many as hundreds of thousands of people lost money because of the 
collapsing financial institutions. Iranians have a term for the growing 
class of victims: “property losers,” or “mal-baakhtegan” in Persian.

Many of the failing institutions sank the money into speculative 
investments during a real estate bubble, lent to well-connected friends 
or charged usurious interest rates to desperate borrowers. Now, 
regulators have quietly steered many of the companies into mergers with 
larger banks to try to absorb their losses, but that has created a 
worsening problem of bad loans and overvalued assets throughout the 
banking system.

Economists say that as many as 40 percent of the loans carried on the 
books of Iranian banks may be delinquent.

“The whole financial system in Iran is in a very fragile state,” said 
Borghan N. Narajabad, an economist in Washington who has studied the system.

The International Monetary Fund warned last month that Iran’s banks and 
lenders “need urgent restructuring and recapitalization,” calling for 
write-downs of overvalued assets and a crackdown on loans to insiders. 
The problem has grown so big, the fund warned, that the money required 
to prop up the banks will “cause government debt and interest outlays to 
rise substantially.”

Even Iran’s supreme leader, Mr. Khamenei, has acknowledged 
responsibility for the growing number of victims of “problematic 
financial institutions.”

“These appeals must be dealt with and heard out,” he said this month. “I 
myself am responsible; all of us must follow this approach.”

The corruption underlying the bank failures has long been an open 
secret. In December, a lawmaker, Mahmoud Sadeghi, released a document 
listing the Top 20 debtors who had failed to meet payment deadlines for 
Sarmayeh Bank, which is co-owned by a pension fund for teachers. The 
loans totaled $1.9 billion, and almost all appeared to be held by 
well-known insiders.

Among them was Hossein Hedayati, a business tycoon and former member of 
the Revolutionary Guards, whose swift rise was so conspicuous that 
websites speculated about the sources of his sudden wealth. The document 
released by the lawmaker showed that Mr. Hedayati owed $285 million, and 
in a television program discussing the loan, another lawmaker, Mohammad 
Hassannejad, accused Mr. Hedayati of using a series of front companies 
to swing the loans and hide his role.

Mr. Hedayati dialed in to the program, sputtering with rage; he denied 
borrowing from Sarmayeh and threated to “sue everyone,” but has yet to 
follow through on the threat.

After the 1979 Iranian Revolution, the new Islamic Republic initially 
nationalized all banks, among other industries. It also created a 
variety of semiofficial holding companies controlled by the supreme 
leader, senior clerics or top military commanders. Over the years, many 
of the companies have evolved into sprawling conglomerates with major 
roles in even the ostensibly private economy.

Clerics controlled religious foundations, called bonyads, that acquired 
commercial businesses. The largest of these, under the supreme leader, 
now makes up “15 to 20 percent” of the Iranian economy, according to an 
estimate by Hooshang Amirahmadi, an economist at Rutgers University who 
studies Iran. The elite Revolutionary Guard Corps controls a separate 
business empire.

All the semiofficial holding companies have major advantages over 
private businesses in favorable access to capital, tax exemptions and 
political connections. And most or all of them have been plagued by 
accusations of inefficiency and mismanagement, in addition to insider 
dealing and other forms of corruption.

Government reformers took steps to open up the banking business in the 
late 1990s and early 2000s, first by allowing religious foundations to 
set up loosely regulated savings and loans, ostensibly to serve the 
poor. The opening of private banks or the sale of shares in state banks 
soon followed.

But under a conservative president, Mahmoud Ahmadinejad, who came to 
power in 2005, semiofficial bodies controlled by clerics, the 
Revolutionary Guards or their allies dominated the newly private 
financial sector. An internal study produced in 2013 showed that 
semiofficial state bodies owned seven of the 17 private banks. Among 
them, the Revolutionary Guards controlled at least two, while the army, 
the police, the municipality of Tehran and a giant religious foundation 
close to the Guards controlled the others.

Among those financial institutions not directly controlled by these 
semiofficial bodies, the largest were usually run by individuals close 
to the same ruling elite, economists and diplomats say. They say that 
made it almost impossible for even the best-intentioned regulators to 
police the banks.

“The involvement of opaque government institutions like the 
Revolutionary Guards works contrary to transparency, and the lack of 
transparency is a recipe for poor banking practices,” said Sir Simon 
Gass, who was the British ambassador to Tehran from 2009 to 2011, in a 
recent interview. “The Central Bank of Iran tries to inject discipline 
into the system but with limited success.”

The outsize returns promised by the banks and financial institutions 
lured capital that might better have gone to more productive uses, 
contributing to an economic downturn brought on, in part, by 
international sanctions imposed because of Iran’s nuclear program. 
Economists say that helps explain why most sectors of the Iranian 
economy outside the oil industry have yet to reap the benefits of the 
sanctions’ repeal after the nuclear deal with the West.

When lenders began to fail over the past few years, some senior Iranian 
officials tried to blame the borrowers, noting that many of the 
institutions were not officially licensed or guaranteed by the Central Bank.

“How many times do you want to be bitten by a snake from the same hole?” 
asked Mohammad Bagher Nobakht, a government spokesman, in an interview 
with the semiofficial news agency ILNA. Officials, he added, “told 
people several times but still they invested.”

Mohammad Bagher Olfat, a Muslim cleric who is deputy chief of the 
judiciary, said that jilted borrowers shared the blame with the lenders 
and regulators.

“Yes, their money is gone, but they shouldn’t expect the state to pay 
for their loss,” he told the same news agency.

It was not just the buyer-beware response of officials in the absence of 
oversight and transparency that outraged the victims. In 2016, Iranians 
were scandalized by leaks about the high salaries of executives at 
state-run companies, including $50,000 bonuses paid to eight managers of 
a state-owned insurance company (when an Iranian laborer might earn $200 
a month).

In that context, the release of a draft budget that proposed raising 
outlays for clerics’ pet projects and their families while eliminating 
the $12 a month cash subsidy provided to 30 million Iranians and raising 
fuel prices by 50 percent provided the spark that ignited the protests.

They were upset to read about the $2 million — a 9 percent increase — 
that went to the son of the late Ayatollah Shahab ad-Din Muhammad 
Hussein Marashi Najafi to maintain his father’s library, and the $15 
million provided to the grandson of Ayatollah Ruhollah Khomeini, the 
founder of the Islamic Republic, to publish the late leader’s works.

But some Iranians had already had enough. When Mr. Asgari was told in 
May that Caspian was closing without repaying his $42,000, he stepped 
outside and checked the encrypted social media app Telegram, where he 
found many groups for “property losers” victimized by Caspian and others 
like it.

“We organized demonstrations in front of their head office,” he said. 
Bowing to pressure, the government eventually refunded most of his 
original deposit but deducted the three interest payments he had 
received. (The government has since tried to block the use of Telegram 
in Iran.)

Arash Tajaloo, 42, a civil engineer in Tehran, deposited a total of 
$414,000 with Caspian in the spring of 2016, when the institution was 
promising him interest payments of as much as 30 percent a year. Caspian 
started restricting his withdrawals after six months, offering the 
excuse of temporary technical problems.

“They kept buying time, week after week,” he said in an interview over 
Telegram.

A lawsuit he filed was consolidated into a class action, “given the 
large number of cases,” he said. He says he joined protests in front of 
Parliament, the presidential palace and the residence of the supreme 
leader, and took part in a 33-day sit-in outside the courthouse.

Caspian has promised to repay him about one-eighth of his original 
deposits, he said, but he has yet to see any of it.

“We still have not received either our deposits or the interest on them 
for 13 months,” he said.




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