Dan Azzi
March 2019


Where did the $22 billion go?

Dan AzziDan Azzi

[This article was originally published in An-Nahar on March 24, 2019 and created a media frenzy such as this report attacking me]

Adventures in Forensic Accounting: Last Monday I received an excel spreadsheet from MJ, a bright young man, a couple of years out of college, whom I met last year at a controversial lecture at AUB (LINK HERE). The lecture was overflowing with people, which I initially attributed to my rugged good looks and charismatic charm, but, alas, it turns out that only my mother and I feel that way. The real reason it was that crowded was that AUB received several menacing phone calls from important types to try to cancel it, which they courageously politely declined. The unintended consequences was that it actually created more buzz for such a seemingly boring topic and the auditorium was so full that they had to use other rooms to which the lecture was transmitted through CCTV.

In his message, MJ said he noticed a huge change in deposits in the latest balance sheet published by BDL. I’m the first to admit that I’m not an accounting guru. The best non-accountant accountant I know is Michael Milken, who had the uncanny ability to detect fraud or problems in a company just by examining their financial statements, without ever meeting anyone from that company or even setting foot there. However, in my case, I look at accounting issues similarly to what Judge Potter Stuart said about pornography, “I can’t define it, but I know it when I see it.”

Most of the entries on this spreadsheet are flat, like gold at around $12 billion. The exceptions are the ‘Securities Portfolio’ entry (which I presume is the eurobonds or dollar denominated debt of the government). It’s been trending upwards over the last couple of years to reach $31 billion, which means the vast majority of our dollar debt is owned by the central bank, not investors or foreigners. On the bright side, this means that we get to control the pricing better and it reduces the likelihood that we get a nasty article about our bonds or Credit Default Swaps in The Economist or FT. However, it also means that nobody wants to lend us money anymore, except maybe a sliver by Qatar. This report also shows that the foreign currency reserves are down from $44 billion (that everyone still remembers from ubiquitous TV interviews) in the summer, to $38 billion now.

But the doozy is what MJ pointed out and when he said “huge” he wasn’t exaggerating. This balance sheet had shrunk by around $22 billion in two weeks, namely in the ‘Deposits by Banks’ and ‘Loans to Banks’ entries. To give you an idea of how huge, if every single Arab country decided to subscribe the same amount as Qatar generously committed to during the Arab summit, their aggregate total would be half this move. It is bigger than the entire annual budget of the Lebanese government and around 40% of our GDP. These entries on the BDL spreadsheet are offset by similar entries on all the large banks’ balance sheets. In my article Moral Hazard, I had done a back-of-the-envelope estimation of this aggregate to be $75-100 billion. Boy was I wrong! It turns out that it was $145 billion in mid February, which is over 80% of bank deposits in the country.

OK, you still don’t know what that means. Here’s an analogy. The balance sheet of the Federal Reserve (The Central bank of the US) is $4 trillion, which is 40% of the total bank deposits or the same as the US government’s annual budget or 25% of US GDP. This is even though they have the ability to print — create our of thin air — unlimited amounts of dollars. The balance sheet of our central bank in February was almost 3 times our GDP or almost 10 times the government budget.

People have asked me to theorize on this. The honest truth is that I don’t know, but I’ll take a stab at it. Since these entries are offset by similar ones by banks, this could have been done to improve their balance sheets prior to their quarterly reports coming out in a couple of weeks. This would be similar to someone asking me how much money I have. So I take out a $100 bill and show them and say I have a $100. Then they turn to my father and ask him the same question. So I surreptitiously slip him the $100 and then he pulls it out and says he has $100. Together, we now look like we have $200, even though we’re double counting the same $100.

Let me be clear. There doesn’t have to be a nefarious reason for this and there could be a very reasonable and innocent explanation, but it’s the size and nonchalance that’s troubling. When the United States authorized the bailout after the 2008 credit crisis, the size of the Troubled Asset Recovery Plan (TARP), the largest bailout in history, allocated 3% of US GDP spent over several years. So when we have a move that’s 40% of our GDP, shouldn’t there be some type of explanation? Maybe a question from parliament? The press? Maybe they’re too busy with something more important, like investigating spending $9,000 by the foreign ministry in the VIP Lounge at Heathrow Airport.

Had enough scary news? Well, let me give you some good news. They still publish the numbers, even though if they stopped, nobody would probably object or notice. The numbers are probably accurate or they would have been massaged better. I’m guessing part of the reason is a reliance on our short attention span in the twitter age, especially the Lebanese public, who doesn’t read much more than the title of an article. And when they read they don’t retain … and when they retain they don’t react … and when they react, they forget …

I know you can’t define it, but do you know it when you see it now?

Afterward: MJ is a self-made, extremely bright young man, who started out in bland schools, but ended up with a Master’s from our most prestigious university, AUB, but he’s unemployed, just like 37% of our youth. If the world were fair, he should have been snapped up by any of our banks or management consulting companies. I would love to identify him, but I’m afraid this will hurt him, as potential employers may not like young people who think outside the box … or who even think. They want someone who can attract “fresh” dollars to continue fueling the racket, hoping nobody will notice. One day, if he’s lucky, he’ll emigrate somewhere where they’ll appreciate his skillset and we’ll never see him again and he’ll end up one more statistic in our chronic brain drain.

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