Dan Azzi
October 2019


What is Riad Salameh thinking?

Dan AzziDan Azzi

Disclaimer: This is a work of fiction. Any similarities between actual people and events is purely coincidental.

A version of this article was first published in Arabic in Akhbar newspaper October 14, 2019.


“If you want to understand a man, walk a mile in his shoes.”

Riad Salameh sat in his plush office, with silk Persian carpets blanketing the floors, smoking his favorite Cuban cigar, as he blew concentric circles in the air, while reading the daily press reports. He didn’t like reading on a computer screen, so his long-term assistant Madame “Hallak” brought newspapers or printouts of online-only articles. Madame Hallak is one of the most important employees at the Central Bank (BDL); because she’s the filter who controls access to him. If measured by his salary and BDL’s $136 billion balance sheet, Salameh would undoubtedly be the most important man in Lebanon. People who tried to breach Madame Hallak’s elaborate defense lines for her boss varied from chairmen of banks all the way down to “selfie with the governor” aspirants.

He cringed as he read some of the scathing criticism in the mainstream media that historically revered him. President Michel Aoun had renewed his fifth term 3 years ago, after a bitter fight among his advisors. Salameh scraped through, due to sound advice from market experts who warned the President that any change would be detrimental to monetary confidence.

He was now governor for 26 years. Whatever you may think of him, he had become indispensable. BDL was Salameh and Salameh was BDL.

Salameh’s approval rating stood at nearly 90% in 2016, triple that of any public official, attributed primarily to maintaining the Lira peg at 1507.5 per dollar for two decades. He was the most admired man in Lebanon through most of his tenure.

Salameh was briefly among the three frontrunners for president in 2016, but regional geopolitics and local deal-striking formed unimaginable alliances, leading to the election of President Aoun in 2016.

As he read more bad news, Salameh had an irresistible urge to call his most trusted lieutenant, a senior, highly-dedicated public servant “Semaan” who’s the unsung hero, quietly fighting the tactical battles. He asks him for the Reserves number. This is the dollar value of gross foreign currency reserves, which stood at $38.6 billion, or nearly $50 billion, if you include the gold stash, much of which is held for safe-keeping in Fort Knox, Kentucky. Salameh repeatedly conveys this number to the press, with his calm voice and slow drawl, in sharp contrast to the loud and animated Lebanese macho stereotype. Nonetheless, he oozed with confidence, and panicky visitors left his office calm, even ready to go long Lira and short dollar. He was the consummate salesman, a skill honed during his Merrill Lynch days 1973-1993, as a financial advisor for the wealthy, which is how he met late Prime Minister Rafiq Harriri. It was the beginning of a beautiful friendship culminating in his current position.

As he thought back to his legacy under attack, Salameh put on his suit jacket. He never left it behind, because of a sensitive key hidden in a secret, specially tailored pocket, which he carried on his person at all times. As he walked towards the waiting room, he stopped to admire pictures of his predecessors. Elias Sarkis was his favorite. He was the one who made the decision to buy gold, worth $14 billion today. Despite the fact that he’s forbidden to touch it by law, it gave him, and the country, excessive self-confidence, although he knew that it was unusable — selling even one gram would require a ministerial decree, but the signaling effect would be like yelling “fire” in a crowded theatre.

He also admired President Sarkis for his courage 1976-1982, when the country disintegrated into a brutal civil war. Sarkis witnessed the PLO setting up a state within a state, two Israeli invasions, the Syrian occupation of most of the country, while keeping the Lira stable in a tight band between 3.22 and 3.92 to the dollar.

He looked up at the picture, whispering, “Tell me, Elias, what should I do now?”

His thoughts are suddenly interrupted by loud chanting outside. He looks out a corridor window, as his office is designed to prevent someone outside from looking in (or someone inside look out). In the good times, it afforded privacy. Today it projected a sense of siege, like he was in a bunker. Demonstrators outside were screaming vitriolic slogans against him and the central bank. He wondered why they hated him instead of the impotent government. Didn’t he give them 22 years of prosperity? 22 years of a strong purchasing power and a higher standard of living than any Arab country in this neighborhood? Why are they so ungrateful? Will they now erase 22 years of legacy?

Salameh knew that $38.6 billion, practically-speaking, wasn’t relevant. The real number is one of the nation’s most guarded secrets, right up there with SHN’s undisclosed location. Estimated at around $30 billion, it was still monumental for such a tiny country. The savvy governor knew that it was not all deployable to protect the peg. He had to maintain a cushion to import essentials like grain, fuel, and medicine, to avoid Venezuela scenarios. He had maybe $6-$12 billion in usable reserves, and at the current leakage rate, wasn’t a lot of ammo.

Did those demonstrators know what he was up against?

He knew where this was going … but what about his legacy? He was Mr. Lira. He then recalled 2016 and wondered why he stayed on. He could have left as the Alan Greenspan of Lebanon, the Maestro of the East, the best central banker in the history of the country. He could have completed his memoirs, suntanning on the Côte D’Azur, or writing critical articles in An-Nahar, like all those back-seat generals questioning his judgment today, from the safety of their non-positions. He recalled the Wall Street expression from his days at Merrill Lynch: “You are your last trade.” He refused to be his last trade, but he needed a miracle.

Salameh was used to miracles. He’d seen the country teeter on the edge, and through a combination of skillful maneuvering, luck, and loyal friends of Lebanon, was able to avert disaster multiple times.

During the 2008 global credit crisis, when the West was facing Armageddon, Lebanon had a reverse capital flight to our perceived safety, an ironic twist of fate. Rich Lebanese expats stopped trusting top foreign banks, and moved their money to local banks, culminating in a Balance of Payment surplus of $20 billion between 2006 and 2010. This surplus was squandered on real estate development and government waste, resulting in a bubble, whose remnants can be seen in the shiny, vacant towers dotting the Beirut skyline.

In 2011, the surplus morphed into a persistent deficit every year until now. In 2016, Salameh recognized the danger signs. This was the fork in the road when he could have considered alternative unpopular measures, which he discarded in favor of continuing to “feed the beast” … but the beast got bigger and hungrier. That summer he made a fateful decision to execute what he called a “financial engineering” transaction, which paid banks an obscene amount in Lira, in exchange for “fresh” dollars obtained from overseas, seduced by mythological rates of interest. Banks booked billions in profit, partially to offset losses in misguided diversification attempts in Turkey, Egypt, Syria, and Iraq. They lost money in every single expansion overseas, which cannot be attributed to bad luck alone, and Salameh, like a guardian angel, was there to help them pick up the pieces, but opted not to slap them with a moral hazard penalty. Some people started throwing around words like Ponzi and Madoff. Even the venerable Economist magazine, described it “like a pyramid scheme … works only with a constant supply of new money.”

Salameh conducted more than a dozen more financial engineering transactions over the next three years, capturing $65 billion of bank dollar deposits (one out of every two US dollars).

In August, everyone blurted a sigh of relief, when S&P maintained our credit rating. While everyone was still popping corks of Champagne, Fitch threw a curveball, and downgraded us, when they calculated BDL’s net foreign reserves at negative $32 billion. The central bank now had more dollar debt than the Lebanese government itself.

Salameh realized that the trade deficit (net imports of almost $20 billion per year) was depleting his reserves. Before 2011, remittances, tourism, and FDI, more or less, covered this import binge, but not anymore. While his FE was covering the “supply side,” providing dollars for the continued import binge, it was costing him dearly in future risk. A few months ago, he finally attacked the demand side, by sucking liquidity out of the market, both in dollars and Lira, because around 70 piasters of every Lira spent eventually ends up converted to dollars for imports … hemorrhaging out of the country. The liquidity embargo, while effective for protecting the Lira, was catastrophic for the economy, causing growth to drop to zero, businesses to fail, and unemployment to rise. This was still not enough, so he curtailed transfers from Lira to dollars or transfers out of the country (by further restricting dollar liquidity). This overflow seeped into the real world, because customers had to go to exchange houses to buy fiat (physical) dollars.

A black market quickly developed, with the dollar trading up to 1800, for the first time in 22 years, jumping outside the band of 1500-1515.

The absence of any economic planning in the country meant that monetary policy was what lead the economy, instead of the reverse. This major flaw in the country had finally caught up with him. He recognized that any decision he makes directly affected the protestors below. It affected their livelihood, standard of living, employment, and quality of life. It also affected the ubiquitous security personnel, who were the ones who would be called to forcefully quell them, if they ever reached the critical mass to threaten the system. It also affected the top 1%, the elite who owned the country.

So any deliberate, drastic measures created too many simultaneous enemies.

However, the problem was too big for one man, and required a concerted effort from everyone in a position of authority. But even then, there was no magic pill to make the pain go away. It was really a choice between a soft (or softer) landing versus all-out chaos. Many of the decision makers, who were political appointees, did not understand the issues, and thus were incapable of offering a solution. Their expertise was in being loyal to their sponsor and giving media soundbites.

Most Lebanese economic analysts were TV media personalities, who had no training or experience in the cancer we were facing. Many of them were helpful for a while, lavishing praise on him and polishing his brand — ‘useful idiots’ during the good times. But today, the country needed something different— leadership. He needed those economists to stop sycophantically praising him, and instead convey the hard message to mobilize the country towards a form of “economic resistance.” Extreme measures were coming anyway, and it was really a choice between doing it at a time and place of our choosing … or having it done to us. He wished that the media had never depicted him as this omnipotent heroic figure, as if he could snap his fingers and stop the gathering storm in its tracks. He recalled the sycophants chanting, “As long as Riad Salameh is in charge, the Lira is fine.” He used to feel pride whenever he heard it, but today he realized that the country’s fate should never depend on any one man — not even him — but needed to be a nation of institutions. He knew the Lira was sick, and that chant was coming back to haunt him now — it put him in a corner and took away the obvious choice, especially that the ruling class had subcontracted this problem to him for so long.

Sometimes, the right choice is not politically palatable. The answer lay at the intersection of economics and politics. Any solution would strike at the constituency supporting a specific political party. Who was going to be the politician to tell his supporters that they have to give up entitlements?

Salameh closed his eyes to think. The country appeared in his imagination as a bus, driving towards a cliff, with its passengers arguing over the number of seats each can take, instead of trying to steer away from the edge.

The bleeding of dollars due to the twin budget and fiscal deficits was now consuming bank deposits. It was like quelling your hunger by eating your own foot. The solutions all involved some type of brutal dollar diet. Maybe he should have floated the Lira in 2008-2010 when massive surpluses were flowing into the country. The Lira would have risen to 1,000 per dollar, and as the balance of payment surplus turned negative in 2011, the Lira would depreciate slowly, back down to 1,500, and then even 2,000 today, allowing a gradual and soft landing. But retrospective vision is 20/20. Who’s the genius who could honestly claim today that he could have seen that in real time? Analyzing a battle in history books isn’t the same as being the General making life and death decisions in the fog of war. He was starting to question the financial engineering. He wondered if he had given the banks so much that their top management actually believed it was real — that their profits were due to their banking acumen and skills. They certainly paid bonuses and bought Fakra chalets like they were investment geniuses, instead of guys who failed at every expansion outside Lebanon, where they competed with real bankers, with real business models, instead of the Disneyworld, for which he was partially responsible, and where they earned free money for no added value. He wondered if he could have pulled off an equity stake in the banks he bailed out, preventing any banker from earning a bonus until every last penny was returned to the Lebanese taxpayer and depositors. He got angrier as he thought about them keeping the eurobond coupons he just paid them outside the country.

The FE transactions started out rare, then increased in frequency. The banks were like junkies, excited every time he announced one, waiting to snort the delicious white powder of phantom profits, but now, when he looked at their balance sheets, he could see the bags under their eyes, the slurred speech, the red nose …. they were badly in need of rehabilitation.

Salameh knew they needed drastic intrusive surgery to extract the country out of the coming abyss. He had to weigh protecting his legacy, and stretching the reserves for 3 more years, until his tenure ended, making it the next guy’s problem, or dealing with the long term-problem now. It was really a political, as much as an economic problem. In some sense, it was the consideration that every political leader in the country was calculating. It was much easier to play the blame game or find a scapegoat than to make a tough decision that’s good for the country but that damaged your personal reputation. Like the fires burning in Mechref and Damour. What’s easier, to extinguish them or issue outraged press releases?

He remembered Nietzsche, “If you stare into the abyss, the abyss will stare onto you.” He now stared deep into the abyss of possibilities: devaluation, haircuts, default. Every single option was catastrophic, and nobody in power wanted to face the abyss that was staring back at them, so they all left it to him, while they find a scapegoat. He remembered the idiom, “If you look around the poker table and can’t tell who the putz is, then it’s you.”

Ask a hundred Lebanese about the reason for the devaluation of the 1980’s and you’ll get a hundred different answers. It was a “Force Majeure” … like an earthquake. Nobody was held accountable. Nobody remembers who the governor was. Google “Governor of the Central Bank of Lebanon” and he’s the only one who appears, as if no governor existed before 1993. He was like Adam and Eve of BDL. He didn’t have the advantage of anonymity now. His past success was his worst enemy today.

Success has a hundred fathers and defeat is an orphan.

Salameh looked out the window at the demonstrators, took a deep breath as he contemplated his options, and thought, “It’s lonely at the top.”

In an interview with CNN, he announced how dire the situation was … days away from a crisis. It was a conscious decision, high-risk, deviating from his “everything is fine and under control” message that he had consistently and convincingly delivered for 26 years. It was the first time that he sounded gloomy. But he had to do it. He had to light a fire under the decision makers to move. His statement shocked the market and the Lebanese people. They had never heard anything like this from the Superman of Lebanon. But Salameh gambled because banks were closed, so there was no chance of a run on them or the Lira. But there was collateral damage. Yields on eurobonds climbed to 37-60%, a level not seen in the history of the nation. So he had to backtrack from his statement somewhat, by issuing a clarification that ended up like the difference between “restructure” and “reschedule.” The next day prime minister Harriri resigned, granting a victory to the protestors, who were cursing Salameh, thinking that his CNN statement was aimed against them.

Salameh looked at his watch. It was 7pm, not the latest he’s ever worked, but he was still jet lagged from his trip to the United States, and he wanted to get some rest. He informed his lone bodyguard and driver that he was leaving. He didn’t have multiple bodyguards like many others in senior positions, because he was always well-loved by everyone, although he was wondering if that was still wise today. He believed that when your time came, no amount of bodyguards could protect you against a well-funded and committed group. He recalled his friend, the late Rafiq Harriri, with all his security resources, which didn’t change his fate.

As they drove out, there were some stragglers from the demonstrators. His tinted window was open. One of them, with a bandana on his head, stood right outside his window. They were a meter apart. They looked straight at each other, eye to eye — a symbol of the masses in pain and a symbol of the Lebanese capitalist system. He thought he would start yelling for the rest and they would mob his car, but maybe the demonstrator detected the sadness in his eyes. He gave the Governor his bandana, then just turned and walked back to the rest of the mob while hurling more insults at him and the central bank.

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