Felix Salmon

Back when we last checked in on Kabulbank, no one really knew how big the hole there was, and the government was still saying that it was solvent. But now Dexter Filkins has some concrete numbers, and they’re insanely huge:

The money that has apparently been doled out by Kabul Bank to Afghan officials is part of an estimated nine hundred million dollars that is lost or missing from the bank. That amount far exceeds the three hundred million dollars in losses that emerged after the Central Bank’s takeover. Investigators said that the nine hundred million dollars includes failed loans and loans to apparently fictitious corporations. The chairman of the Central Bank said that it has recovered some of the loans, but a Western official told me that much of the money is gone: “They can’t find it.” …

The loss of nine hundred million dollars or more at the bank represents a significant percentage of Afghanistan’s gross domestic product, which is only about twelve billion dollars.

$900 million is 7.5% of $12 billion. A hole that size in the US would be over $1 trillion. That’s roughly the grand total of all subprime loans made from 2005 to 2007, all added together. Only the recovery rate on Kabulbank’s loans is going to be much lower than the recoveries on subprime.

The only conceivable silver lining here is that a lot of the money just came straight in from the US, and straight out to a well-connected elite: in a way, Afghanistan has lost only what it never really had. But that doesn’t stop the fact that the weak Afghan government and central bank now have to deal with a major banking crisis along with all their other problems. And I don’t know anybody who’s optimistic about their ability to do so.

Some people are like Winston Wolfe. They’re professional, they’re reassuring, they solve problems, they always know exactly what to do. These are the people you want staffing a bank regulator when there’s a banking crisis.

And then there’s Afghan central bank governor Qadir Fitrat:

Afghanistan’s central bank has stepped in to take control of the troubled Kabulbank, its governor said on Tuesday…

Fitrat told Reuters investigations had also started into the dealings of the bank’s top two directors and shareholders, who were told to resign…

The central bank had previously maintained that Kabulbank had not been taken over, despite a central bank official being appointed as chief executive officer…

Fitrat had described reports in The Washington Post and New York Times newspapers and other U.S. media of possible graft at the bank as “baseless information and rumors.”

However, on Tuesday Fitrat said Farnood, Fruzi and Fahim’s brother, Mohammad Haseen, were now under investigation for suspected irregularities, among other shareholders…

“We conduct our own investigation (and) once we see that there are elements of criminality involved, then we submit those cases to the attorney general’s office,” Fitrat said of the investigation process…

Fitrat insisted Kabulbank was still solvent and that its troubles would not spread to Afghanistan’s other private lenders.

“Fortunately, in other banks, mostly professionals are in charge. The good thing is that the other banks follow the rules.”

None of this, it hardly needs be said, is the kind of stuff which calms a restive population and reassures both local and foreign observers that everything is under control. We will probably never know the true state of Kabulbank’s balance sheet, or how much Afghan and US money is going to be needed to get it back on its feet. And there’s no chance that anybody is going to be successfully prosecuted.

In a failed state like Afghanistan, a strong independent bank, plugged in to a reliable international network, can actually be safer than a huge bank taken over in a chaotic fashion by a central bank governor with precious little credibility. The nationalization of Kabulbank does not mean that the bank is now safe, or that the black hole in its balance sheet is going to start getting smaller rather than larger. It’s still a major risk to national security in Afghanistan, and I hope that some US technocrats are being parachuted in somehow to help patch it up as much as possible.

Bill Black has a detailed round-up of what we know about Kabul Bank, and where the US went wrong. He’s particularly scathing about this quote from Stephen Biddle:

U.S. officials and defense analysts say that challenging local power brokers and criminal syndicates, many of which depend on U.S. reconstruction contracts and ties to the Afghan government for support, would likely add to the unrest in southern Afghanistan and produce a higher U.S. casualty rate. “Putting an end to these patronage networks would not come cheaply,” said Stephen Biddle, a senior fellow at the Council on Foreign Relations who has advised U.S. commanders in Afghanistan.

By contrast, allowing some graft among Afghan power brokers on the condition that they agree to limit their take and moderate predatory activities, such as their use of illegal police checkpoints, could promote near-term improvements, Biddle said. “We spend a lot more money in Afghanistan than the narcotics trade,” he said. “A lot of money that funds these networks comes from us. So we can essentially de-fund these networks, taking away their contracts.”

Black’s response pulls no punches:

He is wrong about corruption, fraud, and predation. Biddle finds it necessary to create this euphemism for corruption (“patronage networks”). He believes that he can calibrate graft and dial his desired level of corruption as if he were using a rheostat to change the intensity of a light. He thinks he can get them to “limit their take” and “moderate” “their “predatory behavior.” He thinks he can get Karzai to “defund” his political cronies. His appeasement strategy has never worked. It will fail and the failure will “not come cheaply.” It will kill and maim Afghans, NATO troops, and foreign aid and construction workers.

Black also asks a very important question I haven’t yet seen posed, let alone satisfactorily answered:

Where were the auditors? PWC was Kabul Bank’s auditor. It missed everything.

The big picture here is that Kabul Bank seems to have been acting as a conduit for taking as many foreign aid dollars as possible and transmogrifying them into offshore holdings belonging to the president’s cronies. And it did all of this openly, with impunity, knowing that the US government was unwilling or unable to put a stop to it.

The result could well be much more damaging to Afghanistan, and to US interests there, than any number of military failures.

I fear that during the crucial years when Kabul Bank was becoming dominant in the country, the US was looking elsewhere: it was more interested in Iraq than in Afghanistan, and insofar as it cared about Afghanistan at all, it cared about the military situation much more than about the financial one. Ann Marlow assured us on the WSJ op-ed page in April 2006 that “while Afghans are lacking in education and management skills, they have a culture that values honor and honesty”. So obviously, there was nothing to worry about. Right?