Collapse of Kabul Bank Points to Fatal Corruption of Karzai Government

I write in anger. Not blind rage, mind you. A cool, searing, steady anger. I think it is a righteous anger. It is not consequential, but it is my reality. I am angry about the 1,172 US troops dead in the Afghanistan War, and all the other brave NATO and Afghan soldiers who gave their lives for a new Afghanistan. Because they haven’t gotten a new Afghanistan. They have paid the ultimate sacrifice for a ponzi scheme masquerading as a reformist government. And, as usual, you and I may well get stuck with the bill for the economic damage done by the fraud.

The house of cards that is the Hamid Karzai government in Kabul may be falling before our eyes, as vast, globe-spanning webs of corruption, formerly hidden in shadows, have suddenly had a spotlight thrown on them. The crisis raises the severest questions about whether the Obama administration can plausibly hope to stand up a stable government in Afghanistan before US troops depart.

As with the second phase of the Great Depression in the United States, the crisis begins with a run on Da Kabul Bank. Depositors took out $85 million on Wednesday, after a damning story appeared in the Washington Post. They took out another $70 million on Thursday. The bank, which owes $300 million, may now have as little as $120 million left in the kitty, though it had once been worth over a billion. But the problem is not just a run on one bank. Can Afghanistan’s whole financial system and economy emerge unscathed?

Pajhwok News Service reports,

‘The immediate concern was that news of the bank’s financial irregularities, already spreading through the capital, would prompt a run on the bank itself and that the panic would spread to other financial institutions. Bank deposits in Afghanistan are not guaranteed by the central government, officials here said. “This could be catastrophic for the country,” a senior Afghan banking official said. “The next few days are critical. I am worried.” ‘

The same world-wide real estate crisis that abruptly revealed the ponzi scheme of Bernie Madoff has undone Da Bank Kabul. But imagine if Madoff had not merely been a criminal who preyed on the wealthy, but had bankrolled a president’s political campaign with his ill-gotten gains and had brought the president’s brother and the brother of the vice-president into his inner circle. And imagine if he had been only one of a handful of financiers in New York with substantial capital.

The story begins with Sherkhan Farnood, a financier who founded Da Kabul Bank after the fall of the Taliban. Over the years he appears to have used the institution for patronage for politicians and their families. Farnood gave millions to the presidential campaign of Hamid Karzai last summer, a campaign that Karzai was accused of only winning through substantial ballot fraud. (Hint: a vote wouldn’t cost much to buy in Afghanistan, and ‘millions’ would buy a lot). The other top executive at the bank, Khalilu’llah Frozi, was a campaign adviser to Karzai. Hamid Karzai’s brother Mahmoud has a 9% share in the bank.

Instead of wiring money overseas, as banks typically do, Farnood used a traditional money-transfer or hawala service, the New Ansari, which is also alleged to have been resorted to by drug smugglers, some of whose proceeds go to the Taliban and other insurgents that kill US troops. Money transferred by hawala cannot be traced electronically. The New Ansari itself is under investigation by US authorities. Persistent news reports suggest that billions of dollars in cash are being flown out of Afghanistan to Dubai, and that, let us say, irregularities are involved.

Farnood often gave out loans without proper collateral or other formalities. He loaned $100 million to Haseen Fahim, the brother of Marshal Mohammad Fahim (an old-time Northern Alliance warlord whom Karzai brought back into government as his vice-presidential running mate in summer of 2009). Haseen Fahim has substantial investments in Afghanistan’s small natural gas sector.

Farnood also apparently loaned himself $140 million to invest in real estate in Dubai, including in villas on the world islands off Jumeirah. These artificial islands made of landfill were to resemble the map of the globe once constructed, and were intended to give the wealthy the opportunity to own an entire faux country. Farnood has been flying out connected people like Mahmoud Karzai and Haseen Fahim and putting them up in the fancy chalets. Afghanistan is the fifth-poorest country in the world, with 36% of the population under the poverty line.

With the world economic downturn and real estate crash of 2008-2009, the Dubai world project largely fell apart, with investors going bankrupt in droves. Indeed, Dubai itself had to be bailed out by its rich sibling Abu Dhabi (which has petroleum; Dubai just has a financial sector). The artificial islands appear from NASA photos to have been abandoned since late 2009 when the own, Nakheel Properties, asked for a delay in repaying $29 billion in debt. Some seem to be sinking back into the lagoon or their boundaries are blurring. Close-up pictures of some of them show an eyesore.

So Farnood’s $140 million investment was suddenly not worth anything at all, and his bank began spiraling down. The details of his other bad investments have not yet emerged. The bank went from having over $1 billion in capital to now having only $120 million and owing $300 million.

President Hamid Karzai is notorious for running interference for his corrupt cronies, and that Farnood and Frozi were out of control appears to have been known for some time but nothing was allowed to be done about it. The two have now been forced out, but the question is whether it is in time to save not only the bank (doubtful) but also the entire Afghan financial system, rebuilt after the fall of the Taliban.

The Karzai government is corrupt and rotten to the core. Not a single US soldier should die to prop it up. The lie that we are fighting “al-Qaeda” in Afghanistan needs to be exposed. The US and NATO are fighting four or five groups of Pashtun insurgents, some of them until fairly recently US allies. The goal of the fighting is to keep the Karzai government from falling to the guerrillas and to train up an army and police force that could go on defending Kabul. The Afghanistan National Army from all accounts has poor morale. No wonder. What Afghan soldier or policeman would die for a ponzi scheme?

NATO should not have allowed Karzai to steal the presidential election. (At least now we have more of an idea how the theft was accomplished). It should not have allowed him to block corruption investigations.

You have to wonder if the Afghanistan parliament is up to impeaching Karzai. One thing is certain. He is part of the problem, not the solution, and as long as he is at the helm, the situation is highly unlikely to get better.

And our troops will go on dying for a vague and probably unattainable goal that the politicians dress up in idealistic flourishes, and worse, dying for a lie.

Posted in Afghanistan | 39 Responses | Print |

39 Responses

  1. I think the U.S. can take full responsibility for Karzai & Co. None of the soldiers or civilians of any nation should have died as a result of a foolhardy American adventure. Karzai didn’t happen to “us”. “We” happened.

  2. The Karzai government is corrupt and rotten to the core.
    That is not a unique situation. It is the fall of all government supported by foreigners.
    Do you really think it is possible to find honnest local politicians willing to cooperate with occupiers ?

    Not a single US soldier should die to prop it up.
    No single US soldiers should be abroad, but dying US soldiers is your reward for trying to gain influence in countries where you should not have put one foot.

    The lie that we are fighting “al-Qaeda” in Afghanistan needs to be exposed. The US and NATO are fighting four or five groups of Pashtun insurgents, some of them until fairly recently US allies. The goal of the fighting is to keep the Karzai government from falling to the guerrillas and to train up an army and police force that could go on defending Kabul.

    Is there any other real alternative which wouldn’t have involved corruption ? If you want to project your power outside of the US, you have to 1) Exercise military power and loose soldiers and 2) Use the power of money in order to get seemingly elected politicians to act in your best interests, instead of in the interest of their people.

    NATO should not have allowed Karzai to steal the presidential election. (At least now we have more of an idea how the theft was accomplished). It should not have allowed him to block corruption investigations.

    Do you really thing that there is another alternative not involving corruption ? I don’t think so. After some years the other one would become just as corrupt, or he would cease to please the US and get thrown out. By nature a government governing under an occupier and put in place by a foreign country can only end in corruption. I don’t believe in a goodwilling empire.

    • Well said Christaine!
      When if comes to foreign interventions, the US govt always takes all the credits ( which rarely, if any, happen) and assign all the bad things to foreign puppets -read Ngo Dinh Diem, in Vietnam, Saddam, Gen. Musharraf, — and so on. Karzai is a product of US like Chalabi was in Iraq. They were assets that were recruited and paid for by CIA.
      US never installs a genuine leader who has grassroots support unless compelled to do so in these kinds of situations. Karzai understands very well that he will, ultimately be the fall guy once everything unravels as it certainly will. Waiting for the time when Mahmoud Abbas will be demonized in MSM media after the eventual failure of the peace process in Palestine.

  3. when you highlight the number of US military members who died while attacking Afghanistan, please also mention the number of Afghan civilians killed by US military members.

    • You have said it for me Redflag. I couldn’t believe that the slaughter, mostly by drones, was not mentioned.

  4. You keep your anger in control enough to describe with clarity how Karzai’s regime is a ponzi scheme masquerading as a progressive government. Here in the USA, mainstream media emphasized the enormity of Bernie Madoff’s scheme because Washington and big bankers needed to avert the public’s eyes from the enormity of their own crimes in stealing the taxpayer blind in order that Wall Streeters might keep bagging huge bonuses.

    What Americans don’t realize is that since the late 1950s when the federal balance sheet started going down the path to world-beating indebtedness, Washington, aided by big bankers, has been running a ponzi scheme fated to end in sovereign default either outright or through terminal weakening of the dollar. The upshot will be that most Americans will be standing in breadlines as the big bankers impose a new monetary system on the nation. But by then the middle class will have disappeared. The big bankers will have enriched themselves by using the taxpayer’s savings in order to collect on their winning derivatives bets, such as the ones against AIG that Washington helped them collect. These bets now total roughly a quadrillion dollars. Although the weakening dollar means the winning bets when collected won’t be worth what they are on paper today, it’s worth it to the bankers to collect even a small fraction of the total. Their motto is ‘half a loaf is better than none’.

    All that Karzai has been doing is to imitate Washington and American big bankers.

  5. “1,172 US troops dead in the Afghanistan War, and all the other brave NATO and Afghan soldiers who gave their lives for a new Afghanistan.”

    Why are American lives and American treasure being expended to “build a new Afghanistan” while people here at home are standing in lines of desperation for food, living under bridges, unable to find meaningful employment, and our own infrastructure is crumbling? If the people of Afghanistan want a “new Afghanistan” let them build it for themselves. When we wanted a “new America” did anyone come build it for us?

    What is the sense of a plan that makes us spread around the globe trying to create “new this” and “new that” while allowing our own country to deteriorate into a crumbling junkpile of street corner beggars and collapsing bridges.

    • Yes, somebody did build our new America: the coolies, the slaves, the indentured servants. Though I don’t disagree that we should be focusing on bringing democracy and justice to the U.S>

  6. I find that using what I call the “What if Scenario Test”
    helps to clarify many things.
    For example:

    If the Karzai Government were not corrupt would:
    The death of NATO soldiers be OK?
    The death of Afghanistan civilians be OK?
    The death of Afghanistan Taliban be OK?
    The occupation of Afghanistan be OK?
    The resurgence of the Opium trade be OK?
    The imposition of Western values be OK?
    The lies we are told be OK?
    The drone assassinations be OK?
    The ….. (feel free to add your own questions) be OK?

    If you were to say no to any/some/all of these questions then
    whether the Karzai Government is corrupt or not is irrelevant.

    • “If you were to say no to any/some/all of these questions then
      whether the Karzai Government is corrupt or not is irrelevant.”

      Hmm, not sure that this statement is true.

      You can say “No” to quite a number of those things and *still* conclude that nation-building is a worthwhile thing to attempt in Afghanistan e.g. No, the death of Afghanistan civilians is not something that we should be “OK” with, but the inevitability of civilian deaths should not deter us from nation-building in Afghanistan.

      The same is not true of corruption on this scale i.e. No, the corruption that is rampant in Afghanistan is not something that we should be “OK” with, but the inevitability of that corrupt should tell us how futile it is to engage in nation-building in Afghanistan.

  7. And our troops will go on dying for a vague and probably unattainable goal that the politicians dress up in idealistic flourishes, and worse, dying for a lie

    Shades of Diem and Nhu: Viet Nam all over again (we always install a kleptocracy)

  8. It’s all connected together.

    The US could end the war and leave a tolerable state behind within six months if it chose to. What’s desperately needed is a Grand Bargain with Iran. That is the key to unlocking the whole region. In such a case Iran would certainly help the US create a stable state in Afghanistan and in Iraq if it meant the US would leave. A grand bargain with Iran would also de-escalate Syrian-Israeli tensions, Lebanese internal tensions, Lebanese-Israeli tensions and Israeli-Iranian tensions.

    But the US still seems to have plans on conquering the region with a long term presence as a garrison to China and Russian involvement in the area. So it will keep trying and failing to defeat a huge land mass of Asia.

    • Stepping back from things, this is the scenario that seems to always seems to just peak through…..

      The way out, if there is any other possibility, is the one Obama seems to be steering toward: of putting lipstick on the pig, declaring victory, and slinking out of Afghanistan in a year as in now happening in Iraq.

      However, a Grand Bargain with Iran seems to somehow be possible, either that or I need to get off the pipe (just kidding). Seriously, the Mullahs may be too infatuated with their notion of chess and of a Great Game here, but for all the world it can be argued that is just the sort of game they’re playing with their posturing. This business with nukes, most evidently, being a bargaining chip/gambit to squeeze Israel into behaving in a TRULY civilized manner, with a parallel goal of getting the US out of the Gulf. Of course, loosing their essential hegemony in the ME is not something Israel is going to find acceptable since (in the pathological of the Likud) any scenario that doesn’t leaving them in the drivers seat is an existential threat. But, no one said it’d be easy. Even, and especially if, they are able to bamboozle Obama into neutering Iran, they’re now on a road to nowhere to with demography steamroller they face. If they play their hand carefully, Iran is in a position to make good things happen.

      There are alot of other elements that could addressed that cannot be gotten into here and now, but I agree, Iran could be the key, and to me it appears they themselves appreciate that potential. The question now is, if Kissinger could go to China, could Hillary go to Tehran?

  9. I’ve linked to this post here, and here.

    The commentary topic for the day: September 03 2010 Travus T. Hipp Morning News & Commentary: Bank Run In Afghanistan – What WILL Be Left When The Bank Has Been Run And Looted?

    Also, in light of the recently disappeared ‘oil sheen’ at yesterday’s Gulf drilling rig fire, and BP’s attempt at blackmailing America’s taxpayers (ie. “We keep drilling in the Gulf or we MAY NOT be able to pay for the Deepwater cleanup”), I’ve attempted satire on the topic at the bottom of those posts. Introducing “Sheen-B-Gone”!

  10. Prof, your anger is justified, in my eyes. I think we are in Afghanistan for one main reason. The Dems are terrified that if they get out some attack may take place in the US. And such attack will be, wrongly, perceived as having originated in Afghanistan. And then there will be a flood of commercials in the American media, and endless accusations on Cable TV that the Dems can’t protect the US. That is the reason we are there. In my opinion. This is all about domestic politics….the 21st century version of the ‘who lost China’ nonsense.

  11. For the first time ever, Prof Cole, I find myself shaking ny head at one of your blog entries. You of all people know that Karzai has always been corrupt, is corrupt now and will remain corrupt just as long as the US is dishing out the cash. Which it does in equal measure to Karzai, the warlords and the Taliban.

    As for “whether the Obama administration can plausibly hope to stand up a stable government” you know that’s not going to happen. There isn’t even the remotest chance of that happening. As an Englishman I deeply resent the way that as members of NATO we have been roped into throwing away British money and lives – again – in that ungovernable country. Karzai just about has control of Kabul, and nothing else.

    You say”NATO should not have allowed Karzai to steal the presidential election” but that is utterly disingenuous. NATO does what it’s told, and it has no business being in Afghanistan anyway. It’s understandable that an attack on one member is treated as an attack on all, but do you really want us to believe the US cannot carry its own water?

    This whole mess is stupid anyway. Started by PNAC and Bush to get revenge on the Taliban, it’s an exercise in spreading American influence; it has damn-all to do with the fine-sounding BS that America now retails as installing democracy. Just like Iraq, and we’ve all seen how that turned out. In fact many of us saw how that would turn out before the USAF bombed Dora Farms.

    If Washington wasn’t so subject to corruption itself, and if politicians would stop worrying about a two-year election cycle, then maybe something could be done. In the absence of that, you’ve got yet another Vietnam coming.

  12. Mission accomplished! The whole point of the Iraq and Afghanistan illegal invasions was “destabilization”. Neither had anything to do with security. And we all know Iran is next in the sights of that little terrorist nation along the Jordan River.
    Iraq is back to the 1200’s in terms of infrastructure (outside the US embassy) and Afghan is producing more opium than ever before. This latest revelation is only more evidence of the truth behind the lies.

    [“…The crisis raises the severest questions about whether the Obama administration can plausibly hope to stand up a stable government in Afghanistan before US troops depart….”]

    I think you give them too much credit for actually considering departing.

    Good write Juan! Thanks and keep it up.
    All the best.

  13. I think the real reason that the US is in Afghanistan is so Obama could have a war of his own. Presidential candidates who aren’t “warlike” don’t get elected. Iraq was someone else’s war–it didn’t count.

    • Thanks for that link. I’ve had a look around the internet and it looks like there are a few errors in that article, particularly in regard identifying the practice of Bacha Bazi as justified by Muslim doctrine. It also appears that the Taleban may be one of the few factions in Afghanistan to be actively fighting this practice – and that the worst offenders are the various militia commanders.

      I remember being shocked when I saw Carmela Baranowskas’ brilliant “Taliban Country” ( link to ) which shows US officers listening to one of the then provincial governors, Jan Mohammed (seen in this link with Commander Dan McNeil link to )

      The governor, talking to the US officers, says of one of the local boys who has just been apprehended by the joint US-Afghan force:

      “We’ll take him with us for a few nights, he will keep us entertained. ”

      I would recommend everyone watch Carmela Baranowskas’ film. It shows local villagers, forced to flee the country or join the resistance as the US forces ally themselves with rival tribal militia commanders. It also shows a “head of civil affairs” who, despite the billions poured into the country, is unable to muster the resources to save a dying Afghan child, brought to him by a local villager and in need of basic vitamins.

      So it would seem that a few questions should be asked of the US enterprise in Afghanistan regarding the apparent contradictions inherent in:

      – fighting corruption in the Kabul government by bribing many of its officials.
      – fighting to extend the rule of the national government by arming and funding its local militia rivals.
      – fighting the war on drugs by arming and supporting the world’s biggest heroin dealers.
      – expanding democracy by supporting a President who stole the election
      – winning heart and minds by denying infants the most basic health care
      – securing the future for the children of Afghanistan by giving carte blanche to the world’s most active paedophiles.

      • I enjoy your list of inherent contradictions and firmly agree with such analysis. It is important, though, to realize the immense challange presented in governmental/social reformation in a country with international boarders that do not reflect the true geo-sociallogical boundaries of the Pashtun. Kabul is not Afghanistan, nor really, is Afghanistan Afghanistan. I believe the contradictions to which you allude reflect greatly the contradiction of the West’s interpretation of the boarders of Afghanistan. It may be called a country, but when a decade of Taliban rule, hundreds of years of autonomous tribal alliances, and poor infrastructure permeate a region, the socio-economic conditions of its people fragmented, factioned, and formidable. As such, in order to unite “Afghanistan” into a western democracy, such factions and internal boarders must be dealt with individually. In doing so, certain tribes must be armored against the taliban. Ironically, the taliban has been the most unifying force within that country within the last 20 years.

  14. The US government, read State Dept., Obama, Clinton, showed a total unwillingness to engage in necessary confrontation when it allowed Karzai to steal the election fr/ Abdullah & then shut him out of any coalition effort. They’re hoping that if they spend enough $, say the right things, and wage a token fight against the Taliban that somehow ‘things will turn out all right.’ Only some sort of calamity can ensue.

  15. link to

    September 4, 2010

    U.S. to Help Bail Out Afghan Bank to Avert a Crisis
    By ADAM B. ELLICK 35 minutes ago

    As thousands of nervous depositors stampeded the central branch of the beleaguered Kabul Bank, the Afghan and United States governments tentatively agreed to bail out the bank.

  16. The US electorate won’t take kindly to bailing out an Afghan bank.. The raising of opium poppy isn’t a viable basis for sound government.

  17. Great article on Kabulbank ! Looking at the larger picture , Afghanistan does not have deposit insurance , so what is known regarding other private banks such as Azizi Bank , Afghan United Bank , Brak Afghanistan Bank and Bank e Mili ? With the most recent news item from the BBC website noting barbed wire and armed soldiers at Kabukbank’s main branch , a 10 thousand dollar withdrawal limit , continuing long lines of customers trying to retrieve their funds – has any news surfaced of a general bank run on other private banks ? Thanks for any info in this regard .

  18. Sounds like typical Wall Street banking behavior to me, with a nod to the 1980s S&L crisis. America’s Afghan presence doesn’t involve terrorism or nation building, just geostrategic (oil and gas) pipe dreams about Central Asia dating back to Zbig Brzezinsky and Jimmy Carter.

  19. Obama had three opportunities to remove Karzai – before the election, after he stole the first round, and then after Abdullah refused to run in a still corruptible second round. Instead Obama actually called Karzai to congratulate him after the third and last chance, rather than telling him to either step down or conduct a fair election.

    What is strange is that Karzai was appointed by Khalilzad one of the inner circle of the Bush neo-cons and helped create a government in their own image of corruption and stolen elections. Yes it could have been different. The Aghan people were thirsty the rule of law after three decades of war.

    Obama had every reason to remove Karzai and to install his own leader who would be responsive to him. This would have also obtained the support of the Afghan people for Obama immediately and afforded him time to correct Bush’s abject failures. When he failed to do this he signalled to the Afghans, just as he has repeatedly to Americans, that he is no different than Bush – in many ways worse. The US now provides no hope for Afghanistan, except continued warfare. Obama”s weakness in playing out Bush’s third term has invited Karzai to play with Obama – for example instructing Obama when US forces can leave the country, disagreeing with him whenvever he pleases, threatening to join the Taliban and so forth.

    The Bush-Obama war in Afghanistan simply cannot be won on behalf of a corrupt government. Yes, installing an Afghan government that was not systematically corrupt would have provided an opportunity to rebuild this failed state, prior to a US withdrawal. But this project was never even started and it is too late to start now. Obama squandered the last opportunity.

    The US should stop wasting blood and money there, and get out as the author explains.

    Incidentally the banking system was created and supervised under advisors working for USAID and was long held up as shining success of US assistance. It is most importatnt that the tangled web of corruption should start to unravel in this sector.where relatively unlimited resources have been invested by USAID.

  20. After the 1893 Durand Line that the Saddozais drew after few Durranis refused accountability ,the results are now visible to the world community..There is no genuine population or integrity left.

  21. What are we fighting for, I don’t give a Dam, let’s just cut and run. Let the chips fall where they may. We are extreamly tierd of all the BS.

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