Afghan Bank Bailout: U.S. Works To Prop Up Kabul Bank To Prevent Crisis

09/04/2010 02:25 pm ET | Updated May 25, 2011

***UPDATE*** The Times has updated their story with comments from U.S. Treasury officials insisting that no American taxpayer money will be used to recapitalize Kabul Bank: "'No American taxpayer funds will be used to support Kabul Bank,' said Jenni LeCompte, a Treasury Department spokeswoman." An earlier version incorrectly reported that American funds would be used to fund the bailout.

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The New York Times reports that the U.S. has agreed to assist the Afghan government in bailing out that nation's largest bank in order to prevent a nationwide financial crisis:

Top officials at Kabul Bank and a senior leader at the Central Bank declined to comment on the details of the rescue efforts, which were still being negotiated Saturday. However, a manager at the Central Bank and a senior American official confirmed that there would be what the American official called an “intervention.”

The United States is advising the Afghan government on how to manage the crisis, but is not contributing any American money, officials said.

Crowds gathered at Kabul Bank branches around the capital to withdraw dollar and Afghan currency savings, with customers saying they had lost faith in the bank's solvency following a change in leadership and reports that tens of millions of dollars had been lent to political elites for risky real estate investments.

"Kabul Bank has lost the trust of the people. Even the chairman resigned so all the people are concerned," said Mohammad Nawaz, head of an Afghan aid group who had tried for three hours to withdraw the $15,000 in his account.

The bank run that began earlier in the week undermines efforts by the central government to build an efficient political and financial system to drag Afghanistan out of its dire poverty.

Problems at the bank could also have wide-ranging political repercussions since it handles the pay for Afghan public servants, soldiers and police in the unstable nation beset by a Taliban insurgency, widespread drug trafficking and the plundering of aid money.

While there was little apparent sign of panic, the deputy commander of the international coalition in Afghanistan said contingency plans were being drawn up to respond in the event of unrest.

"We're prepared to deal with the unexpected," Lt. Gen. Sir Nick Parker said.

Kabul Bank's woes further underscore entrenched problems with cronyism and corruption, with millions of dollars in deposits allegedly loaned to relatives and friends of the ruling elite to buy property in financially troubled Dubai.

The New York Times and The Wall Street Journal reported Wednesday that Kabul Bank's losses could exceed $300 million -- more than the bank's assets. In addition, The Washington Post said Afghanistan's central bank had ordered Kabul Bank's newly resigned chairman to hand over $160 million in Dubai real estate holdings.

On Thursday, President Hamid Karzai reassured anxious bank customers, saying every penny of their deposits would be guaranteed by the government.

"The Kabul Bank is safe," Karzai said in comments echoed by the country's central bank governor and independent banking association.

Calls to bank executives rang unanswered Saturday and it wasn't clear how much had been withdrawn. People hoping to take money out were given numbers but many had yet to be served when branches closed at noon as is customary.

University student Ahmad Fahim held number 1,724, but tellers had made it only to number 200 late in the morning. He planned to return Sunday to try again to withdraw his family business' funds and close the account.

"We've never had any problems with Kabul Bank, but after the news broke, we decided to take our money out," the 23-year-old said.

Fahim said his father had no plans to open a new account and would distribute the cash among the homes of relatives for safekeeping. State-owned banks imposed burdensome limits on the amount of money that could be transferred, while other private banks were even less trustworthy than Kabul Bank, he said.

Given such limited options, Kabul Bank could still be the best bet for Afghans with cash holdings, with its nationwide network of branches and automated teller machines and ability to provide financial services such as loans, bill paying and money transfers.

Mohammad Habib Angar, a calligrapher, said he was taking out most of his Afghan and dollar savings, but wasn't ready to close his account.

"I will wait to see what will happen next. If the bank is able to create confidence, for sure I will put my money back in Kabul Bank because I do not want to close my account," Angar said.

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