Chapter 2

The Fate of Rashid and Rafidain

In order to finance Iraq’s interim and future government, the next challenge was to reboot Iraq’s state-owned banks. With severe amounts of debt and a complete lack of transparency, Iraq’s banks had neither the capacity nor the credibility to integrate into the global financial system and service the loans necessary for domestic infrastructure projects. Lacking in-house expertise and experience, the CPA contracted out the plans for the restructuring of the banking sector to multinational consulting firms. Specifically, the United States Agency for International Development (USAID) selected the multinational consulting firm BearingPoint to reconfigure the Iraqi public banking sector.

In many ways, BearingPoint’s intervention demonstrates the structural limitations of the American effort to restructure Iraq’s financial system. This chapter reveals how institutional corruption stonewalled efforts to reform Iraq’s public banks. While BearingPoint’s involvement in Iraq was brief, the chronicle of their endeavor highlighted the challenge of rebuilding Iraq’s economic institutions without addressing their political dimension.

From the outset, BearingPoint’s engagement was ambitious. By August 2003, the company was to have “up to 100 BearingPoint employees… on the ground” to design and implement regulatory reforms for the state-owned banks. The rapid and sizable deployment underscored the gargantuan task that lay ahead. The consultants had only a few months to analyze Iraq’s chaotic banking sector and come up with an informed to massive systemic issues. During that time, they hastily navigated the accounting books of Iraq’s two largest public banks which had not been reconciled in over a decade. Then, in the little time left for the engagement, they haphazardly engineered a method to resolve the massive debts left over from the Iran-Iraq War, mega-infrastructure projects, and the invasion of Kuwait. The short timeline and difficult assignment meant that BearingPoint’s solution would likely not be able to comprehensively address the sector’s problems.

At the engagement’s conclusion, BearingPoint presented its recommendation to save one bank and amputate the other. The solution, based on the ‘Good Bank / Bad Bank’ paradigm, shifts all of the healthy, functioning assets of the state-owned banks to one bank and punts all of the non-performing assets to another bank. In the case of Iraq, Rashid Bank, the ‘good’ bank, would remain as an institution for financing government debts in the new Iraqi economy, and Rafidain, the ‘bad’ bank, would be dissolved.

Despite BearingPoint’s efforts, the Iraqi Governing Council shelved their proposal. Interviews conducted with Musab al-Kateeb and former Trade Bank of Iraq president Hussein al-Uzri suggest that corruption within the sector drove Iraq’s decision to reject the plan. Hussein al-Uzri, the head of Iraq’s most successful state-owned bank, presented the government banks’ opinion of the conclusion. He described the engagement as formulaic attempt to bring together “typical” consultants who “packaged [their findings] nicely.” Ultimately, he concludes, the recommendation failed to be implemented because “no corporation had the mandate to fix or restructure the banks.” Al-Uzri’s conclusion during the interview is opaque, yet indicates that political corruption may have blocked meaningful reform in the sector. On the surface, his statement appears very matter-of-fact. Of course, a foreign company does not have the authority to execute the restructuring of a public bank. However, his statement can also be a read as an indictment of the political system that prevented the restructuring of the banks. In this case, he appears to suggest that only a foreign for-profit corporation would have had the will to go through with the amputation of one of Iraq’s major financial institutions. In other words, the Iraqi Governing Council saw the inefficiencies within the bank but could not or would intervene

This interpretation of the situation is supported by the interview with Musab al-Kateeb. As a senior advisor at BearingPoint at the time, al-Kateeb was strongly familiar with why the company failed to get the government onboard with their recommendation. He explains that none of Iraq’s leaders wanted to “take the political risk” to fire the vast number of employees that Rafidain bank had accumulated. Al-Kateeb’s statement appears to contradict the darker side of the banking sector he described in Chapter 1. It should be noted that while public backlash from bank employee layoffs was certainly a concern for some politicians, it was not a major motivation for rejecting previous reform efforts. Only months earlier, government leaders openly embraced the much larger layoff of Ba’ath party members in the Ministry of Finance despite the resentment that it fomented among the Sunni population. It stands to reason then that the layoffs at the banks threatened Iraq’s leaders because, unlike de-Ba’athification, they actually had some skin in the game. Iraqi government officials refused to part with either Rashid and Rafidain because those banks had become their bargaining chips in the political transition process. The banks’ employees and their salaries represented a key source of income and status for Iraq’s political parties. Without the banks, politicians could lose a valuable avenue to exert influence through the appointment or dismissal of bank officials with ties to other politicians’ families or political parties.

While BearingPoint’s proposal may have been the right way forward, it failed at the level of political implementation when confronted with the reality on the ground of Iraq’s state-owned enterprises. On this front, both Al-Uzri and al-Kateeb concur that foreign consultants and Iraqi politicians were unable and unwilling to resolve the “structural issues” of corruption and nepotism underlying the banking sector. Without the time to develop an effective and politically palatable solution, the CPA moved try and find another mechanism to finance Iraq’s reconstruction. While BearingPoint’s proposal for the restoration of the public banking sector was rejected, its recommendation for the creation of a ‘good’ bank blazed the trail for creation of a new bank, the Trade Bank of Iraq.

Today, Rashid and Rafidain banks remain in the same form as they did in 2003 – bloated with thousands of civil servants but also dysfunctional. However, one lesson from the conclusion of BearingPoint’s engagement is the importance of understanding Iraq’s banking sector beyond its balance sheets. The uncomfortable truth about Iraq’s public banks is that they are just as much political institutions as they are economic ones, and they are just as tightly interwoven into the factionalism that has defined Iraq for generations as any other part of the Iraqi state. Accordingly, Rashid and Rafidain’s balance sheets are not unreconcilable due to Iraqis’ poor accounting practices but due to the economic and political value in maintaining those practices. In conclusion, this case study suggests that any attempt to restructure Iraq’s public banking sector will have to address the corrupt underbelly of Iraq’s political/financial system.