Hookers, Jaguars, and Lots of Stupid Loans
Lane, Charles
HOOKERS, JAGUARS, AND LOTS OF STUPID LOANS by Charles Lane Making it in international banking During the seventies, lending to the Third World wasn't just a job. It was an adventure. Just...
...President Jose Sarney's fairly progressive, civilian government has just been confirmed in power by an overwhelming victory in state and municipal elections—though it's true that victory was followed by riots over recently announced price hikes...
...clients and themselves by lending to these foreign countries...
...they hold 43 percent of the total foreign debt owed to our banks...
...Flimflam was built into the system...
...Interstate retail banking (mortgages, car loans, etc...
...But since the regionals were new at the game, they didn't have any personnel with international experience...
...The top 15 banks have the rest...
...Brazil has plenty of problems, and its bank creditors may well have to grant further concessions in order to help the country get over them...
...Going global" became imperative for these banks in the seventies because their domestic lending opportunities were limited...
...The costs of maintaining loan officers in a princely lifestyle were nothing compared to the typically hefty interest income the banks earned on the loans they made...
...The word was lend, lend, lend...
...banks, it probably won't start in Brazil...
...But that hit would probably be perfectly bearable for the regionals, and their traditional domestic clients would benefit from being able to export more...
...Neither Gwynne nor anyone he worked with in the international department knew much about the countries they were lending to...
...S.C...
...exports...
...Just ask S.C...
...Gwynne...
...But, thanks largely to cajoling and arm-twisting by Washington, they are willing to back Treasury Secretary James Baker's plan, which would try to come up with $29 billion worth of new lending, $20 billion of it from American banks, and the rest from the World Bank and the Inter-American Development Bank...
...In fact, Brazilian citizens have invested just $10 billion outside the country, compared to $53 billion shipped out by Mexico and $30 billion by Venezuelans...
...The extravagance of the bankers' lifestyle was itself dictated by the perverse economics of the lending craze...
...Everyone was charging about the same interest rate...
...Its investments have paid off in rapid export-led growth...
...The bank never did get it all back...
...was prohibited by the federal Glass-Steagal Act, and many states limited banks' intrastate retail lending to a single city or country...
...Compared to other Third World borrowers, Brazil used its loans in a relatively productive manner...
...The company supplying Gwynne with all these luscious perks was so grossly mismanaged that it had long since been cut off by big foreign banks that knew its reputation...
...Much of their 'intelligence gathering' was done from the shelter of first-class hotels and expensive restaurants," Gwynne explains...
...In 1980, Gwynne found himself in Manila, being "met at the airport by a shiny new Mercedes, which also contained a girl...
...Weidenfeld & Nicholson, $16.95...
...Before he was 26, he "had been to 25 countries and was one of four bankers managing a $150 million international loan portfolio...
...Later, when the loan went sour, the bank was faced with collecting from Ferdinand Marcos's government, which had assumed responsibility for the company's debt...
...Furthermore, his experience as a former insider at Cleveland Trust, a "regional" bank, enables him to explain the perspective of banks other than the big money-center operations that dominate finance in New York, Chicago, and California...
...When he wrote appropriately gloomy assessments of "country risk," his superiors altered them to sound more optimistic...
...Gwynne and many other Americans wonder if it really would be so terrible if money center profit worries stopped exercising so much influence on American economic policy...
...You can quibble here and there with the details of Gwynne's indictment of the banks...
...Small wonder that Gwynne concludes he was "just a bit player in a perverse, global confidence game...
...It was the only way banks knew to impress potential clients with the importance, wealth, and stability of their institutions...
...Therefore, each regional would lose less than the money center banks if everyone was forced to write off bad loans...
...All the banks were selling the same interchangeable product: money...
...Indeed, with possession of nearly half the outstanding loans, but relatively little to lose by writing them off, the likes of Cleveland Trust have a good deal of control over the big banks' fate...
...But from their point of view this means placing their capital at even greater risk for the sake of the money center banks, who stand to lose the most from a default...
...When he started at Cleveland Trust in 1977, Gwynne had a history degree, a masters from a writing program, and two years experience as a French teacher...
...The idea is to let these countries restart their economies and, hence, buy more U.S...
...Gywnne got assigned to Latin America because he knew French...
...But if a string of defaults does someday bring down the Bank of America and other haughty U.S...
...In exchange for the new credit, countries would have to adopt free-market economic reforms to restore their ability to grow and to repay debt...
...the reality was that he was being hustled...
...Not that Gwynne's superiors at the bank would necessarily have been interested in intimate The young ex-banker concludes he was "just a bit player in the perverse, global confidence game . " knowledge of local circumstances...
...And it was great work for a kid, if you could get it...
...Gwynne, however, speaks too soon in arguing that "there is absolutely no justification" for placing "the bank's fate in the hands of one unstable, inflation-ridden country...
...That's better than a more radical alternative that might call into question the very idea that every nickel of debt and interest must be repaid in order to 'protect US...
...The regionals had already been reducing their exposure in Latin America when the Baker plan came along, and they are leaning increasingly toward a solution like that of Sen...
...True, in hindsight it doesn't look too smart for Bank of America, the second largest bank in the U.S., to have loaned $2.5 billion—half of its capital—to Brazil...
...Basically, though, Gwynne's charges stick...
...Thanks to the recent "Cruzado" plan of wage and price controls, inflation has dropped from 225 percent last year to an expected 40 percent next year—not bad at all by Latin standards...
...Gwynne, who worked in the international credit department of Cleveland Trust during the peak of the boom...
...I did not understand how a bank worked," he reports...
...And there was a plane waiting to take me to Baguio, a fabulous mountain resort in the north ." Gwynne thought he was lucky to have found so eager a client...
...Collectively, the regionals constitute a major power bloc...
...These corporate clients, of course, had customers in the Third World, and the banks soon realized they could help their U.S...
...HOOKERS, JAGUARS, AND LOTS OF STUPID LOANS by Charles Lane Making it in international banking During the seventies, lending to the Third World wasn't just a job...
...Unstable...
...Yet he, and hundreds of others like him, performed the quotidian lending chores which, summed up over several years, dozens of countries, and hundreds of banks, led the world into the international debt crisis...
...bank profits...
...Everyone, no matter how little he actually earned at home—and Gwynne never earned more than $20,000 in salary—lived like an expense-account king while calling on prospective clients abroad...
...This would mean an earnings "hit" for all concerned...
...The regionals' exposure in the Third World is smaller on a per bank basis and is spread out over dozens of countries...
...Charles Lane is an associate editor at The New Republic...
...Therefore, putting on airs was the only method left for distinguishing your bank from the others...
...The money center banks aren't particularly eager to lend more to Third World borrowers who have already burned them once...
...Gwynne's funny, often astonishing, tale* of a youth spent lending American money south of the equator adds a much-needed dash of color to what is now the dreary and all-too-familiar story of how bankers led the Third World and the industrialized world alike into the sorry mess we now know as the international debt crisis...
...I traveled overseas three to four months a year...
...Selling Money...
...To expand, regionals increasingly turned to supplying loans to corporate clients, which wasn't restricted...
...Presumably, money center banks reason that this plan at least keeps the debt game going and interest flowing to New York...
...Although the traumatic debt crisis of the eighties—with its "non-performing loans" and looming threat of default or even bank collapse—has caused a certain amount of amnesia about it, the seventies were also a time when the profits on loans to the Third World were as good as, or in many cases, far greater than those that could be gotten by lending at home...
...What little information the regionals did have came from the countries' own central banks, who often found it expedient to cook the books, or from the big banks, who themselves were flying blind...
...Gwynne mocks Brazil's controls on capital flight, claiming they are strict on paper but easy for the well-connected to dodge...
...By • focusing on the role of the regional banks in the debt crisis, Gwynne helps cast the debate over how to get out of the crisis in a new light...
...I stayed at Claridges while in London, at the Oriental in Bangkok, and at the Meridian in Jeddah...
...She told me that she and the car were at my disposal during my stay in the Philippines...
...I flew, ate, and drank first class ." Lorenzo the Magnificent never had it so good...
...So they turned to wet-behind-the-ears types like Gwynne...
...The regionals, too, are being asked to pony up cash for the new loans Baker wants...
...In Hong Kong I was met at the airport by a chocolatebrown Rolls Royce, in the Philippines by a red Jaguar, in Saudi Arabia by a stretch Mercedes...
...The big boys' activities in Latin America and elsewhere are more publicized, but the smaller regional banks' role in the lending boom and the debt crisis was in many ways just as important...
...Skepticism about shaky Third World economies threatened a very profitable activity...
...Cleveland Trust, however, was new in town, and hence naive enough to think itself lucky to have loaned the company $10 million to buy construction equipment from a GM division near Cleveland...
...Bill Bradley, which would grant debtor countries $57 billion worth of direct relief in the form of interest rate reductions and principal write-offs...
Vol. 18 • January 1987 • No. 12
