Breaking the banks

‘When they lend to the developing world, as we shall see, bankers often have only a remote prospect of seeing their money back.’ writes Anthony Sampson. He then chronicles one or two of the more spectacular banking defaults of the past, starting with a brief account of how England in the 14th century, then a ‘wild developing country’, welshed on its debts to Italian bankers. He proceeds rapidly to the troubles the London merchant bank Barings had, in the last century, with the Argentine and the State of Mississippi, the latter’s refusal to pay its debts leading to the formation of the Council of Foreign Bondholders, which is still active today. Later, and in more detail, Sampson examines recent real or potential defaulters – Egypt, Indonesia, Zaire, Iran, Poland – and builds the picture of an international commercial banking system in peril, with syndicated loans being cobbled together to pay the interest on the last loan – which in turn had been raised to pay the interest on the one before last. How, I wondered at the outset, can the commercial bankers be so foolish as to lend if there is a good chance they will not get their money back? The answer emerges that it is Sampson who believes they might not get their money back – not the bankers. Do the bankers then delude themselves? If so, why? The answer to the latter question is threefold.

1. There is a firm belief that a country cannot go bankrupt, which makes it safe to lend to a developing country’s government, if not to a private firm in that country. This belief, indeed, was reiterated very recently in the Financial Times: ‘You cannot liquidate a country. It will always be there. As a result, bankers have long claimed there is no final risk of definitive loss in lending to governments ... in the very long run a bank can feel justified in the belief that it will always get its money back.’ Loans can always be ‘rescheduled’ – today’s euphemism for what you do when a borrower cannot repay.

2. Even if a large debt goes wrong, the banker’s own government will not let the bank collapse as a result.

3. The international agencies – that is to say, the International Monetary Fund and the World Bank – will step in and impose conditions to ensure that a defaulting country repays, so that in the end it is not the commercial bank which suffers, but the people of the defaulting country in higher taxes and lower living standards.

So the bankers themselves do not feel that the chances of seeing their money back are remote; and anyway the rewards of taking the risk are high, although it is not until nearly half-way through the book that Sampson mentions what sends the neat-suited bankers with their flat brief-cases to the ubiquitous Hiltons and lntercontinentals around the world where they do business. ‘It was the easiest money going,’ says one anonymous banker: ‘you just took 1 per cent on the turn, for signing a cheque for a few million dollars.’ That is why the big banks have been falling over each other ‘like starlings or lemmings’ in the last ten years or so to push out the huge petro-dollar deposits of the oil-producing nations. ‘They wouldn’t leave me alone,’ said one Latin American finance minister. ‘If you’re trying to balance your budget, it’s terribly tempting to borrow money instead of raising taxes, to put off the agony.’

It was a temptation not just for the poorer countries: but the poorer the country, the higher the return for the bank, although the bankers were not totally undiscriminating. Only perhaps thirty to fifty developing countries made the grade – the rest were beyond the pale of the bankers’ ‘red line’.

Sampson questions the first two of the bankers’ assumptions. Of course a domestic nation cannot go bankrupt like a domestic corporation: the days when an imperial gunboat could be sent in to seize a nation’s assets are gone. But there is little a commercial bank can do in the end to force a government to change its economic policies so that it can repay. Time and again Sampson asks where the ultimate responsibility for the risk lies: is it with the bankers’ own governments, or the international agencies, or the central bankers? If the answer is that it lies with anyone other than the commercial banks, then the commercial banks are running no risks and ‘how could they justify their spread and high profit margins, or for that matter their high salaries?’ I think Sampson believes that in the end the commercial banks would be bailed out. Nevertheless, he raises the spectre of a collapse in the fabric of international credit as a result of the commitment of commercial banks to countries which could not repay. He quotes Lord Lever, who recently told a large lunch of international bankers in London that he had ‘never been so sumptuously entertained by such a distinguished collection of bankrupts’. The bankers may have laughed, but Sampson thinks Lever meant it.

If this is the case – and it may well be – it is a very serious state of affairs. Sampson, of course, wrote his book principally to do what he is so good at: putting faces and characters to men in power – in this case, the men in charge of international banking – and describing the political machinations they get involved in. Nevertheless, so important is the thesis that international banks have become dangerously overcommitted in lending to developing countries that I felt Sampson should have devoted more analysis to the facts and figures. Fascinating figures are dropped in (although they are often out of date), but there is no real analysis of the total current exposure of commercial banks.

For example, Sampson writes that by 1977 the developing countries (excluding OPEC) owed about seventy-five billion dollars to commercial banks, of which forty-five billion was to American banks. What proportion of total risks was this? And surely more recent figures, if only estimates, are available? Then he reveals that in 1974 Citibank, America’s most thrusting commercial bank, earned no less than 40 per cent of its profits from developing countries, which accounted for only 7 per cent of its assets. In one place he says that 13 per cent of the earnings of Citibank in 1976 came from just one developing country, Brazil, as opposed to 28 per cent from Citibank’s home market in the US, while in another place he writes that Brazil provided as much as 20 per cent of Citibank’s profits that same year. We learn that by 1980 Brazil owed no less than sixty billion dollars, ‘much of it to commercial banks, headed by Citibank’. ‘We feel much safer with Citibank,’ a Brazilian economist explains, ‘because we know they’ve so much at stake.’ I would feel a little happier, if not safer, if you or I knew just how much.

What of the personalities? Bankers, says Sampson, quoting a Belgian banker called Camu, are like monks who, instead of practising chastity, practise giving credit, ‘which imposes an obligation not unlike chastity: an abstention from certain pleasures’. Bankers are very different from financiers: a financier is like an eagle soaring into the sky, while a banker is more like a trout, whose very element is liquid, says Camu. Are these men submerged in streams of money from which they peer sceptically out at the world? asks Sampson. He opens his book with a fine sketch of their annual jamboree at the International Monetary Fund in Washington, where the real business takes place in the corridors and hotel suites and the commercial bankers who really matter are never seen at the main centre in the Sheraton Park Hotel.

Sampson’s story is really about two bankers, however, David Rockefeller and Walter Wriston, who respectively headed the Chase and Citibank, two of America’s three largest and most influential banks, in the great explosion of international commercial bank lending in the Seventies, an explosion in which the Fund and the World Bank were eclipsed. The head of the third bank, the Bank of America, a man called Tom Clausen, lurks in the background. Since he has now taken over from Robert McNamara as chief of the World Bank, he would almost certainly have taken a more prominent role in Sampson’s book but for one thing: he was the only top banker who could not find time to see Sampson – an extraordinary decision for a man who told the Wall Street Journal in 1978 that ‘we think we will come across better talking to the press than not talking to the press.’ Nevertheless the rivalry between Rockefeller at the Chase and Wriston at Citibank (both of whom talked freely to Sampson), and the difference in their techniques, provide a fascinating theme around which to build a picture of the politics of international banking. For Rockefeller falls easily into the part of villain and Wriston almost as easily into that of hero – and neither has the least resemblance to a trout.

Rockefeller’s approach to international banking carried with it the aura of political conspiracy. A founder of both the semi-secretive Bilderberg Conferences and the Trilateral Commission, he liked to fly around the world visiting heads of government (if not heads of state) from the Shah to Khrushchev, purveying platitudes about the world economic and political scene, rather than discussing the technicalities of this or that loan. His open right-wing allegiances and his employment of ex-CIA men (and Henry Kissinger), and the help he gave the deposed Shah which led to the taking of the hostages, made him a target for liberal criticism.

On top of that, he was not a very successful banker. He lost out in the competition with Citibank, in terms both of size and of profits, and the Chase got itself into financial trouble, not from over-exposure in the developing countries, but from too much lending in the domestic property market; and when something had to be done. Rockefeller sacked his number two rather than resign himself.

Wriston emerges as a much more admirable figure, not least because of his succinct observations on the nature of banking. Wriston preached the gospel of political impartiality in international lending; as a Citibank spokesman put it, ‘we have worked in the whole post-war period to try to live down the accusation of Wall Street Imperialism.’ The bank has undertaken a massive increase in international lending out of basic motives of free enterprise: you take a risk for which you expect to be paid. Wriston is thus not ashamed of making money from developing countries: ‘Round here it’s Jakarta that pays the cheque,’ he says.

Of the commercial banks’ role in the great recycling of petro-dollars, Wriston told Sampson at a time when others were expressing caution: ‘It was the greatest transfer of wealth in the shortest time-frame and with the least casualties in the history of the world. I think that is something to be very proud of. It was a terrifically difficult thing to do ... We did it.’ This sort of sentiment makes it much easier to overlook the fact that Citibank was almost as deeply involved in Iran as the Chase: it lent $55 million to the Shah’s twin sister for a housing project – she used it to build a palace. Nor would Citibank condemn apartheid in South Africa, when pressure from Chase’s domestic clients forced even David Rockefeller to do so.

In the end, however, it is Citibank’s philosophy which poses the dilemma of the commercial banks’ role in international lending. Last year, when Clausen, then still head of Bank of America but soon to be appointed to the World Bank, suggested that international agencies should play a greater role by guaranteeing the banks’ longer-term loans to approved countries, Wriston disagreed. He told Sampson: ‘The IMF is a political institution which would have to decide who got the guarantee and who didn’t ... I don’t see the political allocation of the guarantee as a feasible political decision.’ One of his aides added: ‘Once you start getting close to any agencies, they start wanting to interfere.’ Yet Citibank had effectively been rescued, both in Zaire and in Peru, by the intervention of the IMF, in the latter after Citibank’s own attempts to dictate the country’s economic policy had led to riots. The banks want support but not intervention: ‘Help! but hands-off!’ as one of them put it.

Sampson, too, is in a dilemma. As an adviser to the Brandt Commission, in favour of the rich helping the poor, he can hardly criticise the Wriston approach, because it has undeniably had positive results. But as a financial expert, he can see the Lever argument: the banks, qua bankers, have gone too far; they are playing a game of chicken, in which they dare the governments of the wealthy nations not to help them should a major default threaten their own stability. Yet it is the ultimate sanction of those governments, operating via the international agencies, that enables them to operate in the first place. So in the end Sampson rejects the Wriston approach: it should be the agencies, not the commercial banks, who determine a country’s creditworthiness, and the role of the agencies should be enhanced. The world’s economic future is ‘too dangerous to be left to the bankers alone’: it ‘calls for political accommodations which can only be reached by governments and world institutions’. The trouble about such institutions is that they move, and adapt themselves, slowly – and they are cautious. That is why the Wristons and the Rockefellers leaped in and took the initiative away from them in the Seventies – and will no doubt do so again when the occasion arises. We need the Wristons if only to force the governments into action.