[PDF]Selling Money S. C. Gwynne

SELLING
MONEY











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S. C. Gwynne


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Weidenfeld & Nicolson
New York








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Copyright © 1986 by S. C. Gwynne


All rights reserved. No production of this book in whole
or in part or in any form may be made without written
authorization of the copyright owner.


Published by Weidenfeld & Nicolson, New York
A Division of Wheatland Corporation
10 East 53rd Street
New York, NY 10022


Library of Congress Cataloging-in-Publication Data


Gwynne, S. C. (Samuel C.), 1953-
Selling money.


Bibliography: p.

1. Loans, Foreign. 2. Loans, American. 3. Banks
and banking, International. 4. Banks and banking,
American. I. Title.

HG3891.5.G98 1986 336.3'435 86-9143
ISBN 1-55584-005-1


Manufactured in the United States of America
Designed by Irving Perkins
First Edition
109876543241





To my mother and father


Contents


1. Whistling Past the Graveyard 13
2. Into the Money Vortex 27
3. “The Paradise of Little Fat Men” 44
4. The Invisible Bank 75
5. Cakewalk 94

6. A Roving Commission 117
7. Trouble in Paradise 128

8. The $195-Million Burn 144

9. The Phony End of the Debt Crisis 158


Appendix 171
Notes 173
Bibliography 181


The bank system is, from the standpoint of formal
organization, the most artificial and highly evolved product
which capitalist society is capable of producing.


—KARL MARX


Time is the inflexible enemy of all false hypotheses.


—SAMUEL JOHNSON








Chapter One


WHISTLING PAST
THE
GRAVEYARD








l


YOU HAVE probably never heard of Jesus Silva Herzog. His name be-
longs to the back pages of history, along with the names of others who
unwittingly started panics or triggered disasters. Silva Herzog is merely
a well-fed, upper-class Mexican technocrat, noteworthy only because on
August 13, 1982, he was left holding the bag—the metaphor is apt—
containing the financial and moral equivalent of an $80-billion promis-
sory note, $26 billion of which was due and payable to the largest banks
in the world. He himself had not borrowed all that money, but as the
then-current finance minister of the Republic of Mexico he was obliged
to pay it back.

In August 1982, Jesus Silva Herzog arrived on short notice at the
U.S. Treasury Department in Washington and, in the words of a Trea-
sury Official, ‘“‘turned his pockets inside out.’’ He had tried desperately
to keep up the fiction of Mexico’s solvency during the summer months.
Now he had exhausted all of his emergency lines of credit, and his own
compatriots had managed to expatriate what remained of his hard-cur-
rency reserves. Mexico was bankrupt, an empty shell that had nothing


13


14 SELLING MONEY


to show for its unfathomably large debt. The purpose of Silva’s humil.
iating pilgrimage was to reveal this horrible fact to U.S. monetary ay.
thorities. There was nothing else he could do.

While the rest of the world pursued its business, news of Mexico's
insolvency spread quickly to fourteen hundred horrified creditor banks,
Eighty billion dollars. It defied the imagination. Loans to Third World
nations had barely even existed prior to 1970. Now a single country had
been able to borrow a massive percentage of the capital and reserves of
the world’s largest banks. For over a decade, Mexico had been the dar-
ling of America’s credit and capital markets. It had borrowed unprece-
dented amounts of money at rates usually reserved for Europeans and
had been considered the shining example of why lending to developing
countries was a sound and profitable practice. Now, Mexico suddenly
stood out as incontrovertible proof that the banks had acted foolishly
with billions of their depositors’ dollars.

Within a week, Mexico exploded into headlines around the world. A
crisis loomed: not since the 1930s had so much bank capital been threat-
ened by such uncertain debt. But even more frightening than the size of
the debt was the fact that the creditor banks were apparently ignorant of
the state of Mexico’s finances. The country had somehow gone bankrupt
in secret, and the world’s most powerful banks, which maintained full
branches in the country, had not been privy to this. The idea was pre-
posterous. Mexico had been in a near panic condition for months: an
inflation rate of nearly 100 percent had played havoc with its currency;
$100 million a day had been fleeing the country since the turn of the
year; hundreds of thousands of upper-class Mexicans had been flooding
the retail and real estate markets in Houston, Miami, and Los Angeles,
desperately buying up dollar assets, knowing that the dollar would soon
be revalued against the hopelessly weak peso. Mexico was being forced
to repay the largest debt in history, at the most usurious rates in mem-
ory, in a currency that was rapidly depreciating. Yet the fact was that
in the five months before Silva’s visit, commercial banks had poured $4
billion in new loans into the country. And when this crisis exploded,
the banks had no idea what Mexico had done with all that money. No
one could explain exactly where it had gone.

Silva Herzog’s visit was the high-water mark of a lending boom that
had lasted a decade, representing the largest transfer of wealth from rich
nations to poor nations in history. It also marked the beginning of the
most profound international debt crisis ever, which by early 1983 in-


Whistling Past the Graveyard 15


cluded defaults by a dozen Third World countries and placed in jeop-
ardy more than $300 billion—half the total debt of the developing world—
in foreign loans.


From 1977 to the month that preceded Mexico’s default in 1982, I
was an international banker. For most of that time, I worked as a trav-
eling loan officer for a $5-billion Ohio bank called the Cleveland Trust
Company (later renamed AmeriTrust Company).*

It was perhaps the best time in history to be in the business of inter-
national banking, better than the Renaissance when Lorenzo the Mag-
nificent through his Medici bank had financed the War of the Roses,
better than the nineteenth century when the merchant banks of Baring,
Rothschild, and Hambro had poured money into the United States and
Latin America. There had never been such a large or sustained foreign
lending boom, or so many foreign markets in which to operate, or so
much money to dispense, or so few obstacles to its dispensation. And
never had so many young men and women inherited an industry with
such speed and lack of ceremony.

Before I reached my twenty-sixth birthday, after less than two years
in the bank, I had been to twenty-five countries and was one of four
bankers managing a $150-million international loan portfolio. It was an
unusual life for a twenty-five-year-old. I traveled overseas three to four
months a year. In Hong Kong, I was met at the airport by a chocolate-
brown Rolls Royce, in the Philippines by a red Jaguar, in Saudi Arabia
by a stretch Mercedes. I stayed at Claridges when in London, at the
Oriental in Bangkok, and at the Meridien in Jeddah. I flew, ate, and
drank first class and held two separate passports from the State Depart-
ment to help me get safely in and out of the Middle East. I catalogue
these items specifically to impress the reader, because this sort of cor-
porate largesse is truly unusual, even in the world of international busi-
ness. Such stylish travel is well beyond the financial reach of most peo-
ple, even of most corporations. Yet in the late 1970s it was very much
the perquisite of the young American banker, who was to be found in
great numbers roaming the streets of Third World cities such as Kuala
Lumpur, Rio de Janeiro, and Seoul, briefcase in hand, looking for deals
to finance. He did not have to look far. Since OPEC had raised the


* Although Cleveland Trust changed its name to AmeriTrust in 1979, for the sake of clarity I have
chosen to refer to it as The Cleveland Trust Co. throughout.


16 SELLING MONEY


price of oil, both the public and private sectors of the Third World had
been in a borrowing mood. In those years total loans outstanding to the
non-OPEC Third World more than tripled—from $94 billion to $294
billion. And that is what paid for the bankers’ epicurean comforts. The
yearly increase in fees and interest income of America’s top thirty banks
had been spectacular.

I was part of a generation of young people who entered the banking
business in the mid-1970s. It was the most conspicuous flowering of
youth in business since the days of the bull markets on Wall Street a
decade before. At the money center banks, international lending staffs
both in the U.S. and abroad were rapidly doubling and tripling in size
in the years following the first oil crisis. Even the Cleveland Trust Com-
pany, a conservative midwestern bank that had never had an interna-
tional division to speak of, was staffing up: by 1975 it had a lending
staff of twenty, two foreign exchange traders, and a support staff of
forty, most of whom were under thirty years old. The same was true at
regional banks across the country. We owed our jobs and our quick
promotions to the size of the ‘‘surplus’’ the banking industry undertook
to recycle. Some $600 billion would move from the haves to the have-
nots within a decade. To do this, the banks had to create tens of thou-
sands of jobs that had never existed before. They had to hire an army
of people to find, negotiate, monitor, and collect that superabundance
of foreign loans. The problem was that there were simply not enough
experienced international bankers to go around by the time of the mid-
1970s lending boom. Experience had to be accumulated quickly; what
formerly took years now had to be compressed into months. Younger
and younger people had to be promoted to positions of power. It was
not a question of passing over older and more qualified people; they did
not exist. The more loans the banks made, the faster middle manage-
ment passed into the hands of the baby-boom generation, which was
smart enough to know a good deal when it saw one.

It was wonderful to be young and upwardly mobile in the banking
industry in those years. The stodgy old gentlemen’s club of decades past
had been dramatically transformed into one of the fastest and most com-
petitive businesses on earth. Thousands of young people streamed in
from colleges and business schools looking for that alluring combination
of travel, glamour, foreign intrigue, and high-stakes international fi-
nance that modern banking seemed to offer. The profession became quite
fashionable. Ivy League parties on New York’s Upper East Side would


Whistling Past the Graveyard 17


be littered with international bankers. They were easy to spot. They
were the ones telling the fascinating stories about bribery and corruption
in Indonesia, or about how bauxite mines were built in Brazil. They
were the world travelers, the cosmopolites who seemed to be so wise
and experienced for their age, the ones who handled millions of dollars
in foreign loans, who had met the finance minister of Venezuela or the
chief of the Korean central bank.

It was even more wonderful to be so much in demand. Yet the de-
mand had little to do with personal excellence and much to do with the
banking industry’s maniacal demands for personnel. There was frantic
competition among banks for bankers with even a few years’ experi-
ence. “‘Headhunters’’ stalked the international lending floors with an-
noying frequency. As a young loan officer I would typically receive five
calls a month inquiring about my interest in various positions in banks
around the country. It was a fast market, desperate enough that, with a
well-considered move, you could double your salary and insure your
vice-presidency before the age of thirty.

My career in banking coincided with the greatest boom cycle ever in
international lending. I entered the banking industry just as the last few
notions of sound overseas credit practice went sailing off into the blue
yonder. I left the business a month before Jesus Silva Herzog’s infa-
mous visit to the U.S. Treasury. I can’t say that I left because I had
any foreknowledge of the coming crisis; I left because of the dementia
of the system. There was something perverse about the job itself. I was
called a loan officer, but I was no lender at all. I was nothing more than
a conduit. I represented a bank that was supposedly lending the money.
But then, as Karl Marx reminds us, the bank is not really the lender at
all. The bank is just a middleman, a broker for the funds placed with it
by individuals and corporations. I was not lending my own money, or
even the money of a large, impersonal financial institution, but money
that belonged to ordinary citizens who were collecting at best 5 percent
interest on it, and who had unwittingly entrusted me with its disposition.

The practice of marketing foreign loans was even more illogical.
‘‘Selling’’ loans finally made no sense to me at all. In the years after
the first oil crisis, how much convincing did it really take for Third
World nations to borrow from foreign banks? They had been systemat-
ically drained of their international reserves, and they were desperate
for foreign credit. My job was not to make a carefully considered credit
decision, but to do exactly what American banks were trying to do at








18 SELLING MONEY


home with their retail operations; convince a prospective borrower that
my bank’s money was better than another’s. This may seem a rather
silly pursuit, but it was not silly to the banks. They devoted seemingly
endless energy and resources to it. And it wasn’t all just smoke, either:
banks offered deposit services, cash management, funds clearance, and
balance reporting services that made a difference to a borrower. But
none of this changed the fact that I was ‘‘selling’’ loans, or the fact that
the recycling of all that money was a political game from start to finish,
since the leaders of the Third World had no choice but to borrow if they
wanted to hold political power. The alternative was bankruptcy, default,
and the sort of horribly unpopular austerity programs that later made the
IMF infamous in the 1980s. Their predicament had been created by the
highly political organization called OPEC; it would be assuaged by the
banks with the cooperation of the political establishments of the indus-
trial world. Given the premise that borrowers had infinite appetites, lending
became a rather one-sided operation, with the flow of loans from spe-
cific banks to specific countries depending entirely on personal and in-
stitutional politics within the lending banks. It was this political process
within the banks that turned sovereign credit on and off like water from
a tap. When it was turned on, we loan officers were sent scurrying to
the ends of the earth to drag up whatever business we could. When it
was turned off, everything stopped. It made no difference finally who
was selling those loans, or even who was running the people who sold
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