Bailing Out the Big Banks

A chance encounter with a major Canadian financier aboard an AMTRAK train chugging its way through a heavy snowstorm to Washington can lead to candid conversation. The financier was appalled at the imprudent loan practices of the large American and Canadian banks. “They’re acting as unrestrained as some of their major debtors,” he observed, adding that he truly feared for the stability of the international financial system.

The newspapers that week had been filled with reports that the major New York banks and the Reagan Administration were asking Congress to approve a $10 billion line of credit to the International Monetary Fund (IMF). Together with contributions from other western nations, the IMF would strengthen the ability of Third World countries to meet their payment schedules on loans from U.S. and European banks.

Some members of Congress objected to bailing out Chase Manhattan Bank, Citibank and the Bank of America while critical domestic programs for less fortunate Americans were being cut. Not so, says Citibank executive, George Clark. To these people uninitiated in the simple truths behind complex international finance he explained that the legislation is not a bailout; it is a jobs bill. On the CBS Evening News, Mr. Clark told reporter Jane Bryant Quinn that “what we’re trying to do here is to keep the total global payments mechanism going. And that’s terribly important for the United States in terms of our own economy and our exports. And of course, exports mean employment and in a strange kind of way this is basically a jobs bill.”

So, taxpayers, prepare to pay up for the profligate behavior of the big banks, but do console yourself with the feeling that jobs will be preserved–especially the jobs of the top moguls at Citibank and its fraternity. The bankers would like your money with no strings, no strengthening of standards for making those multibillion loans to foreign countries or fast track multinational corporations and no increase in bank disclosure requirements to give you a little advance notice that these banks may be about to apply for welfare.

These foreign loans are not insubstantial. Mexico, Brazil and Argentina owe about $200 billion by themselves. Poland and Zaire are heavy in debt as well. The loan portfolios of the U.S. banks have become increasingly burdensome. So these banks have been taking it out of the pocketbooks of American consumers and small businesses.

Who says so? None other than former Merrill Lynch chief, Donald Regan, now Reagan’s Secretary of the Treasury. Testifying before the Senate a few days ago, Mr. Regan said: “I think that banks, faced with a lot of problem loans, both foreign and domestic, are doing their utmost to keep their earnings, by keeping their interest rates up.”

At about the time of Regan’s testimony, the United American Bank of Knoxville was declared insolvent and ordered closed. This was the fourth largest bank failure in American history. Tiger International, a large air and surface freight transportation company, suspended payments of interest and principal on about half of its $1.8 billion in debt. The huge Washington Public Power Supply System is widely expected to default by April on two now-cancelled nuclear power plant projects. Electric rates in the Northwest have been rising very sharply because of these and other nuclear power projects.

All this led me to recall something that the Canadian financier on the AMTRAK train conveyed. There is much behind the scenes he implied that may not long remain behind the scenes.

Why did the large banks make such improvident loans and keep getting in deeper and deeper? Some observers say it was the temptation of loaning to governments, which are not supposed to default, in large amounts with minimal administrative costs. The interest rate was delightfully high also. Other analysts think that David Rockefeller, while head of Chase Manhattan, obtained some assurances from Washington that foreign loans to shaky Third World allies would not present risks to the Banks.

Independent economist Stanley Sheinbaum had a quick exchange last year at the supersonic Concorde waiting lounge near Paris with Walter Wriston, the world’s leading go-go banker and Citibank strongman. “Why did you make those foreign government loans?” Sheinbaum asked. “Because the government wanted us to do so,” replied Wriston.

If this is true, Wriston, the arch free-enterpriser has not been very forthcoming in his many public interviews. Nor has he been operating according to capitalist principles of being willing to absorb both profits and losses.

At any rate, to the millions of consumers and taxpayers who are being pressed into a spreading big bank salvage operation, it appears that what has been behind the scenes may become front stage with lots of dirty laundry. Did you ever think you would be drafted to save the international financial system from collapse? Citizens who do not have a say are those who usually end up having to pay.