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9. International monetary relations. Bank lending: Italy – European banking institutions

Starting in the mid-1960's, these Italian institutions had begun borrowing heavily in the Eurodollar market, that is, borrowing American dollars from European banking institutions. The banks almost fell over themselves trying to get into the loan syndi­cates. After all, what could be safer than loans to governmental or quasi-govern­mental agencies of a major Western Euro­pean nation? Especially one that was in the midst of an economic miracle, its GNP growing at 10 percent plus each and every year, at least almost every year. Italy was the Japan of the West!

So in poured the billions, usually on a ten-to-fifteen-year basis, at interest of around _8 percent. At first, the large mer­chant banks in London monopolized this business — until it outgrew even them. Then, increasingly, it was the so-called con­sortium banks in London, Paris, and Brus­sels which provided Italy with more and more billions. This type of institution was also a child of the mid-1960's. The idea was this: If a group of very large banks from different countries — say Chase Manhattan from New York, Deutsche Bank from Frankfurt, Credit Lyonnais from Paris, the Union Bank of Switzerland from Zurich — got together, and set up a joint subsidiary, this new type of "daughter bank" would have almost unlimited credit, because of the immense power and resources of the parents. The concept became especialy attractive when it was discovered that such banks could be founded with very little capital, and that even if the consortium bank took on huge deposits, and made huge loans — such as those to Italy—the European authorities did not insist that the parents keep feeding in more and more capital to keep pace with the growth of the bank. Terrific, everybody thought. Not exactly prudent, but very profitable. And they had very fancy names: Orion, Mid­land and International Banks Ltd. (MAIBL), Union de Banques Arabes et Francaises, Western American Bank (Europe), and so forth and so on. By the mid-1970's there were over thirty such institu­tions— many handling billions of dollars. All were predominantly backed not by paid-in capital, but by the capital and reputation of the parent banks back home. A highly sophisticated inverse pyramid device.

The problem was, if one of those consortium banks went under, who would bail them out? Not H.M. government, even though most were in London, because for the most part they were owned by non-British institutions. Not the Common Market, since the Common Market had no banking authority. Not the United States, even though many large American banks were involved — and heavily involved — in these inverse pyramid banks in Europe, because after all, they were in Europe.

No, ultimately if something went wrong, it would be the share­holders and depositors back in New York or Toronto or Zurich who would get stuck with the bill. And that was unthinkable. So, for the most part the managers of these multibillion-dollar consortium banks were given very strict guidelines. Stick to safe borrowers. And what could be safer than loans backed by the moral obligation of the government of one of Europe's largest countries? Especially, they reasoned, because under no circumstances would the West ever let Italy go down the financial tube. There was also the matter of profit. The banks cleaned up on the Italians. On average, they took 3 percent of the face value of each loan, paid on the front end, to "set up" the deal. That amounted to $30 million for each billion floated, their fee for what essentially amounted to a couple of weeks of paperwork, and a lot of phone calls to other banks in the issuing syndicate. Then, year after year, at least 8 percent interest—which was great, since for many years they were able to borrow or "buy" the dollars at only 5 percent.

A sure and highly profitable thing. Until the middle of the 1970's. Then, one after another, those astute European bankers started asking themselves the same simple question: "How are the Italians ever going to pay back all our loans?"

And nobody had an answer. So the spigot was turned off, at least by the commercial banks and their joint daughters, the consortium banks.

"Let the Common Market take care of Italy for a while", was their attitude. And their prayer was that when the commercial loans started to come due — in 1979 — the Common Market would also supply Italy with enough dollars to start paying them back. The powerful bank lobby went to work, and the Common Market — actually, it was almost exclusively the government of West Germany — stepped in. Germany lent Italy the billions it needed for a few years. But not blindly. The Germans are the most prudent financiers in the world. They demanded collateral. First, part of Italy's gold reserves; later all of them. Still Italy needed money to stay afloat: to buy oil, to buy wheat, to buy whiskey, Italy being the largest importer of Scotch in the world next to the United States. Then Saudi Arabia stepped in with its help.

How do you get the finance minister and the head of the Bank of Italy to drop everything and meet you in Germany on two days' notice? Easy, if you represent Saudi Arabia's money.

I don't want to go into sordid details about the bribery of these two gentlemen. After all, I assume they are still around somewhere. Let's just leave it at this: we gave them 25 percent down in cash and agreed to transfer the rest to their Swiss bank accounts in Lugano upon completion of the deal. Standard procedure.

That done, and having gotten rid of them, we put through a conference call to the head of ENI. After all, it was his company's assets which were going to be pledged to a group of foreign banks. Not that he could have really blocked the deal. ENI was state-owned, and we had just bought the state. But who wants waves? We promised him that quarter of a billion additional working capital. He wanted three-fifty. We settled on three hundred million. He wanted to pay 10 percent interest. We wanted 12 percent. We agreed on 11 percent. He wanted it for ten years. We wanted to lend for one year. We settled on three. He wanted all this in writing, immediately. We flatly refused. We compromised by agreeing to send him a letter of intent, cosigned by Reichenberger and myself, within two weeks.

So by December 2, 1978, we were ready to go.

Randolph Aldrich had claimed that it would take him five phone calls — all local — to package the three billion we were after. Reichen­berger and I figured we would need nine, all long distance. We divided up the territory. I agreed to take care of the American, Canadian, British, and Japanese banks. Plus making a firm commitment myself for Saudi Arabia. Reichenberger took on the European continent, plus Iran. We worked out of his office in Frankfurt, just three blocks up the street from my hotel. His staff had everything lined up by this time. Most important was the summary of the conditions of the loan, starting with the term, interest rate, and repayment schedule, and ending with a meticulous listing of the collateral involved. A "country quota" had been worked out, a deadline for agreement—twenty-four hours—and a penalty for nonperformance, following confirmed agreement by telex within that twenty-four-hour period.

Reichenberger had added one further feature. The whole deal would be done in German marks, not American dollars. I went along with it. Why not? The mark was still the strongest currency on earth.

My fellows back in Riyadh would love it.

This proposal went out simultaneously to the nine lead banks which were going to be invited in, from their nine respective countries. Needless to say, the First National Bank of America was not one of them. Each сopy was addressed to the chairman, and each went to the special telex number of the various banks reserved for highly sensitive material. They went out at mid­night, meaning that they would be on top of the recipients' desks first thing the next morning.

The next morning we made those nine phone calls. All nine were successful. We had our three billion, plus the three hun­dred million on the side, all together by four o'clock that afternoon. That evening Reichenberger actually invited me to his

home, along with about half of his Board of Directors, to celebrate the birth of the new German-Saudi financial alliance. Everybody got rather drunk except me. And thank God I didn't.

Because when I walked into the Leip-ziger Bank the next morning, it was obvi­ous that overnight the whole damn deal had fallen apart. Reichenberger grimly told me what had happened. Already at seven thirty that morning, his assistant had received a call from the American lead bank, which means it must have been placed around midnight, New York time. The message: After a thorough review, the bank's executive committee had refused to approve their participation. Count them out. Permanently. At eight, the Cana­dians— same thing. The Japanese had not bothered to call. They had put it on a telex: "We herebye [sic] inform you that we have withdrawn from your Italian Euro-mark loan syndicate, signed Mitsubishi Bank." The British had been last in, also backing out.

Reichenberger was howling mad. And I did not blame him. Every bank but one of those he had contacted — the Swiss, the Dutch, the French, the Belgians — had come through, and stuck to their deci­sions. The exception was Iran.

It was the exception which, in my mind, proved the rule, which was: Do not fight the Randolph Aldrich crowd and expect to win in the first round. The line was obviously about to be drawn between those who were going to be the leaders and those the followers in the new financial world that the oil revolution had brought into being: the battle was on between Wall Street, along with its financial satellites abroad, and the European hard-currency bloc. At stake were the Arab megabucks, and who, ultimately, was going to control their use.

The American group knew that by blowing the Italian deal, they were courting disaster. If Italy went down the financial drain, could New York be far behind? But if New York did not manage to get a very big piece of the Arab action, was not disaster inevitable anyway? The Americans were obviously willing to play chicken right to the edge of the abyss. And I, it suddenly dawned on me that morning in Frankfurt, was really the pivot man.

For instance, I thought, if I went back to Riyadh and told it exactly as it had happened — what then? The Saudis would not like my story one bit. They were extremely touchy people. Very nationalistic. Very touchy about money, especially losing it. What if they cut the Americans off? Not one more fucking penny, Aldrich! If the New York money market was tight as a drum in December of 1978, what would it be like in a couple of months? And while we were at it, we could do the same to the British and sterling as we were doing to the Americans and the dollar. The bloody island would sink in its own lethargy, and Aldrich and his fiends could try to figure out how to solve that! I am not a vindictive person. Never have been. Nor has the ability to exercise power really influenced my judgment. It is just that Aldrich and his crowd might have badly underestimated William H. Hitch­cock.

Not that I was exactly on the best of terms with Herr Doktor Reichenberger, and the crowd he represented either, that Decem­ber morning in Frankfurt. Christ, he could have killed me. But, fortunately, he was too busy composing a new set of telex messa­ges, postponing the Italian Euromark deal "temporarily". When I think back, what was probably going through his mind was that I had set him up. Made him look like a fool, for whatever crude American or sly Middle Eastern reason. When you are Germany's largest bank and you blow a $3 billion loan syndication — where your name is right on the line, in bold type — the word gets around, to put it mildly. And people start to wonder about your touch. And, after all, it had been the Leipziger Bank's name which had been on the bottom of each and every telex — at Reichenberger's insistence, not mine.

We take comfort in what we can. I decided that after this fiasco I needed more than just my thoughts to comfort me before I went back to Riyadh to regroup. A side trip, I decided, was definitely called for. To Zurich. To play a few games. But not with the gnomes.