Hookers, jaguars, and lots of stupid loans.

HOOKERS, JAGUARS, AND LOTS OF STUPID LOANS

During the seventies, lending to the ThirdWorld wasn't just a job. It was an adventure. Just ask S.C. Gwynne, who worked in the international credit department of Cleveland Trust during the peak of the boom. Before he was 26, he "had been to 25 countries and was one of four bankers managing a $150 million international loan portfolio. . . . I traveled overseas three to four months a year. 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. I stayed at Claridges while in London, at the Oriental in Bangkok, and at the Meridian in Jeddah. I flew, ate, and drank first class.' Lorenzo the Magnificent never had it so good.

Gwynne's funny, often astonishing, tale* of ayouth 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. 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. 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. Collectively, the regionals constitute a major power bloc; they hold 43 percent of the total foreign debt owed to our banks. (The top 15 banks have the rest.)

* Selling Money. S.C. Gwynne. Weidenfeld & Nicholson,$16.95.

"Going global' became imperative for thesebanks in the seventies because their domestic lending opportunities were limited. Interstate retail banking (mortgages, car loans, etc.) was prohibited by the federal Glass-Steagal Act, and many states limited banks' intrastate retail lending to a single city or country. To expand, regionals increasingly turned to supplying loans to corporate clients, which wasn't restricted. These corporate clients, of course, had customers in the Third World, and the banks soon realized they could help their U.S. clients and themselves by lending to these foreign countries. 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.

But since the regionals were new at the game,they didn't have any personnel with international experience. So they turned to wet-behind-the-ears types like Gwynne. 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. "I did not uncerstand how a bank worked,' he reports. Neither Gwynne nor anyone he worked with in the international department knew much about the countries they were lending to. Gywnne got assigned to Latin America because he knew French. 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.

Not that Gwynne's superiors at the bank wouldnecessarily have been interested in intimate knowledge of local circumstances. When he wrote appropriately gloomy assessments of "country risk,' his superiors altered them to sound more optimistic. Skepticism about shaky Third World economies threatened a very profitable activity. The word was lend, lend, lend. 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. "Much of their "intelligence gathering' was done from the shelter of first-class hotels and expensive restaurants,' Gwynne explains.

The extravagance of the bankers' lifestyle wasitself dictated by the perverse economics of the lending craze. All the banks were selling the same interchangeable product: money. Everyone was charging about the same interest rate. Therefore, putting on airs was the only method left for distinguishing your bank from the others. Flimflam was built into the system. 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. It was the only way banks knew to impress

potential clients with the importance, wealth, and stability of their institutions. 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.

And it was great work for a kid, if you couldget it. In 1980, Gwynne found himself in Manila, being "met at the airport by a shiny new Mercedes, which also contained a girl. She told me that she and the car were at my disposal during my stay in the Philippines. And there was a plane waiting to take me to Baguio, a fabulous mountain resort in the north.' Gwynne thought he was lucky to hasve found so eager a client; the reality was that he was being hustled. 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. 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. 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. The bank never did get it all back. Small wonder that Gwynne concludes he was "just a bit player in a perverse, global confidence game.'

You can quibble here and there with the detailsof Gwynne's indictment of the banks. 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. 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.' Unstable? President Iose 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. Compared to other Third World borrowers, Brazil used its loans in a relatively productive manner. Its investments have paid off in rapid export-led growth. 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 mocks Brazil's controls on capital flight, claiming they are strict on paper but easy for the well-connected to dodge. 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. 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. But if a string of defaults does someday bring down the Bank of America and other haughty U.S. banks, it probably won't start in Brazil.

Basically, though, Gwynne's charges stick. Byfocusing 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. The money center banks aren't particularly eager to lend more to Third World borrowers who have already burned them once. 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 exchange for the new credit, countries would have to adopt free-market economic reforms to restore their ability to grow and to repay debt. Presumably, money center banks reason that this plan at least keeps the debt game going and interest flowing to New York. 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 U.S. bank profits.

The regionals, too, are being asked to pony upcash for the new loans Baker wants. 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. The regionals' exposure in the Third World is smaller on a per bank basis and is spread out over dozens of countries. Therefore, each regional would lose less than the money center banks if everyone was forced to write off bad loans. 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.

The regionals had already been reducing theirexposure in Latin America when the Baker plan came along, and they are leaning increasingly toward a solution like that of Sen. Bill Bradley, which would grant debtor countries $57 billion worth of direct relief in the form of interest rate reductions and principal write-offs. The idea is to let these countries restart their economies and, hence, buy more U.S. exports. This would mean an earnings "hit' for all concerned. But that hit would probably be perfectly bearable for the regionals, and their traditional domestic clients would benefit from being able to export more. S.C. 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.