All the Presidents' Bankers (67 page)

Brady needed private banker support so that the government wouldn’t be caught subsidizing all the potential damage. The debt overhang was so
nefarious that the banks were in grave danger themselves, but they were waiting out the government rather than collaborating with it.

Brady tailored a plan he thought would be sure to make them happy. On its surface, the Brady plan would induce banks to voluntarily forgive a portion of the principal and the interest for third world loans.
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Banks would have the “obligation” to exchange their outstanding developing-country debt with bonds at a discount, or to lend new money, or both. In return, banks would receive less risky bonds secured by US Treasury bonds. The action would increase national debt in the process.

Funds required to purchase those Treasury bonds would come from international organizations. Thus, the plan would effectively subsidize private banks using the IMF and the World Bank channels that, in turn, were supplied by an increase in federal debt on the backs of US taxpayers. Like many bank bailouts, it was a way for Wall Street to cook its books rather than allow for debt forgiveness or bankruptcies that would have been less costly to the developing countries. It “rescheduled,” for example, $20 billion of Mexico’s $84 billion of debt, adding an extra $1.5 billion in new debt. Because of the Brady plan, local banks ceased providing loans, delaying Mexican recovery in jobs and wages and growth. Mexico, meanwhile, opened its banking system to more privatization for foreign speculators to raise extra cash.

Technically, the banks should write off some of the debt, and they could also lend new money to the struggling countries. But that didn’t happen. The banks still didn’t lend and wouldn’t lend for another nine months or so, and then only after additional incentives were added.
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Bank of America, Clausen, and Third World Debt

Three years after Clausen returned to the top slot at Bank of America, the firm with the largest US bank exposure to Mexico was still reeling. Thus, Clausen was particularly keen on the Brady plan.
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In July 1989, he helped bang out its details alongside Alan Greenspan; Gerald Corrigan; Pedro Aspe, Mexico’s finance minister; and Citibank chairman John Reed, who led the fifteen-bank advisory committee on behalf of no less than three hundred creditor banks.
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As leader of the negotiations and head of the bank with the second biggest exposure to Mexico, Reed had already officially lent Brady his support after a visit to the White House in late March.
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Unofficially, US banks were mired in private negotiations. They refused to fully embrace the proposed Brady
plan or comply with the US government’s request that they forgive a portion of loans, despite Brady’s incentives or “additional financial support” from the IMF and World Bank that was designed to get the banks on board.
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Former Citibank chairman George Moore had strong thoughts of his own regarding the crisis, which he had penned in his 1987 book,
The Banker’s Life,
and augmented in a March 1989 paper that circulated around the White House.
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Moore admitted that the banking system had gone “too far” in recycling oil profits when OPEC quadrupled the price of oil. But rather than blame banks for overzealous lending (that far exceeded the reasonable country limits set in the 1930s), he put the onus on the IMF and the Bank for International Settlements, who, he said, had “to know of the extreme heights to which these debts had rapidly risen.”
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It was not unlike bankers and politicians blaming the Fed for the late 1920s speculation that led to the Crash of 1929, as opposed to the banker culprits who had stood to gain more personally from their speculative practices.

As Moore summarized the situation: “It was a wonderful party—before the check came. It was a trillion dollar binge. The banks thought they were making a lot of money, the borrowers never had it so good. All ordered more drinks, as long as the bar was open. Meanwhile, responsible international institutions like the IMF and World Bank were looking out the window when they should have stopped the party!”
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On June 2, 1989, the World Bank unveiled its three-year program for Least Developed Countries (LDC) debt relief, as per Brady’s proposals.
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Three months later, J. P. Morgan added $2 billion in loss reserves anyway, to indicate the program was insufficient. Chairman Lewis Preston stated, “The action we’ve taken should give us greater flexibility to work with these countries advising government and private sector clients.”
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It was a version of Reed’s what’s-in-it-for-us doctrine, which entailed banks soliciting the government to buoy their positions but not helping in return to alleviate the problems—and as such, placing the burden of their actions on the taxpaying population. It also opened avenues for bankers to further extend themselves into the region for merger and acquisition business.

Reed Slams Regulation

Meanwhile, Reed still had national policies to change. He was called before the Senate Banking Committee on July 13, 1989, to provide testimony on domestic financial policy.
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This time, he stressed his opposition to deposit insurance premiums.

Reed proposed that the level of deposit insurance be gradually cut back.
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He wanted depositors to judge for themselves whether banks and savings institutions were taking undue risks. His logic was similar to that of Chase chairman Winthrop Aldrich during the Depression; the big banks that were better at managing their risk should not have to pay the same premium for insurance as the banks that weren’t, or any if possible. Customers could decide if their deposits were safe or not.

Reed also united with Corrigan before the Senate Banking Committee to argue that the US banking system was falling behind that of other countries.
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Reed demanded no less than a “major restructuring of our financial system” to keep up with a rapidly changing “competitive environment.”
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As the latest torch carrier for that global competitiveness argument, Reed paved the path for Robert Rubin, Larry Summers, and the man who would be his partner in finally breaking Glass-Steagall, Sandy Weill. Now deregulation was presented as even more critical in the fight against potential European banking supremacy, and thus to America’s position as a global financial power.

The S&L Blowout and Greenspan’s Game

The deregulation of the S&L industry between 1980 and 1982 had enabled thrifts to compete with commercial banks for depositors, and to invest that money (and money borrowed against it) in more speculative real estate ventures and junk bond securities. When those bets soured, the industry tanked. Between 1986 and 1989, 296 thrifts failed. An additional 747 would shut down between 1989 and 1995.
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Among those, Silverado Banking, Savings and Loan Association went bankrupt in December 1988, costing taxpayers $1.3 billion.
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Neil Bush, George H. W. Bush’s son, was on the board of directors of Silverado at the time. He was accused of giving himself a loan from Silverado, but denied all wrongdoing. Records in the Bush archives show seven pages of redacted communication related to Neil Bush in early 1990.
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Another son, Jeb Bush, had already been dragged through headlines in late 1988 for his real estate relationship with Miguel Recarey Jr., a Cuban American mogul who had been indicted on one charge of fraud and suspected of up to $100 million of Medicare fraud charges.
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But the most expensive S&L failure was Lincoln Savings, a debacle that cost taxpayers $3 billion.
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The flameout also led to the Keating Five political scandal, in which five US senators were implicated in accepting campaign
contribution bribes from Charles Keating.
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Keating had secured a study from Alan Greenspan, then a private sector economist, concluding that direct speculative investments were not harmful.
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It took several months of internal political battles before the Bush S&L plan headed to the House floor for consideration, but finally, on June 14, 1989, it was ready.
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On the same day that the Bush team was presenting its S&L package, Greenspan was swiping at Glass-Steagall, retreading the well-worn theme of global competition before the Senate banking subcommittee. He claimed that current regulation put US banks at a competitive disadvantage and thus inhibited the US financial system’s growth globally, and by extension the very stability of the country (using the angle Reagan had mentioned at his swearing-in ceremony).

“There is no question we are being significantly suppressed by the Glass-Steagall restriction,” said Greenspan. “My concern is that as we continue to internationalize . . . we are in effect inhibiting our institutions from fully participating in that.”
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With Greenspan on deck advocating the repeal of Glass-Steagall, New York bankers reinvigorated their drive to expand across state lines and to circumvent New Deal limitations on the financial services they could hold under one roof, such as the inability to purchase insurance companies. Their argument was that insurance restrictions should not apply to subsidiaries of bank holding companies. In other words, just because banks couldn’t own insurance companies, why couldn’t their subsidiaries?

In practice, this was a minor but important distinction. As Philip Corwin, senior legislative counsel for the American Bankers Association, put it, the issue had gone from a “turf fight (between insurance and banks) to a consumer issue.” In a rather odd alliance, the Consumer Federation of America supported the big banks’ campaign for insurance powers.
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The CFA subscribed to the notion that the more firms were involved in insurance, the more it would increase competition and thus decrease rates for individual consumers, an argument disproven time and time again. For when big firms expand their reach, consolidation, and power, the actual result is higher prices.

Bush’s S&L bailout plan became the Financial Institution Reform, Recovery and Enforcement Act, signed on August 9, 1989.
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The FIRREA abolished the Federal Savings and Loan Insurance Corporation (FSLIC) and allowed the Federal Deposit Insurance Corporation (FDIC) to insure S&L deposits.
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The centerpiece of the act was the establishment of the Resolution Trust Corporation (RTC) to handle savings and loan failures.
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The first president of its oversight board was Daniel Kearney, a banker who had spent a decade
in Salomon’s real estate financing department creating the very securities that had combusted on the books of the S&Ls.
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The RTC would be funded via a new privately owned corporation, the Resolution Funding Corporation (REFCORP), which would issue $30 billion in long-term bonds to raise the needed capital beginning in 1990.
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This proved another boon for the big commercial banks. They could profit by virtue of their intermediary position selling those bonds into the market, while the government was subsidizing the entire project.
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Within six years, the RTC and the FSLIC sold $519 billion worth of assets for 1,043 thrifts that had gone belly up. Key Wall Street banks were involved in distributing those assets, making money on financial destruction once again. Washington left the public on the hook for $124 billion in losses; the thrift industry lost another $29 billion.
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Bankers vs. Senators: Venezuela

Willard Butcher, CEO of the Chase Manhattan Bank, succeeded Dennis Weatherstone in 1989 on the Fed’s advisory council.
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He, too, had a wide range of concerns about the restrictive nature of current regulation and the LDC debt problem for US banks. While his compatriots wrestled with the Treasury Department and Congress on the issue of LDC debt, he took up the issue with the media.

On July 25, 1989, Butcher wrote a letter excoriating a
New York Times
editor over his assumption that banks rejected a proposal for Venezuela’s debt reduction because “it did not offer them the option of lending Venezuela new money to use for repaying its existing debt.” Butcher claimed, “The banks rejected the proposal because that country’s request for debt reduction was excessive and not based on needs.”
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But his harshest criticism centered on the piece’s suggestion that the United States “announce that there will be no international guarantees on Third World debt for any bank unless all the banks jointly approve sizable debt reduction.”
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He declared the idea “naive and illogical” on the basis that US banks accounted for only 31 percent of Venezuela’s bank debt versus that extended by foreign institutions, and thus, it was unlikely anyway that “all the banks will ever jointly agree.”
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Butcher warned, “The progress of these negotiations cannot be helped by editorials that are illogical and wrong.”
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More broadly, he was using the globalization of excessive debt as an argument against US banks doing their part to alleviate a situation they had
created, while his brethren in Washington were arguing that US banks had to be deregulated in order to compete with these international firms for more such opportunities.

Two months later, a team of five senators sent letters to eight top bankers including Preston, Clausen, Butcher, and Reed.
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They implored the bankers to support the government’s plan for Venezuela debt restructuring. They even played hardball, promising to support funding to the IMF and World Bank for “market-oriented economic reforms”
only
if banks reduced debt or began lending again.
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