Creature From Jekyll Island by G. Edward

Furthermore, it is predictable that most unsound loans eventually will go into default. When the borrower finally declares that he cannot pay, the bank responds by rolling over the loan. This often is stage managed to appear as a concession on the part of the bank but, in reality, it is a significant forward move toward the objective of perpetual interest.

Eventually the borrower comes to the point where he can no longer pay even the interest. Now the play becomes more complex.

The bank does not want to lose the interest, because that is its stream of income. But it cannot afford to allow the borrower to go into default either, because that would require a write-off which, in turn, could wipe out the owners' equity and put the bank out of business. So the bank's next move is to create additional money out of nothing and lend that to the borrower so he will have enough to continue paying the interest, which by now must be paid on the original loan plus the additional loan as well. What looked like certain disaster suddenly is converted by a brilliant play into a major score. This not only maintains the old loan on the books as an asset, it actually increases the apparent size of that asset and also results in higher interest payments, thus, greater profit to the bank.

THE UP-THE-ANTE PLAY

Sooner or later, the borrower becomes restless. He is not interested in making interest payments with nothing left for himself. He comes to realize that he is merely working for the bank and, once again, interest payments stop. The opposing teams go into a huddle to plan the next move, then rush to the scrimmage 1- "Banking Against Disaster," by Walter B. Wriston, The New York Times, September 14,1982.

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line where they hurl threatening innuendoes at each other. The borrower simply cannot, will not pay. Collect if you can. The lender threatens to blackball the borrower, to see to it that he will never again be able to obtain a loan. Finally, a "compromise" is worked out. As before, the bank agrees to create still more money out of nothing and lend that to the borrower to cover the interest on both of the previous loans but, this time, they up the ante to provide still additional money for the borrower to spend on something other than interest. That is a perfect score. The borrower suddenly has a fresh supply of money for his purposes plus enough to keep making those bothersome interest payments. The bank, on the other hand, now has still larger assets, higher interest income, and greater profits.

What an exciting game!

THE RESCHEDULING PLAY

The previous plays can be repeated several times until the reality finally dawns on the borrower that he is sinking deeper and deeper into the debt pit with no prospects of climbing out. This realization usually comes when the interest payments become so large they represent almost as much as the entire corporate earnings or the country's total tax base. This time around, roll-overs with larger loans are rejected, and default seems inevitable.

But wait. What's this? The players are back at the scrimmage line. There is a great confrontation. Referees are called in. Two shrill blasts from the horn tell us a score has been made for both sides. A voice over the public address system announces: "This loan has been rescheduled."

Rescheduling usually means a combination of a lower interest rate and a longer period for repayment. The effect is primarily cosmetic. It reduces the monthly payment but extends the period further into the future. This makes the current burden to the borrower a little easier to carry, but it also makes repayment of the capital even more unlikely. It postpones the day of reckoning but, in the meantime, you guessed it: The loan remains as an asset, and the interest payments continue.

THE PROTECT-THE-PUBLIC PLAY

Eventually the day of reckoning arrives. The borrower realizes he can never repay the capital and flatly refuses to pay interest on it.

It is time for the Final Maneuver.

THE NAME OF THE GAME IS BAILOUT

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