Creature From Jekyll Island by G. Edward

According to the Banking Safety Digest, which specializes in rating the safety of America's banks and S&Ls, most of the banks involved with "problem loans" are quite profitable businesses: Note that, except for third-world loans, most of the large banks in the country are operating quite profitably. In contrast with the continually-worsening S&L crisis, the banks' profitability has been the engine with which they have been working off (albeit slowly) their overseas debt.... At last year's profitability levels, the banking industry could, in theory, "buy out" the entirety of their own Latin American loans within two years.1

The banks can absorb the losses of their bad loans to multi-national corporations and foreign governments, but that is not according to the rules. It would be a major loss to the stockholders who would receive little or no dividends during the adjustment period, and any chief executive officer who embarked upon such a course would soon be looking for a new job. That this is not part of the game plan is evident by the fact that, while a small portion of the Latin American debt has been absorbed, the banks are continuing to make gigantic loans to governments in other parts of the world, particularly Africa, Red China, and Eastern European nations. For reasons which will be analyzed in chapter four, there is little hope that the performance of these loans will be different than those in Latin America. But the most important reason for not absorbing the losses is that there is a standard play that can still breathe life back into those dead loans and reactivate the bountiful income stream that flows from them.

Here's how it works. The captains of both teams approach the referee and the Game Commissioner to request that the game be extended. The reason given is that this is in the interest of the public, the spectators who are having such a wonderful time and who will be sad to see the game ended. They request also that, while the spectators are in the stadium enjoying themselves, the parking-lot attendants be ordered to quietly remove the hub caps from every car. These can be sold to provide money for additional salaries for all the players, including the referee and, of course, the Commissioner himself. That is only fair since they are now 1- "Overseas Lending ... Trigger for A Severe Depression?" The Banking Safety Digest (U.S. Business Publishing/Veribanc, Wakefield, Massachusetts), August, 1989, p. 3.

32 THE CREATURE FROM JEKYLL ISLAND

working overtime for the benefit of the spectators. When the deal is finally struck, the horn will blow three times, and a roar of joyous relief will sweep across the stadium.

In a somewhat less recognizable form, the same play may look like this: The president of the lending bank and the finance officer of the defaulting corporation or government will join together and approach Congress. They will explain that the borrower has exhausted his ability to service the loan and, without assistance from the federal government, there will be dire consequences for the American people. Not only will there be unemployment and hardship at home, there will be massive disruptions in world markets. And, since we are now so dependent on those markets, our exports will drop, foreign capital will dry up, and we will suffer greatly. What is needed, they will say, is for Congress to provide money to the borrower, either directly or indirectly, to allow him to continue to pay interest on the loan and to initiate new spending programs which will be so profitable he will soon be able to pay everyone back.

As part of the proposal, the borrower will agree to accept the direction of a third-party referee in adopting an austerity program to make sure that none of the new money is wasted. The bank also will agree to write off a small part of the loan as a gesture of its willingness to share the burden. This move, of course, will have been foreseen from the very beginning of the game, and is a small step backward to achieve a giant stride forward. After all, the amount to be lost through the write-off was created out of nothing in the first place and, without this Final Maneuver, the entirety would be written off. Furthermore, this modest write down is dwarfed by the amount to be gained through restoration of the income stream.

THE GUARANTEED-PAYMENT PLAY