Jekyll_text

30 THE CREATURE FROM JEKYLL ISLAND
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 31
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, exceptfor 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.
The banks can absorb the losses of their
bad loans to multinational
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
absorbing the losses is that there is
not
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.