Citicorp, the largest U.S. bank, finally broke ranks with its peers and admitted what everyone has known for years, but no one would say out loud, namely, that its mammoth loans to Third World countries are bad loans. Citicorp’s new chairman, John Reed, decided that it was time to face reality and write off 25 percent of its loans to Less Developed Countries because they will never be repaid.
This will give Citicorp a net loss of $2.5 billion in the second quarter of 1987. This was an acute embarrassment; it will cause Citicorp to post its first year-end loss since 1934.
Citicorp’s Third World commitment amounts to more than 10 percent of the bank’s total loan portfolio, so its disintegration poses a severe threat to the bank’s future profits. Three years ago, Citicorp was the world’s No. 1 bank. Now it is only No. 5, behind four foreign banks.
Citicorp’s announcement that it would set aside $3 billion in additional reserves to cover these loan losses set off tremors in the banking community. It caused anxious meetings in other big banks which are less able than Citicorp to absorb such tremendous losses.
Citicorp gave its sudden announcement a self-righteous veneer by claiming that honest bookkeeping is the best banking policy after all. Indeed it is. But what does this action say about the honesty of Citicorp’s bookkeeping over the last five years, as well as of the other big banks that continue the fiction that their loans to Third World countries will someday be repaid?
What does this say about the integrity of the auditors whose annual financial statements have described these colossal loans to Communist and Less Developed Countries as “assets”? Surely these professional auditors, who are paid large fees and enjoy impeccable reputations, knew what the rest of us have known for years, namely, that most of those loans are worthless because the Communist and Third World countries can never repay the principal and cannot even make current interest payments.
Five years ago, Citicorp ran a color advertisement in the U.S. newsmagazines bragging about its ability to give foreign investors reliable, accurate and fast information. The graphics showed a big human toe under water, and the headline read, “What every international trader needs is advice on when not to dip a toe in the water.”
Citicorp boasted that it had offices in 16 countries plus a network of operations in 93 countries. It sounded impressive, but it just proves the old adage that none are so blind as those who will not see.
Citicorp was then leading the biggest, richest banks in America, including Manufacturers Hanover, Chase Manhattan, J. P. Morgan, and BankAmerica, down the primrose path of making large loans to Communist and Less Developed Countries which could never be justified by customary commercial criteria. The previous CEO of Citicorp, Walter Wriston, urged other banks to lend abroad because “sovereign nations never go bankrupt.”
The roll call of the insolvent, unstable, often unfriendly foreign countries who were the beneficiaries of these loans included Mexico, Brazil, Argentina, Bolivia, Bulgaria, Yugoslavia, Rumania, Poland and Hungary.
The liberal media elite, usually so eager to expose and exploit any mishandling of a few thousand dollars by public, business or military persons, generally failed to report this largest mishandling of other people’s money in the history of banking.
Anybody with common sense would have known that those were bad loans when they were made. The foreign borrowers didn’t provide the financial statements, the information, or the security that American businessmen and farmers must provide when they apply for bank loans. The Federal Reserve System is supposed to supervise the banks. But the Fed pressured the banks to make more and more bad loans to those same bankrupt foreign countries in order to keep the interest payments coming. From time to time, the Fed would even pass the word that its bank examiners would give the banks a hard time (the euphemism was closer scrutiny) unless they increased their bad loans to foreign countries. This was powerful pressure to persuade banks to persevere in the fiction and the folly of Third World loans.
When American businessmen and farmers make mistakes in business judgment and go bankrupt, they are told: Tough, that’s just a risk you take in the private enterprise system. But when the nation’s biggest banks make mistakes of colossal proportions, somehow we’re all expected to look the other way.
