31 AUGUST 1985, Page 12


Nicholas von Hoffman on

US banking scandals which leave investors unmoved

SEVERAL weeks ago 72-year-old Harry Usatch and his 46-year-old son, Jerald, pleaded guilty to charges of paying kick- backs over a 13-year period to officers of the Salvation Army. The Usatches paid,a quarter of a cent a pound for old clothes and rags donated to the Salvation Army, which they then resold in the Third World. At the same time reports have it that officers in the Salvation Army are the subject of a grand jury investigation.

Even to casual readers of the business pages of America's newspapers this bizarre item cannot have come as too much of a surprise. We are in a period of business crime and sharp practice which is likely to touch the most prestigious names in com- merce and industry as well as the shadiest. The New York branch of Christie's auction house has had to pay an $80,000 fine to the New York City department of consumer affairs for lying about the price it got for a painting in an attempt to prevent a fall in the art market. In the wake of the Christ- ie's incident came reports that this genteel form of consumer fraud is widely practised in the city which has become the economic, if not creative, centre of the art world.

Earlier in the year an astonished finan- cial world woke to read over its-soft-boiled eggs that the old-line First National Bank of Boston had been fined half a million dollars for failing to report more than a billion dollars' worth of cash transactions. The reporting requirements have been instituted to stop dope-peddlers and other racketeers from escaping detection by laundering their money. It has not been proven that the Bank of Boston was taking fees to service organised crime, although the circumstantial evidence has caused some people, wise in the ways of the underworld, to hold their noses when the bank's name is mentioned. Before it could be mentioned too often, however, it emerged that two score other banks were guilty of the same thing, including Chase Manhattan, Manufacturers Hanover and the Bank of America.

The banks claim that these misdeeds were technical infractions of government regulations, and the administration in Washington is not disposed to let the bloodhounds in the Justice Department off their leads to sniff out the truth. As a result we don't know if the banks believed they were too grandly important to adhere to the legal requirements, whether some of their employees on their own corruptly helped gangsters and dope-peddlers laun- der their ill-gotten gains or whether, as a matter of policy, the banks knowingly were helping the underworld in return for garnering rich fees. The last has been shown to be the case with certain Miami banks, which developed an accommoda- tingly profitable approach to the dope business some years ago. The stereotype of the humdrum, clubb- able gentleman banker, gold watch-chain slung between the pockets of his waistcoat, hasn't been seen around American count- ing houses in some years now. He was a product of the era (circa 1934-1975) of close government regulation and scrutiny. Before that, American bankers were given to plunging and reckless risk-taking. Their massive financing of stock purchases by issuing under-collateralised loans with their depositors' money played a major role in bringing the banks down in the early 1930s. Whether such behaviour is criminal or merely pathologically greedy, today's bankers are behaving in much the same way. In an attempt to cover the billions of bad loans in agricultural speculations, banks lent more billions in Africa, Central America and the oil industry. Faced with losses large enough to turn your lips blue, they have resorted to doubtful accountancy and thinking up yet new schemes of high risk and dubious ethics to save themselves. `Untold billions of dollars worth of uncol- lectable loans to countries are still carried on banks' books as assets,' the business magazine Forbes has recently pointed out. Manufacturers Hanover, to name one, has $3.7 billion — 112 per cent of its net worth — tied up in loans to Brazil and Argentina. Chase Manhattan also has $3.6 billion 92 per cent of its net worth in loans to the same two countries.'

Hence the case of the collapse of Chica- go's international money centre bank, Continental Illinois, and its takeover by the government, is not a unique deviation in an otherwise safe and sane system. The Bank of America, formerly the largest bank in the United States but now shrunk- en to number two on account of its losses, has, under pressure from government au- ditors to keep its books more, ahem, shall we say carefully, announced a loss of more than £400 million last quarter. But the struggle to make the banks' quarterly reports and annual statements reflect their true financial condition is a thankless one, if, indeed, it is being attempted. Fear that candour might reveal a situation so start- ling it could precipitate a crisis is making the regulatory authorities understandably cautious about enforcing the, rules.

Like losing gamblers the banks keep coming up with new, ethically questionable schemes to cover the losses at the book- maker's, such as 'note issuance facilities' or nifs. A nif is a promise by a bank, in exchange for a fee, to lend money to a company at any time over a specific num- ber of years if the company's credit ratings so deteriorate during that period of time that it is unable to borrow from anyone else. This is nothing more than a contrac- tual promise to make a bad loan at some point in the future. Nifs are not carried on the banks' books as contingent liabilities. They are part of a category of activities called, - tra-la, 'off balance sheet obligations'. These obliga- tions come in myriad forms — obfuscation and obscurantism being an essential part of the sleight-of-hand operation. In addition to nifs, there are standby letters of credit, foreign money purchase agreements, every sort of arcana. We're just learning _about the intoxicating world of off balance sheet obligations.

Intoxicating isn't too strong a word for it either. As of the end of 1984 the 15 biggest banks in America had, in their pursuit of coin, signed themselves up for no less than a trillion dollars in contingent liabilities, that is promising to pay somebody or other money under one set of conditions or another. Of course these institutions don't have a trillion dollars, so they have to hope that all these contingent liabilities don't become actual obligations. - No one can count the schemes banks have come up with to find money. The losses, however, can be counted. Several years ago the same people who let their breakfast eggs grow cold reading about the Bank of Boston spilled their marmalade at the first revelations of the doings between the banks and the government bond under- writers. Again the trail of the deals, the swaps, the loans, the repurchase agree- ments and so forth is too complicated for recapitulation. Suffice it to say the morning papers reported that Drysdale Govern- ment Securities had gone down owing hundreds of millions to firms who had lent securities to Chase Manhattan Bank, who had, for a fee, turned them over to Drysdale. The affair cost the bank a quarter of a billion dollars but nobody learned anything from it.

In March of this year breakfasters again had their teacups rattled with news that the failure of ESM, another government bond underwriter, threatened to bring down over 71 savings banks in Ohio because of runs by depositors. The state was forced to order all of them to suspend business as it was learned that one of the largest stood to lose many millions. In the course of un- ravelling what happened, investigators un- covered a rat's nest of illegal activity such as using the same collateral more than once, self-dealing, and embezzlement. One of the principals has committed suicide, others are facing trial. The litiga- tion will go on for years and the banking industry will move on to develop new tricks to put in their bag.

In terms of dishonesty all of this was a prelude to the E. F. Hutton scandal. With 6,600 sales persons operating out of 400 branch offices across the nation, the 81- year-old firm is, with its television slogan, `When E. F. Hutton talks, people listen', one of Wall Street's giants. They were certainly listening on the day it was announced that Hutton had pleaded guilty to no less than 2,000 counts of fraud in a complicated scheme to cheat scores of banks of millions of dollars of interest. This was accomplished through a highly co- ordinated set of manoeuvres carried out by dozens of E. F. Hutton branch offices. The gist of the conspiracy was to write cheques on an uncovered account in one bank in one city and deposit it in another bank in another city, picking up a day or two's interest on money they first didn't have. The next morning the deficient account would be covered. It hardly seems worth- while to go to so much trouble for one night or a weekend's worth of interest, but when the sums involved run to a billion dollars or more in the aggregate and the scheme is run over a number of years, the crime can be a profitable one.

Hutton's top management has been re- peating it didn't have the wildest idea that this was going on and that it wasn't a crime anyway, but merely 'overly aggressive money management'. However, a guilty plea to 2,000 felony counts is prima facie evidence somebody's rules were not being as strictly observed as they might be. Moreover, as time has passed and more internal company memos get leaked out of congressional investigating committees, the more_ it looks as though top manage- ment did know or could have known its company was systematically stealing from its bankers.

You might think that Hutton would be reeling from the publicity, its customers abandoning it by the limousine-full, but nothing of the sort has been happening. In the first few days there were some announcements of public entities . going elsewhere to have their new security issues underwritten but that small flare-up of indignation died out. In the present atmos- phere on Wall Street there is no time for dilly-dallying over a little cheque-kiting. In the last months three of the biggest defence contractors have been caught stealing from the Pentagon and a former deputy secret- ary of defence and former board chairman of LTV, one of the nation's largest cor- porations, has been jailed for exploiting confidential, inside information to make a killing on the stock market. Other com- panies have been printing and selling securities to the public that are so suspect they are commonly referred to as junk bonds. Every day some new, strange and dubious financial 'product' is put on the counter for fools, optimists and children to buy. By next month the Hutton scandal will be a thing of the past. After all, the decks have to be cleared of the old scandals so the new ones can be properly appreci- ated.

It is not true, however, that so much dishonesty goes unremarked. A few weeks ago the business page of the New York Times carried the headline: 'White Collar Crime: Booming Again.' Under that, a subhead declared: 'Economic Pressures, a New Permissiveness and Simple Greed Are Eroding Corporate Morality. One Cure: Ethical Leadership.'

And high time too.