Banks to share losses for bankruptcies?

Up until Enron, the big international banks had nothing to lose. They don’t have to do careful due diligence before granting large loans because by the time a large client goes under, they had already collected their fat fees. The banks also somehow manage to be first in line to get paid when the assets are divided or the firm is rehabilitated.

Strangely enough, no one asks whether the bank should bear part of the loss for bad credit judgment. Or worse, think that the bank was part of a conspiracy that helped in the firm’s collapse.

Then came Enron. A number of big banks, Citibank and JP Morgan, among them, paid hefty fines to settle accusations that they helped Enron management hide the firm’s financial problems with creative investment banking.

The moral hazard is clear. Banks can disregard good banking practices and lend money to corporate clients or even dictators, like our very own Mr. Marcos, and expect to be paid whatever happens. They don’t care if the money went to something like the nuclear power plant that was overpriced to cover kickbacks. The banks gladly lent money because it was risk free and very profitable.

That’s why we are still paying for that nuclear plant, even if we are not able to use it. In a way, the banks operate like the Mafia, because if we refused to pay the nuclear plant loan, so-called cross default provisions would make all of our obligations to all banks, not just those involved with the nuclear plant, due and demandable. We are also blacklisted for further credit accommodation.

And yes, if the country goes under and is unable to pay its obligations, the IMF makes sure that any rescue program gives the international banks top priority for payment, that is, until Argentina refused IMF’s pressure. That’s why banks don’t care where money borrowed by governments go. If the money ends up in secret accounts, so much the better for the banks. At worse, the money gets frozen and the banks get to hold all that cash interest free, indefinitely. Banks hardly ever end up holding an empty bag.

But, hopefully, times seem to be changing. The hefty fines paid by the banks, even if made without having to admit guilt, is a signal that banks must now address that moral hazard inherent in their lending practices. They must now make sure their client is on the up and up about how the money is to be used. The banks must not conspire with the management of the client firm, as it seemed they did with Enron.

Then, there is Parmalat, a once high flying Italian food conglomerate (the guys who made Parma ham an international treat) that went under, apparently because its owners-managers diverted massive bank borrowings to uses other than the firm’s. Parmalat turned belly up and is now under rehabilitation. The man in charge of taking care of Parmalat seems determined to teach the banks a lesson.

Last Tuesday, Parmalat refused to accept claims of over euro1 billion (US$1.3 billion) in debt from Citigroup Inc., Bank of America Corp., UBS AG and other global creditors. It was the Italian company’s latest attempt to share the blame and costs of its fraudulent near-collapse with international financial institutions.

Parmalat argues that these big banks either abetted the fraud or received payment at the expense of other creditors. Among the banks whose claims Parmalat is also denying are Deutsche Bank, Morgan Stanley, Credit Suisse Group, Banca Intesa SpA and Capitalia SpA, according to a website Parmalat created to inform creditors whether it had accepted their claims.

According to an Associated Press story on Forbes.com, Parmalat’s government-appointed administrator, Enrico Bondi, has in the past few weeks launched a campaign against some of the world’s largest investment banks and lenders, investigating their relations with Parmalat’s previous management. The Italian dairy giant, also launched lawsuits against Citigroup, UBS and Deutsche Bank.

Bondi’s three lawsuits already seek over $10 billion (over euro 8 billion) in damages and revoked transactions from the banks, arguing that they helped Parmalat by disguising its real financial state and structured deals to their own benefit at the expense of other creditors. Financial institutions have insisted that they were misled by Parmalat’s fraudulent bookkeeping.

Tuesday’s rejection of some of these banks’ debt claims forces creditors to appeal Bondi’s decisions to an Italian court before Sept. 18. If the court denies the appeals, creditors won’t be able to convert those debt claims into equity, as planned under Bondi’s plan to save Parmalat.

Perhaps, times have changed. The moral hazard inherent in the behavior of large international banks is, hopefully, now being addressed. Maybe, if the nuclear plant fiasco happened now, the banks could be made to answer for the moral hazard of lending to a known overpriced project of a two-bit Third World dictator. In the same way, maybe all those who lent money to Saddam Hussein should also take their lumps. Then again, I am dreaming.

Marinduque

I just got a snail mail dated July 5th from a John Wright of Gasan, Marinduque. I don‘t know if the situation has improved over the past month but here is what he wrote.

It comes as no surprise to anybody on our island, Marinduque, that there is a shortage of rice for the third year in succession. The rains failed to come. Worse, the water table appears to be falling.

Anything that isn’t produced on the island must come in by ferryboat. Last month, our local shipping operators raised its freight prices by more than 100 percent.

About the only produce a small island like this produces is copra. Fortunately, for the last three years, the price has been high. Without that, there would have been real problems. The catch is, all the copra has to be exported off the island to be processed. We then re-import the products so paying those expensive ferryboat fares twice.

Malampaya

I also got this e-mail from "a concerned employee" of PNOC.

I was able to read your columns last Friday (Aug.6) and last Wednesday (Aug.4). Secretary Perez claimed that the privatization of the Malampaya is still open to other bidders, but how can this be possible when the negotiations between PNOC-EC and KOGAS is in its final stages with Sec. Perez being an active broker.

You also hit a core issue when you questioned the legality of him being the Chairman of a PNOC Subsidiary – PNOC-EC. The more serious implication, however, is his culpable violation of Art.VII, Sec. 13 of the 1987 Constitution that prohibits, in this case, members of the Cabinet in being interested in government contracts and transactions whether they should participate directly or indirectly.

Your statement on the petrochemical deals being whipped up is just the tip of the iceberg. More to follow...

Payback Callback

Here’s Dr. Ernie E.

Bernard, who is noted for his gracious manners, was awakened at four forty four a.m. by his ringing telephone.

"Your dog’s barking is keeping me awake," said an angry voice.

Bernard thanked the caller and politely asked for his name and number before hanging up.

The next morning at precisely four forty four a.m., Bernard called his neighbor back.

"Good morning, Mr. Williams.... Just called to say that I DO NOT have a dog."

Boo Chanco’s e-mail address is [email protected]