Caution: Boric Acid
I have written many times in passing about the country of Chile. For such a small country, far from the United States, farther from Europe, and with a turbulent course of history during the span of our lifetime, it holds a disproportionately important role in my consciousness. I have thought long and hard about why Chile enjoys such a place in my sense of history and I have a number of thoughts about why.
My first direct exposure to Chile came at the end of 1985 when I was asked to take over my bank’s $4 billion exposure to the sovereign debt of what was then called LDC (Less Developed Country) debt, which was mostly to Latin America. That was meaningful to me for a number of reasons, not the least of which was that I was born on home leave when my mother worked for the Rockefeller Foundation in Venezuela, where she had been at that point for eight years trying to raise up the standard of living for the poor rural and mostly indigenous people of that country. My father had been Venezuelan. I learned to speak Spanish before I learned to speak English since the governess and nanny duties were mostly conducted in Spanish. And if that was not enough, I had studied development economics and third-world government (dual major in Econ. and Govt.) at Cornell University. It almost felt as though life had prepared me for this new role of savior of our bank by figuring out a better way to extract us from the clutches of this overwhelming financial burden (our capital base was only $1 billion, so a 25% decline in the value of the debt portfolio would wipe out our capital). Latin American sovereign debt was trading at 90 cents at that point and falling fast.
I was put into the job by our Vice Chairman, Phil Hampton, who I had known for ten years. I reported to Joe Manganello, the bank’s highly-respected Chief Credit Officer and one of the most street-wise and solid citizens I have ever known. One of my first official meetings was to go with Joe and Phil to the Chairman’s office (the same office that ultimately years later became the office of Paul Tagliabue when he was NFL Commissioner). Attending besides the four of us was the guy who preceded me running Latin America, Bill Epstein, and our then-President, Charlie Sanford, the heir apparent to the bank’s throne. This was sort of a transition meeting going over two significant deals that Bill had teed up to swap out of some of the debt. Bill was a brilliant strategist who was just a bit too unconventional and irreverent for the bank’s management. Swapping out of the debt into equity that could be grown and then sold for cash was a good idea, but the Devil was in the details of how you sought approval and how you executed.
The first deal was in the Philippines (considered an extension of Latin America in those days since it was equally debt burdened). It was a swap into equity in a local retail bank. We had just sold all of our retail banking operations in the U.S. so it was a counter-intuitive deal. When challenged on the deal by Charlie, Bill said in his offbeat way, that he was sure Charlie would like the CEO of the Philippine bank since he was a Wharton grad (Charlie had gone to Wharton)…oh, and he was also an albino (Charlie, who was a southern redneck of sorts was not known for his tolerance of people unlike him….especially in skin color). Charlie was not amused and glared at Bill so hard that when the Chairman said no to that deal and asked about the other deal, he turned to me to explain it. I told him it was a swap of $42 million of Chilean debt into the largest life insurance and pension companies in the country. He just shook his head as Charlie mumbled to himself in the corner and Bill smirked. The Chairman had only one question of me, were we committed to the deal? The answer was yes and the Pinochet government (one of the world’s most notable dictators) would not look kindly on our staff if we reneged. The Chairman told me to go through with the deal and dismissed me and as I left the office I heard Bill, who was a stand-up guy in the end, jump to my defense and say that I had inherited the deal from him and was not to blame.
During the next decade, through some deft maneuvering, we turned that $42 million investment into over $1 billion in value to the bank and also executed another several hundred million dollars worth of swap deals in Chile and other countries to save an even bigger slice of our portfolio. But Chile was the origin of the debt-for-equity swap strategy and my memories of going there and doing business during the Pinochet dictatorship years are rather vivid. To be fair, since Pinochet got into office by killing Salvador Allende, the leftist, communist President in 1974, we were well into his “brown-suit” stage when he had forsaken his military uniform and was all about looking grandfatherly and trying to right the Chilean economy by doing things like swapping out of its U.S. dollar debt. But, by any global standards, Pinochet was still a dictator who had disappeared lots of young activists and none of that was ever far from consciousness as we navigated those waters. I actually met the man several times and he was very congenial. He never once suggested I might end up buried under some stadium steps.
So, you see, Chile played a pretty interesting role in my career during the years when I was made a partner of the firm at a young age and more or less earned my “chops” as a banker. And Chile was a major area of study during my years at Cornell since the rise and fall of Salvador Allende happened exactly while I was at Cornell and was a fresh issue for classroom discussion.
Today I read that Gabriel Boric, a thirty-five-year-old left-leaning activist was elected President of Chile with a 55% majority. Boric is not a Communist per-se, but his coalition includes the Chilean Communist Party, and he is clearly the most liberal leader of Chile by a long shot since Allende. The headlines have included his key policy of bringing to an end the “privileges of a few.” That sounds a lot like my old business friends, many of whom built their wealth and standing during the pro-business days of the Pinochet regime, must be feeling very vulnerable right now. Look, I think of myself as being as liberal as they come, as progressive as anyone, but somehow short of being a communist or even a true socialist (as opposed to the moniker thrown around irresponsibly by Republicans these days). But I also saw all the good that the latter-year Pinochet technocrats (mostly out of University of Chicago) did in broadening the middle class base of Chile. They couldn’t reverse the Pinochet killings, but they did help lots of Chileans get to a better place. So, you see, I am conflicted.
I do not worry about Boric ruining the Chilean economy, though he does have his sights set on the less eco-friendly parts of the mining sector. These are not the ways of angry expropriation and nationalization we saw under Allende. These are the moves of young activists afraid of the way we are ruining the planet. I won’t claim to know enough about all their intentions and where this is going, but the last time the military partnered with the country’s elite and that could always happen again. When I read about how close we are to those possibilities in America, I just know that there are grounds for caution in Chile as the acidity of leftist activism may burn in the belly of the Chilean right.