Getting Chile
In 1985 I was sitting in our Chairman’s office with five other senior officers of Bankers Trust Company. I was 31 years old and had been with the bank for nine years. I made the first-line officer rank of Assistant Treasurer in 1978, Assistant Vice President in 1980 and Vice President in 1982. This was somewhat of a lockstep, but a lightning-fast lock-step if that isn’t too much of a non-sequitur. The career-track subtleties were being made a Team Leader in 1979 and a staff Division Head (pay-grade 40, which was a big freakin’ deal). During those salad days of New York banking, I got bonuses at increasing levels from 1978 onward, a distinction never seen before in our bank. By 1983 my bonus exceeded my salary for the year. And then at the end of 1984 I was promoted to Senior Vice President by the circumstance of being moved to run $4 billion of sovereign LDC (Less Developed Country) debt and find “a better way” to get our money back.
When my banking pals learned that I was being assigned to run Latin America (where the vast majority of that LDC debt came from), one pulled me aside to explain something to me. He said, “when the Bank dislikes you they fire you, but when they HATE you they assign you to Latin America”. To me it was another great challenge and ultimately it was the sort of assignment that made me love my banking career. Every day was a new adventure. I had already handled large financial institutions like First National Bank of Boston and John Hancock Insurance. I had done massive mining deals that involved coal mine drag lines and molybdenum non-monetary production payment financings. I had transitioned to do cross-border currency swaps for multi-national corporations. And I had formed and created the bank’s futures and options subsidiary, leading to the start of our Global Derivatives franchise (the granddaddy of them all and something I went back to run at the end of the ‘80’s). But in 1985 I had to find ways to get back that $4 billion as it’s value was dropping like a rock.
The best idea out there was to find ways to swap the sovereign debt for something more liquid that might hold its value better and give us a path to cash. The two most popular ideas, neither of which had actually been done yet, were debt-to-goods swaps and debt-to-equity swaps. The first meant swapping the debt for some sort of good that was presumably hard to sell. Barter deals were all the rage, but they generally involved commodities like oil or even fishmeal, which were actually uniform commodities. The typical deals kicking around were for woolen Peruvian hats or Tunisian sandals made from camel leather. These are hard goods to trade. The debt-to-equity swaps required the sovereign government to agree to buy the US$-denominated debt for local currency and allowing us to use that to buy (with an appropriate capital certificate) a local company or asset. This was an activity that had the benefit to the sovereign of extinguishing US$ debt (the root cause of much of the LDC Debt crisis), but it did so by causing inflation from the printing of local currency to buy the debt. The winning argument here was that it brought foreign know-how and connections to bear on local businesses that would get spurred into becoming booming global businesses to serve the wishes of the new owners (banks like us). The road to cash is a powerful motivator for everyone.
This meeting in the Chairman’s office was to consider two vestigial deals which were on my new plate from my predecessor. He was there, as was the Chief Credit Officer (my boss), the Vice Chairman (his boss), and the newly installed President (who was the heir apparent to the throne). The topic of debt-for-equity was understood by all as the subject-du-jour. The President was not a fan. He was a good-ole-boy from Savanah, Georgia and he was convinced we would be paying “the round-eye tax” getting snookered by local sharpies with well-greased hair. I have rarely seen more body language being worn on one body. Every limb and part of his body was crossed with repressed displeasure. Remember, he may have been the heir apparent, but he was still second in command and the decisions were the Chairman’s to make as much as the President was wanting to call the shots.
As I started to explain the two deals that we needed to decide on at that gathering, the Chief Credit Officer jumped in to defend me making sure that the Chairman (and perhaps more so the President) understood that I was forced to play a hand that I had been dealt on entering the job. This was a critical moment for this 82-year old white-shoe bank. The LDC Debt exposure that I had been handed was four times the capital base of the bank. That meant that a decline of 25% in value effectively wiped out our capital base. The value of the debt had already fallen at least 10% and showed no signs of abating. Critical may have been an understatement. I carried on to explain the deals. My first decision was which of the two to present first and which to do last. I didn’t yet understand all the views in the room so this was a good news / bad news issue where it was unclear what was good and what was bad just yet.
I started with the “easier” deal. Both were debt-for-equity deals. This was a 56-branch retail bank in the Philippines. Besides the over-leveraged status of the country, the Philippines was in the middle of a revolution of sorts with a government massacre here and a deposed leader there. I should add that the most notable move made by our Chairman during his tenure was quite portentously deciding to exit the retail banking business and choosing to rely on purchased money funding rather than retail deposits. That was a radical move and by 1985 it was starting to look smart, but it was still somewhat fresh. When the President said what everyone was thinking, that moving back into retail banking, even as a defensive move would send a terrible signal to the markets. This was when my predecessor, who had a strange sense of humor, jumped in and said that our President would like the CEO of the Philippine Bank because he was a Wharton graduate (our President’s Alma Mater). He smirked when he tagged on the random fact that the CEO was also an albino (fully understanding our President’s rather narrow-minded view of life). The Chairman just turned to me and said, no and asked about the second situation.
I explained that we had bid and won an auction with the Chilean government, still being run by the dictator, General Augusto Pinochet, for the country’s largest life insurance and pension companies. I could see the Chairman’s shoulder’s slump. I interjected that Chile was doing more of the right things from an economic policy perspective than any other Latin American country at that time. The President used this time to expound on his views about the “round eye” tax. The Chairman cut him off and asked me if this was a deal we could get out of or if we were committed. I said we were committed. There was no more discussion and he just said to me, “proceed”. The President was heard mumbling that even he as the President wouldn’t presume to approve a deal like that. His vitriol was directed to my predecessor, but there was enough to wash over onto me as well.
We went on over the next decade to make over $1 billion on that $43 million deal (actually valued much less since we were using debt previously contracted). Today, I was told that we are in the hunt for funding for our hydrogen company from the Chilean government. It reminded me that getting Chile could work out well for us.