...the committee of banks was called "advisory" because God forbid anyone might think it was a steering committee (which of course it was) and accuse it of actually making decisions for which it could be held accountable. It existed merely to pass on the decisions of the Mexicans all of which were drafted for them. But it was a friendly bunch, 13 institutions, each with a different agenda and only occasionally at one another's throats. There actually emerged one or two rather torrid L'affairs de coeur and one of the Mexican negotiators actually wound up marrying one of the bankers...a traditional marriage by the way. There was of course one overriding goal and that was to save the system for even in 1982 there was no question that this was a systemic risk.
I shall spare you the details but suffice to know that Mexico had over 500 bank creditors of various size and denomination, who were, for the most part, prepared to accept the fact that their loan were to be restructured and all of whom were relying on the advisory committee for practically all information regarding the process. No one liked it but as long as everyone was in the same boat the banks were prepared to go along.
The process was well under way when a rather extraordinary event occurred. Into a meeting of the committee one day walked the managing partner of the committee's counsel. The committee was represented by a large New York law firm...a VERY LARGE New York law firm. For the managing partner to make an appearance was a shocker but what was even more shocking was the tale he told. Remember the oil syndicate? It seemed that one of the participating banks, in order to comply with a simple internal audit had asked the agent if it had fulfilled it's agencies duties and insured that the oil assumed to be the source of repayment remained free and unencumbered. Sadly, it had not but in the scramble to fulfill the request it had learned of the Mexican double dipping. Now, the committee knew of it. We were not amused.
The managing partner, let's call him Bob, began to explain the situation. Clearly, he said an event of default under the oil facility had occurred and through the magic medium of the concept of cross default, every other loan in which the Mexicans were involved was in default. Now another default at this stage hardly mattered but in addition to another cause of action against the Mexicans all the banks in the oil facility undoubtably had a cause of action against the agent bank which if they ever learned about the fact that their chances of getting repaid under that facility were now in question as a whole bunch of OTHER banks had claims on the same source of repayment, chances were they might take umbrage. There was also the delicate little matter of whether or not, the advisory committee, now on notice of this small indiscretion by the Mexicans had any duty to inform the original syndicate or any of the banks in the competing syndicates. And oh, said Bob, three of the banks on the committee were involved in the subsequent facilities when they had full knowledge that the Mexicans were in breach of every covenant in the agreements and then some. Sheepish looks, consternation and real anger.
What to do. Well, says Bob, it seems that five of the seven "arrangements" as he called them had been terminated and the remaining two (as far as he could tell) were about to run out shortly after which the issue would, in his opinion, become moot. In a court's opinion, someone had the temerity to ask? Well, said Bob, one could never be sure how a court might rule. Confusion. Was there a duty to reveal this revolting state of affairs? Technically, yes, said Bob. Should we, asked a banker present? Well, that was really our decision, said Bob. I think someone asked him what the hell were we paying him for but I'm not sure.
It was pretty clear to all present that if this sordid little mess got out
1. the reputation of the committee would be trashed
2. the restructuring process would be dead
3. there would be a massive default on the part of Mexico and perhaps others
4. there would probably be law suits all over the place, resulting in
5. bank failures, beginning with the agent bank who was toast, putting bankers out of work (not good)
Yet, on the other side of the ledger, was there a duty to the participants of the original syndicate to inform them of the malfeasance of their agent which would have given them a cause of action against it and recovery on the part of their shareholders and did this duty outweigh the avoidance of the systemic collapse that was staring everyone in the face?
There was one other issue that not everyone realized. One of those present wandered up to Bob as discussions continued.
"You didn't address the question of individual liability on the part of those present."
"No I didn't"
"And?"
"If you're asking the question, you know the answer."
"Not if I inform my management"
"Yes,but..."
"But if we alI do that there is no way we keep a lid on this thing."
"That's probably the case."
"Will you represent me?"
"We represent the committee not individual banks or individuals."
"It was a joke, Bob."
"I know, Charlie, but that's the way I had to answer that."
The committee took Bob's advice and I, for one, never told my management. I can't speak for anyone else. The rest, as they say, is history. But from this little event I hope one can realize how difficult were the decisions that the management of the Bank of America and Ken Lewis in particular faced. I have joked about Ken but I sympathize with him as well. I wish him well.
Oh, one other little fact. In that conference room 25 years ago, as today, was a representative of the Federal Reserve. And the agent bank for the original syndicate? Why, Bank of America. Funny, eh.
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