The queer thing, when you think of it, is that when the Bank of Credit and Commerce International was seized by authorities earlier this month, next to nothing happened.
Oh, there is a ruckus on Fleet Street. The government of British Prime Minister John Major will probably fall as a result, eventually. People in England are plenty mad at their regulators. The failure has cost small depositors around the world a great deal of hard-earned money.
But in international financial markets there was nary a blip. Outside of England, where the BCCI lockup engendered a mild run on banks, there was scandal-but no panic on the payments wire.
Why is that? There are two distinct answers. Each illuminates something worth knowing about our highly specialized, globally interdependent world.
The first part is simple. It is that other big international banks understood pretty well what was going on at what was laughingly referred to by sophisticates for years as the ”Bank for Criminals and Crooks.” Few would have anything to do with BCCI, given its well-known tolerance for flight capital, drug money, terrorists and spies. As Steven Mufson of the Washington Post has noted: ”The web of interlocking deposits and transactions that ties big banks together did not include BCCI.”
Financial crises arise from unexpected shocks. Specifically, they arise from the discovery that some company previously considered creditworthy has made a wrong bet, and not necessarily a particularly big one.
It was the failure of ESM, a little bond dealer in Florida, that touched off the Ohio thrift crisis; the collapse of BBS, another government securities dealer in New Jersey, that put the mortgage-backed securities market nearly into gridlock; the insolvency of Penn Square Bank, a little Oklahoma lender, that touched off the run on Continental Illinois.
But BCCI was a relatively well-known player, at least among other banks. It had been founded on a shoestring in Pakistan in 1972 by Agha Hasan Abedi, a man described by the Financial Times as having ”an almost legendary ability to attract influential figures.”
A victim of the Pakistani civil war, Abedi set out to replicate-on a global scale-the success he had enjoyed in the 1960s from Dacca to Karachi with his United Bank; he caught the global wave of Organization of Petroleum Exporting Countries` money with near perfection, quickly opening a string of branches around London in the very creamiest locations.
Among those he recruited were Kamal Adham, then head of Saudi Arabian intelligence, and several influential Persian Gulf Arab sheiks. Crucial in this first group was the Bank of America, which put up a 25 percent share of BCCI`s initial capital. The deal was advertised as a two-way street: Bank of America was seeking entry to the Mideast; OPEC profits were said to be looking for recycling opportunities in the West. But Bank of America pulled out in 1980, about the time BCCI first moved into America, at least partly because it was unable to pry open its partner`s books.
Since then BCCI`s audits have been an inside joke in banking circles;
David Lascelles and Richard Donkin of the Financial Times reported that as recently as 1987 BCCI hired different auditors for its Luxembourg and Grand Cayman subsidiaries, then forbade both firms to talk to each other or to hire Urdu-speaking examiners. Urdu is the dominant language of Pakistan, and all important bank memos were written in that Hindi tongue. Why accountants Price Waterhouse sat still for this arrangement is anybody`s guess, but top rating agencies stopped grading the bank`s paper years ago.
No wonder, then, the only ones who didn`t get the word were widows and orphans and managers of English council funds-those who depended on
”independent auditors” and government regulators for their information. Among sophisticated bankers, about the only surprise in the Bank of England`s decision to spurn Abu Dhabi`s offer to pump $5 billion into the bank, and to finally confront the mess instead, was it came so late.
The second part of the question therefore is the more interesting. If bankers-and, by extension, the informal college of international regulators that arose in the 1980s to attempt to pierce BCCI`s veil-had the bank pretty well pegged, why not the politicians? If the industry shunned BCCI, why did the wider world permit it to continue to operate?
For one thing, there was an unmistakable touch of moral class-or at least moral pretension-about Abedi`s operations, his philanthropies and close ties with governments in Africa, Asia and South America. (Many are now roiled by the scandal.) From the beginning Abedi styled BCCI as a bank uniquely concerned with mediating between rich nations and poor; his friends refer to him most commonly as ”visionary.” Among BCCI`s indirectly controlled adornments were the politically correct South magazine, and the Third World Foundation, which annually awarded a $100,000 prize of BCCI money to a leading figure in the developing world.
Then there was the rich vein of Islamic paranoia about the West (some of it justified, to be sure) that the bank artfully exploited whenever it was accused of wrongdoing. ”The bank`s only crime was that it was an outsider encroaching on territory that the West believes to be its sole preserve,”
Humayan Gauhar, a former editor of South magazine, told Agence France Press earlier this month.
Finally, Abedi was expert at manipulating down but not-quite-out men of influence. In the 1970s he recruited Peter Cargill (later Sir Peter) from the World Bank to open doors; he hired Clark Clifford to be his lawyer in a similar fashion a couple of years later. Abedi was co-chairman of former President Jimmy Carter`s Global 2000 project, aimed at Third World farmers;
former British Prime Minister Lord Callaghan, whose charities Abedi sometimes supported, was a paid adviser to the bank. Several prominent American politicians are said to have been identified from seized records as having dealings with the bank. Their names are certain to surface.
Republicans and Tories may take the heat for having permitted BCCI to operate too long-in part, perhaps, to permit their spies to use its services. But as the case eventually becomes clear, BCCI increasingly will be seen to have been a Democratic and Labor Party bank; the investigation against it, in dozens of venues, will be led for the most part by conservatives.
In sum, at its most basic level, BCCI operated along a global fault line between Islam and the West. When you think about it, what has happened to Agha Hasan Abedi has much in common with what happened to the Shah of Iran. With book assets of around $20 billion, BCCI was not even a very big bank, much less a nation. In its 73-nation network of lending operations, however, it was a potent symbol of the aspirations of the Islamic world to global prominence. But where University of Chicago business school professor Marvin Zonis titled his excellent new study of the fall of the Shah ”Majestic Failure,”
there is something irreducibly squalid about the BCCI saga, with its revelations of the bank`s links to the Abu Nidal terrorist group and its simple giveaways of depositors` cash to rich Mideastern borrowers.
After BCCI, international-bank supervision is moving swiftly to tighten up. Gerald Corrigan, president of the Federal Reserve Bank of New York, the man who stemmed the panic in the wake of the 1987 crash, has taken over the crucial supervision committee of the Bank for International Settlements, as long had been anticipated. The next banking scam as complicated and pervasive as this one will probably take place on an interplanetary scale.
