Back to Basics with Iraq BY DEBORAH LUTFERBECK 0 N A JUNE EVENING in 1989, a group of American executives calling themselves the Iraqi Business Forum were given an audience with Saddam Hussein in Baghdad. This was no ordinary group. The business represented had total annual sales of $500 billion. If their companies were formed into a nation, the forum’s spokesman told Hussein, it would only stand behind the United States and Japan in terms of net worth. That spokesman was Robert Abboud, then president of First City Bancorp. in Houston. Abboud later described his posture at the meeting as being direct, blunt and adversarial. But for all Abboud’s scolding, First City stepped up to the Iraqi lending plate along with other U.S. banks, and most significantly, a U.S. branch of the Italian Banca Nazionale del Lavoro financial institutions to Iraq was the U.S. government, which provided generous terms and guarantees to lenders who would do business with Iraq and exposed not the banks but the U.S. taxpayer to the risk of losing $5 billion in loans to Iraq. The allegations go beyond simple bad lending policies to Iraq to supply the country with food. An exhaustive investigation by the House Banking Committee, under its chairman, U.S. Rep. Henry B. Gonzalez, D-San Antonio, reveals that the U.S. government might have missed the fact that Saddam Hussein was building up his military arsenal through the use of U.S.-backed loans. BNL, through its Atlanta branch, was probably the single largest banking contributor to Iraq, receiving close to $2 billion in outright lending support from the U.S. government. When government agents seized the records from the Atlanta branch in the fall of 1989, it appeared that the bank had diverted as much as $4 billion to Iraq, including about $2 billion of loans backed by the Commodity Credit Corporation, which the U.S. taxpayer is liable for. The Atlanta bank was not alone. Whether or not the loans were motivated by the drive to explore new export markets for U.S. crops, the story that now has been dubbed “Iraqgate” is widespread and complex. One of Texas’ largest banks, First City of Houston, became just one enabler to Iraq. While no charges of illegal activities have been leveled against the Houston bank, it perhaps played an unwitting role in a policy decision that failed: Here is how it happened: The seeds for loans to Iraq were sown long before Abboud’s trip to Baghdad. In the early 1980s, when President Ronald Reagan sanc Deborah Lutterbeck is a financial writer based in New York and Washington, D .C. 14 JUNE 19, 1992 tioned a move to take Iraq off the list of terrorist nations, the Middle Eastern country, wracked by an extended war with Iran, became eligible for a host of U.S.-backed lending programs. By the time the Forum traveled to the Middle East in 1989, Hussein already had secured more than $4.5 billion in agricultural loans from the U.S. Those loans made by U.S. food exporters were guaranteed under the U.S. Department of Agriculture’s Commodity Credit Corporation otherwise known as the CCC. U.S. businesses needed little prompting, as they were eager to enter the reopened Iraqi markets, and some of them banded together to form the Iraqi Business Forum. While not a direct creation of the U.S. government, the Forum “did play a key role in United States-Iraq commercial relations,” according to Gonzalez. The Forum also seemed to have very close ties with Henry Kissinger. Through his company, Kissinger Associates, the former National Security Adviser and Secretary of State under President Nixon offers political advisory services to a host of corporations, many of which turned up as Forum founders. To untangle the connections between the politicos and the bankers in the BNL matter is quite a task for investigators. For instance, one of Abboud’s former employees, Alan Stoga, later became a director of Kissinger Associates. Stoga had been employed as an economist at the First National Bank of Chicago during the same period that Abboud was that bank’s chielexecutive officer. Stoga’s new boss, Kissinger, happened to be on the BNL payroll “during the height of the biggest bank scandal of all time,” Gonzalez said. BNL hired the former top government official to join their Consulting Board for International Relations. Stoga also accompanied the Forum on its summer trip to Baghdad. One can only imagine how the Iraqi President responded to Abboud’s finger-shaking. According to his testimony before the House Banking Committee on April 9, 1991, Abboud issued an all-too-rare scolding to Hussein. “I told President Hussein that if Iraq wanted to attract capital to develop its resources, Iraq would have to play by the established rules of international trade. Even more, he had a very parochial perspective on how the world operated and what the proper conduct might be in the international financing community,” Abboud said. But Hussein was doing pretty well on the international lending front, especially with a little help from Washington and the Commodity Credit Corporation. Here is how the Commodity Credit Corporation works. Each year, according to government mandate, the CCC must make at least $5 billion available to U.S. exporters for targeted programs, explained Larry McElvain, director of the CCC Operation division. Once the CCC designates a certain country let’s say Iraq for the purposes of this exercise it then announces that the country has been targeted and funds are available to U.S. exporters. At that point, an exporter would go to Iraq and enter into a transaction. If the CCC approves the export transaction, it guarantees 98 percent of its cost. However, a CCC guarantee allows the U.S. exporter, if it becomes anxious about immediate payment, to sell a U.S.based bank its uncollected receivable that is backed by the CCC. The CCC steps in only when the foreign bank does not honor its guarantee for the importer. . The bulk of those bad loans were made by the Atlanta branch of BNL which held receivables backed by guarantees from the Iraqi nation: al bank which are now in default to the tune of $2 billion, leaving CCC and guess who the American taxpayers to pick up the tab for Washington’s favors to Iraq. It turns out that, despite his tutoring by Kissinger, his lectures to Hussein, and his concerns about the parochial nature of the Middle Eastern state, Abboud and First City too put their lending foot forward. As Abboud told the Banking Committee, “First City committed to confirm and negotiate up to $50 million of these agricultural exports on the basis that it was good for our customers and that our principle risk would be capped at $1 million because of CCC’s 98 percent guarantee.” Abboud added that no Texas banker can afford to overlook export prospects. “With leading ports in Houston, Galveston, Corpus Christi, as well as the border cities with Mexico, Texas enjoys some $50 billion a year in international trade out of a gross state product of about $325 billion. One out of every eight Texas manufacturing jobs comes from exports, and in agricultural exports, we rank first in cotton, second in rice, and third in wheat in the United States. A large Texas bank would naturally finance its customers’ trade.” Naturally, especially when the taxpayers take the downside and the bank takes the upside. According to some former administration officials, trade was the driving force behind opening up the U.S. relationship with Iraq. Stephen D. Bryen, a former Deputy Undersecretary of Defense for Trade Security Policy in the Reagan Administration, said, “The real truth is that what was going on was, the United States was in a big hurry to open up positive and good relations with Iraq. The keystone of that, I think, was trade.” Establishing a trading role was something the U.S. was willing to pay for.
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