Hey! Randy

Misplaced Trust

Posted by heyrandy on July 20, 2012

In Banks We Trust, Penny Lernoux, 1984

We take banks for granted. Make a deposit, make a withdrawal. Ho hum. All very  ordinary. Perhaps not. Lernoux takes us on a global tour of banking. It is a wild ride. There is so much corruption in the international banking system one wonders how everyone is not  in jail. Lernoux tells us that too.

Modern banking is built upon an image of stability. Most people consider bankers staid, dull, boring. Behind the bland façade there are some real cowboys. Some of these cowboys were thrown from their horses and hit the ground hard.

Banks are interconnected. They lend money to each other. They form partnerships in large loans. This causes lots of problems. The big problem is self-delusion. The bankers see what they want to see. The criminals know this.

Lernoux begins the tour with an obscure bank in Oklahoma, Penn Square Bank. It was not very large. It was located in a strip mall. It took the big banks for a ride. Penn Square was in the heart of the “oil patch.” It was supposed to know the oil business and those in it. The large New York based banks used Penn Square as a middle man in making loans to the oil men. Penn Square was corrupt and incompetent. The big banks did not do any checking. If they had, they would have found out about Penn Square’s fast dealing.

This error of not checking things was repeated throughout the book. The banks did not even check on themselves. Safety was a minor concern. What mattered was growth. Make loans, lots of them. The managers obeyed. The banks suffered. Even the small, local banks did not do the appropriate checking. Many of the small banks went into partner withe the giant New York banks in loans to third world countries. The small banks assumed that the big boys knew what they were doing.

Lernoux tells us of the international drug dealers using U.S. banks to launder the drug money. Gone are the days when crime profits were carried by people using suitcases with hidden compartments. The amounts of money are just to large to be transferred by anything but a bank. How to get a bank to coöperate? If they don’t do it willingly (many did because the profits for the bank were huge), just buy the bank. Or start one. It is amazingly easy for a foreigner to buy an American bank. It is also very easy to start one.

Most of these banks were located in Florida, especially Miami. Miami was the hub of through which passed most of South American produced drugs and through which most of the drug profits were channeled to other parts of the world. The business was so lucrative that many of the world’s major banks opened branches in Miami so they could get in on the action.

It was not all drug money. The CIA was involved. It uses banks to move money around the world to fund its actions. Some banks did so much Agency business that they were almost themselves Agency operations. If the drug money was dirty, this money was filthy.

The author also tells us of the problems involving the Vatican Bank. It is a story of secret P2 Masonic lodge, corrupt Italian bankers, bad business deals, and a strange death. The principle person was an Italian banker, Roberto Calvi, who was found hanging from a London bridge. Calvi’s bank collapsed. He was in London hiding because he feared for his life. His death was ruled suicide, but the circumstances are very strange.

It is in the area of lending to governments that the banks did their most foolish business. The amount of money owed the banks by South American government was so large that the banks were in danger of failing if the governments defaulted on the loans. But the American taxpayer came to the rescue. The banks were saved to practice moral hazard another day.

After reading the book I will never again see banks in the same way.

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