An excerpt of the book IN BANKS WE TRUST by Penny Lernoux

Anchor Press/Doubleday, 1984 - hardcover

Front cover (photo)

Back cover (photo)

Inside cover flap (photo)

from pages xvi - xxiv


"What is robbing a bank compared to owning a bank!"

BERTOLT BRECHT, The Threepenny Opera



In 1980 a newspaper editor asked me to write a series of investigative articles on the impact made by the large U.S. banks on developing countries. The idea of researching so esoteric a subject was daunting, since, like most people, I assumed that only financial wizards could understand the complexities of banking. Still, any moderately informed observer could see the connection between foreign debt and rising social discontent in areas like Latin America, and bank experts could explain the financial puzzles—even to a neophyte like me.
    The first stage of the investigation led to New York and Washington, D.C., where I made several discoveries, the most important being that there is no such thing as a bachelor's or a master's degree in banking. For the most part, banks hire liberal arts graduates who learn banking on the job. And many of the people who buy or found banks have had no experience in banking at all. If they can learn it, so can we.
    The second discovery was that all sorts of hanky-panky had been going on in U.S. banks, and that several pillars of the U.S. financial community had been near collapse in the mid-1970s. During a meeting with a congressional staffer who was an expert on banking, I had with me a copy of The Crash of 79, a romantic thriller about the follies of international bankers, written by former banker Paul E. Erdman. "You think that's fiction," the staffer laughed. "Look at this page about huge real estate losses. Erdman was talking about Chase Manhattan and Citibank." Many more such revelations followed during my weeks in Washington, by the end of which it seemed clear that the facts were more startling than any fiction.
    Congressmen, their aides, economists, and even some bank regulators all made the same point: Because of the pressure for growth and profits, traditional guidelines for prudence and integrity in banking had been discarded as "old-fashioned" and "stodgy," and rewards and promotions were going to aggressive executives who turned out the most loans—regardless of whether they would ever be repaid. Nor were they particular about their clients or meticulous in their conduct of the bank's business, whether within the law or not. Evading the law had become common practice, and those who protested were fired for incompetence or "mental illness," or just shelved for lack of initiative.
    During the 1970s, when the United States and world economies were still experiencing growth, few questioned such shoddy practices because on paper the profits looked so handsome. But when the new decade opened on a world recession, the dangers of speculating struck home, with huge bank losses resulting when hustlers failed to take even minimal precautions. Several Congressmen complained to me that they suspected some banks, in order to gamble for higher profits, were deliberately evading U.S. regulations designed to insure the safety of depositors. If they lose, predicted Congressman James Leach (R-lowa), "the buck stops with the taxpayers." Two years later, when the Reagan administration was bailing out U.S. banks that had lent excessively to Mexico and Brazil, bankers brusquely informed the American public that taxpayers had no choice but to pay. U.S. bankers are not interested in economic and political conditions or whether a country can repay, a staff member of the Senate Subcommittee on Foreign Economic Policy had told me. "Their bottom line is the U.S. Treasury."
    The Washington experience sharply shifted the direction of the investigation: Obviously a lot of wheeler-dealers were being attracted to the profession, much as gamblers are lured to Las Vegas, but with far less risk. A gambler who fails to pay his debts in Vegas' casinos may end up in jail or the morgue. But a banker who gambles his institution's stability through reckless loans can expect no more than a slap on the wrist from U.S. bank regulators; he may even be promoted for his recklessness!
    Criminal investigators repeatedly told me that, contrary to popular belief, white-collar crime is not victimless since somebody always pays (viz. the taxpayer in the bank bailout). Another frequent observation was that such misbehavior often opens the door to organized crime. Living in Colombia, the narcotics supermarket for the United States, I could see how a banker who started out by cutting corners might end up with a highly questionable clientele, including mobsters and drug traffickers. It was common knowledge that several banks in Colombia laundered drug money for a fee. The drug trail led all over the world, from the Caribbean to Miami, Australia, and eventually, to the Vatican, but the faces soon became familiar—mobsters, right-wing terrorists, and CIA agents, all of whom used the same banks and bankers. As one private investigator explained to me, it is not surprising that the Mob prefers a bank patronized by the CIA, since both are involved in illegal activities, only the CIA calls its work covert action. Any bank that serves the CIA by funneling agency money into covert work must hide the trail through paper fronts, and such fronts are precisely what organized crime needs to wash its dirty money. It also became apparent that some bankers deliberately blurred their relations with government agents and mobsters, using a CIA cover to protect their criminal connections. But in a number of cases it was not only the banker who clouded the lines but also the CIA, which was working with gangsters, supposedly for political motives but occasionally for the personal enrichment of its agents, as appears to have been the case in the Nugan Hand Bank scandal in Australia.
    Two questions arose from such connections. Why was the CIA working with gangsters and drug traffickers? And how did banks fit into the picture? The answer to the former can be traced back to World War II, when ties between organized crime and the CIA's predecessor were first forged, and, more recently, to the cold war, when the anti-Communist imperative led the CIA to take an active role in promoting Southeast Asia's heroin trade. After the ClA's disastrous experience at the Bay of Pigs in 1961, a number of agents turned to the cocaine and marijuana trade, and the South American drug traffic was also politicized, with militant anticommunism—or just plain terrorism—serving as cover for the trade.
    The answer to the second question lies in the changed nature of banking and the size of criminal profits. In the past mobsters infiltrated many industries but rarely bothered with banks because they were not spectacularly profitable and were conservatively run. Moreover, the underground economy was still limited in size and had no overwhelming need of banks. All that has changed since the 1970s, with the exponential growth of money markets and a parallel explosion in profits from crime, particularly the drug trade, which earns more than $79 billion a year in untaxed profits and ranks as the United States' second biggest industry after oil. Today banks are an essential cog in criminal industries, serving to launder dirty money and finance new enterprises and for related activities in the securities, commodity, and stock markets. Such is the wheeler-dealer atmosphere in banking that even the most venerable institutions have been touched by scandal. They include the Vatican Bank, which has been implicated in a $1.4 billion fraud.

* * *

    This book follows the same pattern of discovery that the investigation took, first describing the follies and dubious shenanigans of several large U.S. banks. The people involved are not necessarily criminals, although convictions may arise from one case. Rather, they are what is loosely described in business journals as wheeler-dealers—people who skirt the law or take big risks for quick profits. Some were plain dumb, in the words of a bank chairman involved in the Penn Square debacle, believing that there was such a thing as a sure gamble, only to discover, when the chips were down, that potential profits must be weighed against the danger of loss. Curiously, while malevolent, the criminal element poses less of a threat to the average American than the wheeler-dealers, who, as happened in 1929, could bring the economy crashing down. Indeed, it is the "anything goes" atmosphere in banking today—along with huge profits and virtually no government controls—that has attracted so many crooks.
    The second part of the book documents the criminal aspects of banking, showing how gangsters and U.S. intelligence agents have used the same banks. The Latin-American and Caribbean connections, particularly in the chapters on the Vatican Bank, relate right-wing terrorists to bank involvement in the U.S.-bound narcotics traffic, two thirds of which originates in Latin America.
    The third part also focuses on Latin America because of bankers' fears that a string of Latin defaults could end in a replay of the 1929 bank crash. Latin America also offers a good example of how human rights in the developing countries are linked to American pocketbooks. By so enmeshing their financial futures with Latin America, U.S. banks have probably done more than any human rights organization to heighten Americans' awareness of their neighbors' plight.
    Throughout the book there is a recurrent theme: the complacency in American society that tolerates—even admires—Mafia gangsters and the successful operator who makes a killing by bending the law. Or, as one criminal investigator put it, "It's time we Americans recognized that the idea that crime doesn't pay is pure nonsense. Crime pays more than any other profession, with less risk and a higher profit motive." Especially for banks.




CHAPTER I describes how Chase Manhattan, through loose management, lost $542 million on a securities gamble and a high-flying bank in an Oklahoma shopping center. Supporting cast: Continental Illinois and Seattle-First National.

CHAPTER 2 documents how such disasters occur through lax regulation and auditing procedures encouraged by "bank reserve," and how such "reserve" enabled Citibank to evade tax and prudential regulations, as revealed by the shocking results of a three-year Securities and Exchange Commission investigation.

CHAPTER 3 links Chase's loose management and Citibank's failure to check employees' backgrounds to the $20.3 million "Outrigger" real estate seam involving organized-crime figures.



CHAPTER 4 reveals how a Sydney merchant bank became the fulcrum for organized crime, covert action, and the politics of heroin in Southeast Asia. Cast includes a Who's Who of the CIA.

CHAPTER 5 connects Southeast Asian heroin traffic, the CIA, and organized crime in Caribbean bank havens.

CHAPTER 6 shows how Miami has become a center for "hot" money, drugs, and international intrigue.

CHAPTER 7 names Miami banks in drug traffic and explains money laundering and regulators' failure to stop it.

CHAPTER 8 tells of the rise and fall of an international laundromat with CIA, drug, terrorist, and organized-crime connections.

CHAPTER 9 documents the links among European and Latin-American fascists and Nazis, the cocaine traffic, organized crime, and the Vatican Bank.

CHAPTER 10 examines the "suicide" of Italian banker Roberto Calvi and his fascist and Vatican connections, and how the Vatican Bank's failure to honor its debts threw a monkey wrench into the Eurocurrency market.


CHAPTER 11 relates how the wheeler-dealer atmosphere in banking led to a gambling spree by U.S. banks in Latin America and tells of the Great Bank Bailout.

CHAPTER 12 concludes with some questions and answers.