King Boris of Bulgaria, King Ferdinand of Romania, Count Istvan Bethen of Hungary.
Although the names of these potentates have long been forgotten by most Americans, they have been resurrected for a few by the Foreign Bondholders Protective Council. This little-known organization, with headquarters in a tiny office on Broadway, negotiates with foreign governments to recover monies that private citizens and institutions in the United States loaned many years ago to now-extinct countries and regimes.
Since its founding 47 years ago, the council has recovered more than $3.5 billion for owners of publicly offered dollar-denominated bonds in default, either in the form of resumption of interest payments or as lump-sum cash settlements.
Until the 1970s bondholders could expect the principal to be paid in full with a nominal interest payment. Since then, however, those Communist Eastern European nations willing to liquidate the debts incurred by their royal predecessors generally have settled for lump-sum cash payments, typically 40 cents on the dollar.
To date some 26 countries ranging from Argentina to Yugoslavia have made 45 debt settlements. From a post-World War I total of $2 billion in defaulted bonds, the debt has been worked down to just $156 million as a result of the council's negotiations and of unilateral actions by debtor states.
Today countries borrow from the World Bank or bank syndicates rather than going to the New York markets as they once did. "We're a self-liquidating organization," said John R. Petty, president of the council and president of Marine Midland Bank. But Petty doesn't hold out much hope that the remaining debtors will settle quickly.
The largest amount owed is about $75 million in Russian dollar bonds issued in 1916 by the government of Czar Nicholas II. (All amounts are approximate because records often were destroyed in wartime.) Also in default is approximately $1.5 million in 1927 Estonian bonds. The Soviet Union took over the tiny country in 1940 but never assumed its obligations. Czechoslovakia also owes $2.7 million on 1922 bonds.
The second-largest single debtor is Cuba Castro's government defaulted in 1960 on approximately $52 million of outstanding obligations incurred by his country between 1930 and 1953. China owes $5.5 million on treasury notes issued in 1919 under President Hsu Shi ch'ang. Twenty years later the Chiang Kai shek government defaulted on those bonds.
During the 1920s some $10.5 billion of dollar-denominated securities were issued publicly in the New York market, "a figure larger than the total of foreign government bonds floated in London during the previous half century," according to a council history. By October 1933 some $2.5 billion of those bonds were already in partial or complete default.
Sensing that the situation was very serious, a group of influential private citizens formed a nonprofit public service corporation with the backing of the federal government. The founders of the Foreign Bondholders Protective Council included financier Andrew W. Mellon and Henry L. Stimson, later Roosevelt's secretary of War. Like the other bank executives, former diplomats academics, lawyers and other business leaders on the board of directors, Petty serves without compensation. (The council gets its operating funds from a 1 1/2 percent fee it deducts from the amounts recovered for bond holders.)
Petty has served on the council since 1972. Since then settlements have been arranged with Poland (including Danzig), Hungary, Romania and Bulgaria. In the case of Bulgaria, the State Department pushed resolution of the defaulted dollar bonds, issued in 1927 when King Boris was on the throne, as a precondition to granting that country most-favored-nation status but it did not do so in the case of the People's Republic of China.
Petty brought the Chinese matter up last November with Rep. Charles Vanik (D-Ohio), chairman of the House subcommittee on trade. On Dec. 20, after MFN status had been passed by his committee, Vanik referred the matter to the State Department. J. Brian Atwood, assistant secretary for congressional relations, responded that it was not State's policy "to espouse defaulted foreign dollar bond claims of nationals of the United States against foreign governments except under very unusual circumstances."
And he referred the matter back to the council. Petty was instructed by the Treasury not to bring up the defaulted bonds on a trip to China. This issue, not related to other Sino-American claims, remains unresolved.
Similarly the State Department did not push bond negotiations with East Germany. Some talks were held with the Russians in the early 1970s but nothing came of them. Negotiations with Czechoslovakia are in limbo over the issue of the return of Czech gold held in the United States.
If the U.S. government provides little leverage, the private sector offers little either for the simple reason that international banks are not worried about such small arrearages. Although the majority of Marine Midland stock has been acquired by the Hongkong and Shanghai Banking Corp., Petty does not attempt to wear two hats at one time.
After negotiations leading to a preliminary offer, the council places advertisements in newspapers inviting bond holders to register their claims. The council even has put notices on the bulletin boards of churches serving the ethnic population of the offering country.In this manner well over 300,000 bond holders have been located. Most certificates come from trust companies which have preserved them in vaults, but others come out of attic trunks.
According to Alice Popp, who has lived with the defaulted-bond question for 40 years as the council's only paid employe, most of the holders are immigrants or their children who were persuaded to invest their dollars in the new regimes of the old countries between the world wars. Some of the bonds have face values as low as $50.
Asked if most recipients were surprised to learn about their bond bonanzas, Popp replied that many never had given up hope. "Take the Polish. bThey are very frugal. They don't make lampshades," she said, a reference to the popular maxim that stock certificates of bankrupt companies and defaulted bonds are good for nothing but papering the walls or decorating.
Because Poland has allowed several years for claimants to come forth, more than half of its $40 million debt (on which the government will pay 40 cents on the dollar) has been claimed. Romania by contrast allowed only six months, with the result that only $473,300 out of $7.5 million was claimed.
But if the bond holders aren't very surprised, they aren't very happy either, Popp added. Contrasting the first 35 years of the council's activity, when countries were expected to pay their debts in full, to the lump-sum cash settlements arranged with Eastern European countries, she exclaimed, "These past five years have been terrible. The council is a ping pong ball, bounced back and forth between those (bond holders) who urge us to 'take anything you can get' and those who complain 'it's better than nothing'."