Meyer Anselm Rothschild, the founding father of the banking family, got into the "foreign loan" business in the 19th century. He provided capital to various German princes, but only after personally inspecting the value and condition of their estates.
Today, the foreign loan business is a lot more complicated and extensive. As a result of the sharp oil price increases, the recession of the early 1970s, and the desire of poor nations for economic development, private banks have become mainstays of financial support for developing nations. Their involvement abroad is greater today than at any time since the crash of 1929.
The huge dollar amounts involved have raised questions over how U.S. banks that are heavily into international lending make their decisions and evaluate their risks.
The largest international lender in the world, Citicorp, made 72 per cent of its profit last year from its foreign operations. About 63 per cent of its outstanding loans are overseas. They totalled $25.57 billion at the end of 1976.
Citicorp's principal subsidiary, Citibank, has branches in 103 countries and an overseas presence far larger than the U.S. government's in some countries. In Brazil, for example, Citibank has 360 officers. The State Department has 116 and the Agency for International Development has eight.
In 16 countries Citibank is the only U.S. bank present.
"City is spread so far and wide that for them a revolution in one country means an arms sale in another. One way or another, they will have a piece of the action," a veteran New York financial writer said.
George J. Vojta, the executive vice president for international operations, says the most important principle of Citibank's overseas lending system is to have a base so broad that:
"We may get hurt, but never killed by a disaster someplace."
In an interview, Vojta said, "We're always going to have some problems somewhere, in a country or with a business, or in a product line or with a currency," but, like an insurance company, the risk will be spread sufficiently to insure Citibank continued profits.
At one point several years ago, Citibank has loans outstanding in 22 of the 28 countries listed as special risks by U.S. agencies, but its loan losses overseas have always been considerably smaller than domestic losses and the loans to economically weak nations are modest compared to loans to sounder countries.
At the end of 1976, $344 million, or about 1.5 per cent of outstanding overseas loans, were to the group of nations with annual per capital incomes below $200.
A second crucial protection against risk is built to the interest rate structure. "You know beforehand that a certain proportion of your loans is going to go bad, but you don't know which or when," one Citibank official said, "so you charge enough interest on all your loans to cover the bad ones."
When you get off the elevator on the fifth floor of Citicorp's Park Avenue headquarters, small wall plaques give directions as though they were road signs at a bizarre international crossroads. Europe, the Middle East and Africa to the right, Asia-Pacific to the left.
It is from here that Vojta, the senior vice president in charge of the three regions into which Citicorp has divided the world and their assistants watched over foreign operations.
But it is a decentralized system in which the bank's officers in the field have wide autonomy.
Rothschild found value in having a look for himself and Citicorp agrees that you can evaluate clients better in their country than from New York.
The country officers and area officers in the field are never reversed on a loan decision as long as it is within the limits established for that country by headquarters.
Vojta proposes the risk limits for each country and Irving S. Friedman second-guesses them, Vojta said. Friedman is a senior vice president and the senior adviser for international operations.
The ceiling for a country can changed every day and is reviewed at least once a year, Vojta said.
"Profit opportunities are always subordinated to the principle of avoidance of excessive country risk," Friedman told a group of investment counselors last month.
Friedman, Vojta and the bank's chairman and vice chairman, Walter B. Wriston and G.A. Constanzo, have made a number of public appearances over the last year rebutting press stories that Citicorp and other major international lenders are dangerously overextended.
"I know of no developing country today that can't service its private debt. The popular notion that the less developed countries are a disaster area simply doesn't square with the facts," Costanzo told a House Committee recently.
Citicorp has just published a 118-page study by Friedman on "The Emerging Role of Private Banks in the Developing World." Not surprisingly, it strongly supports lending to developing nations.
In an interview, Friedman reiterated his predicition that no nation will go into default on its debts to private lenders in 1977. He acknowledged that he is worried about two or three that he thinks will make it, but without much room to spare.
In addition to diversification of loans among countries, Citibank makes sure that its loans to any one country are of different types and maturities.
At signs of serious potitical trouble, the bank can call in its loans as they come due, thereby reducing its risk in that country. Citibank's evacuation of Saigon was a success, Vojta said. "What they (the Communists who conquered Saigon) got was the furniture," he said.
In Lebanon the trouble came more swiftly and Citibank was more deeply involved. Senior Vice President Edwin P. Hoffman said last month that Citibank wrote off $4 million in bad loans as a result of the civil war that destroyed much of Beirut.
In addition, Hoffman said, "Beirut branch books suffered an earnings hit of close to $3 million, $1.1 million of interest not accrued, and operating expenses, including relocation expenses, of $1.8 million."
Sometimes when Citibank retires from the field it is not under gunfire.
Citibank is proud of its rapid action in reducing its exposure in Chile as former President Salvador Allende came to power. Allende was a Marxist.
The similarity of attitudes toward developing countries held in U.S. banks' executive suites and at the State Department have led to charges that the banks actively make foreign policy.
Citibank officers and Foreign Services officers are in frequent contact both in the United States and abroad, exchanging information.
It would be inappropriate, Vojta said, for the bank to ask the U.S. government for help in protecting its overseas interests and equally inappropriate for the government to seek aid in furthering its policies from Citibank.
"Our on-site intelligence, in the best sense of that world, provides every day an enormous amount of real information about what's going on," Vojta said.
Citibank's foreign policy is to make money, its officers say. They refer back to four "principles for a Worldwide Corporate Citizen" laid down by Senior Vice President George J. Clark in 1973 Senate testimony.
'We believe that every country must find its own way politically and economically," the principles say.
But Citibank is there, like a neighborhood doctor, to help prevent serious troubles in any action where the bank has a stake.
Last year, Zaire was in default and Peru was close to being unable to service its debts. In both cases, Citibank played a leading role in arranging new financing plans contingent on the government's taking action to restore their credit-worthiness.
Friedman and other bankers make clear they don't dictate what actions the nations should take, but the distinction between dictating and responding to inquiries can blur when the borrowers know they are on the edge of losing all access to the private capital markets.
Neither Peru nor Zaire is out of the economic woods yet, but if Citibank is ready to lend a helping hand with economic reforms, it stands solidly behind its principles of not passing judgment on political systems on healthy borrowers.
"Banks don't criticize Brazil or other nations with nasty governments because they can get their equity interests clobbered. Bankers behave as though they were walking on eggs," said one banker.
Thus, there are no Andrew Youngs in the 25,700-person foreign service of Citibank.
U.S. policy has a ripple effect on the banks, however. If Washington is cooling toward a developing country, as it did toward Allende in Chile, it would have an effect on the banks, a Treasury official said.
In the 19th century, Lord Macaulay explained:
"The strength which is derived from the confidence of the capitalists . . . flies, by the law of its nature, from barbarism and fraud, from tyranny and anarchy, to follow civilization and virtue, liberty and order."
Anarchy, barbarism and fraud still drive away capital. It is less clear that tyranny inspires a lack of confidence among capitalists.
Brazil is an excellent example of the extraordinary ties that have developed between a foreign nation and a U.S. bank.
Citibank loans to Brazil amount to more than $2 billion, according to informed sources. This is about the same as Citibank's total loans to individuals in the United States for all household, family and other consumer purposes. As recently as late 1974, Citibank's Brazil exposure was estimated at only about $1.1 billion.
In 1976, Citibank made 13 per cent of its profit in Brazil, more than twice the consolidated after-tax earnings in Britain, Germany or Japan.
With that kind of investment, it is not surprising that Senior Vice President George E. Hagerman Jr., in describing Brazil's political system told investment analysts:
"In terms of ideology, both the government and the opposition agree that a full western-style democratic process should be restored, but disagree about the means and the timing."
His statement is true, that it would be clearer to explain that the opposition wants the restoration yesterday while the government appears unlikely to feel the time is right during the lifetime of any living general.