Lending

From Mr Wang:

"...What does this mean? Well, in a nutshell, Ecuador doesn't have much money. We know why. Ecuador sells oil, and oil prices have collapsed, so Ecuador is broke. So Ecuador decided not to pay its creditors.

Next, you need to find a reason not to pay. So you set up an official presidential commission and have it recommend that Ecuador should refuse to pay interest on USD $4 billion of its debt. Need some moral justification? Well, just accuse the banks of making irresponsible profits out of these deals. But didn't Ecuador's own government approve of these deals in the first place? Oh. Well then, let's just choose a few government officials and make accusations against them too. Simple as that.

So in the past few months, this is the repeating story of my working life. As mentioned earlier, I'm not involved in the Ecuador matter at all, but I am looking at many cases where the client is broadly just doing the same thing - in other words, anything and everything it can to try to wriggle out of a deal gone bad. That includes employing tactics which are dishonest and unethical, and sometimes frivolous to the point of being baffling."



From Manias, Panics and Crashes (after it was revealed that an employee, Yasuo Hamanaka, of Sumitomo Corporation lost $2.6 billion in copper derivatives trading instead of the $1.8 billion reported):

"On June 3, 1999, it[Sumitomo Corporation] announced suits against the Union Bank of Switzerland for $230 million and the Chase Manhattan Bank for $532 million, having already sued J.P. Morgan & Company. The suits against Chase Manhattan and Morgan were for almost $1 billion and for lending to Hamanaka when they knew he lacked the authority to commit the company"



I understand the rationale for the such laws, to make banks more accountable in their risk assessment and lending practices. Yet, I still feel it to be quite disturbing that not only does the lender has to run the risk of default by lending capital to you, he also has to take the risk that he may get sued for lending the capital to you.

Whenever a scandal or crisis erupts(like now), you, as the lender, may very well suffer a double whammy. Not only will you fail to recoup the loan, you may even stand to lose more as companies slap you with lawsuits. The borrower, on the other hand, may default on his loan, and at the same time, win money from the lawsuits.

Disturbing.