The Arabs and oil p8

Deutsche Bank, Midland, Société Générale, and Société Générale de Banque, with the ultimate goal of
establishing a pan-European global bank. It had six separate banking operations including London
(EBC), New York (European American), European Asian and European Arab. Yassukovich who was
managing director of EBC, remembers setting it up in London in 1974 amid strikes and power cuts,
often working by the light of a paraffin lamp. He acknowledges that consortium banks "had their
moment. They allowed member banks to experiment and were a way of sharing risk. But it was always
clear to me that they didn't have a long-term future."
Says de Gelsey: "It was right for the banks to club together. Now mergers are doing the same thing. In
time we found that our shareholders were competing with us." Orion was sold to Royal Bank of
Canada. EBC was bought by ABN Amro.
The end of the beginning
London's Big Bang in 1986 spelled the end for a number of London-based consortia,
Yassukovich says. Libra Bank, which had made its mark in emerging-market debt trading, was shut
down and its traders bought by Deutsche Morgan Grenfell. Of the Arab consortium banks the two
biggest, which started with governments as shareholders, Arab Banking Corporation (ABC) and Gulf
International Bank (GIB) are now pale shadows of what they were in the 1980s. UBAF has shrunk to a
small Paris operation. Banque Arabe et Internationale d'Investissement (BAII), which was embroiled in
the Bank of Credit & Commerce International (BCCI) collapse in 1991, is now just a Paris fax number.
United Bank of Kuwait, set up in London by three Kuwaiti banks in 1966, is perhaps the only
consortium bank that continues to thrive.
The mushrooming of Arab banks was a response to the oil revenues that poured into the Arab
world after the 1973 oil crisis. ABC and GIB became big recyclers of petrodollars, through
syndicated lending to the developing world. The mid-1970s to the early 1980s was the era of the
syndicated loan: to Mexico, Brazil, Italy, Nigeria, Turkey.
Saudi Arabian Monetary Agency had "three wise men" as advisers: John Meyer, Alfred Schäfer, and
Robert Fleming, respectively the chairmen of JP Morgan, UBS and Robert Fleming, who urged it to get
some investment bankers to manage its rapidly rising cash mountain. It hired a team of eight people
from White Weld and Baring Brothers. Among them was David Mulford, then at White Weld.
Oil, inflation, default
"Everyone thought the oil crisis and the petrodollars were a world-destabilizing event," says Mulford.
So it was fortunate that the Saudis undertook to invest their funds smoothly and unobtrusively around
the world. "We created a huge portfolio of private placements," says Mulford. "Sama was the biggest
operator in the government bond markets, and the biggest holder of US government bonds. It had a
portfolio of private placements and equity in double-A and triple-A corporate names. We negotiated
with governments to smooth out tax barriers and the like, on the understanding that we wouldn't disrupt
the local market." The Saudis were buyers and holders of government and agency bonds - they never
traded in and out.
After the second oil price shock at the end of 1979, Saudi revenues were around $10 billion every 30
days. "Every business day, $50 million was added to the short-term portfolio," says Mulford. Because
of the Friday holiday in Saudi Arabia, the team of eight people, managing around $135 billion, could
operate on only 16 business days a month. "As the deregulation process spread, we were creating
the forerunner of the global market," he concludes.
Saudi Arabia further endeared itself to the west by placing a SR10 billion enlarged access
resource fund with the IMF. As a reward it became a permanent member of the IMF board of
governors.