Bankers Grab the Booty

A rush for Iranian assets sends lawyers into courts on two continents

A mighty new weapon--the lawsuit --is being rolled out in the economic power struggle between the U.S. and Iran, and the battling is shaking the money markets. Lawyers last week went on a suing spree, grabbing up Iranian corporate and industrial assets not only in the U.S. but also in West Germany. The free-for-all rush after Iranian booty put investors and businessmen on edge, rattled money markets and in the process helped send the dollar into a renewed slide while pushing gold back up to more than $400 per oz. In the scramble, banks even wound up suing each other. Lamented one London finance man: "The situation is total confusion." Added a nervous colleague in Frankfurt: "The chaos is complete. You just do not know what to expect next."

That was certainly true for the West German government. In a move that left Bonn officials sputtering in helpless surprise, Morgan Guaranty Trust, the U.S.'s fifth largest bank and a leading creditor of the Iranian government, quietly went into an Essen court and attached Iran's 25% share of two of West Germany's best-known companies, Friedrich Krupp GmbH, a diversified steel and engineering combine (1978 sales: $5.9 billion), and Deutsche Babcock, a manufacturer of industrial equipment (1978 sales: $1.6 billion). Iranian stakes in the two companies were acquired under the Shah in 1974 and 1975, and they have a market value of approximately $270 million.

Morgan Guaranty argued that the attachment orders, which are automatically issued in West Germany in cases of disputed debts, were necessary to cover possible losses from Iran's default on a $500 million loan. It had been made by an eleven-bank syndicate that included Morgan and was headed by Chase Manhattan Bank. In fact, Morgan Guaranty's $40 million share of the loan is more than covered by the estimated $8 billion to $9 billion in Iranian assets that were frozen in U.S. banks by presidential decree on Nov. 14.

To West Germans, the Morgan Guaranty action was an unnecessary power play that, because of the court action, threatened to propel West Germany directly into the U.S.-Iranian conflict. Said a finance ministry official in Bonn: "It was a damned stupid thing to do. This is endangering not only our business interests, but the lives of 1,500 West Germans still in Iran."

The attachment order must be followed by court trial in which Morgan Guaranty is expected to argue that it needs to hold onto the shares until Tehran guarantees that its loans will be repaid. Meanwhile, more asset seizures seem likely. Asserted an officer of a New York City multinational bank: "We are going to grab every Iranian asset in sight. There is already a line of banks halfway down the block in West Germany waiting to do the same thing."

The Khomeini government also got into the assets-grabbing game. In a $25 billion civil suit for damages filed in a New York State court against the Shah and his wife, lawyers for the Islamic Republic of Iran submitted a list of assets in the U.S. that they claim are owned by the couple. Included in the list: a 5% share of Milwaukee's First Wisconsin National Bank and a 20% stake in Union Carbide's Puerto Rican subsidiary. The revolutionaries want the assets to be seized and turned over to Iran in compensation for alleged corruption and thievery by the previous regime.

The assets pursuit adds to the turmoil and confusion that has been spreading through the world of high finance since the Carter Administration froze Iran's U.S. bank accounts worldwide. In London, the Iranian central bank last week even brought suit against Bankers Trust and other U.S. institutions, claiming that they lack the power to freeze, seize, or in any other way expropriate Iranian funds in their overseas accounts no matter what the U.S. Government says. This is an argument that many European bankers themselves make. Confessed one top international banker last week: "Frankly, I'm embarrassed to be a European. We should be showing more solidarity with the Americans."

The deteriorating climate has been worsened by Tehran, which has been spewing a stream of conflicting announcements about various steps that Iran has decided upon to undermine the role of the dollar in international money matters. Most perplexing of all has been the government's mercurial statements about Iran's foreign debts, which total some $15 billion. Though Finance Minister Abol Hassan Banisadr shook bankers everywhere by declaring two weeks ago that the government was renouncing its debts, Iranian central bank officials now insist that the statement applied only to nongovernmental, private debts incurred under the Shah. Early last week Japan's Sumitomo Bank Ltd. received a $1.2 million interest payment due on a $50 million syndicated loan to the Iranian government. Perhaps Iran will honor its debts after all, at least to non-U.S. banks.

The sheer unpredictability of the Khomeini regime is causing officials in Tehran to gloat openly about the damage they are doing to worldwide confidence in banking itself. Crowed Ali Reza Nobari, 32, a former newsman who for the past two weeks has been running the Iranian central bank: "Once you lose trust, what have you got? Nothing! This ends confidence in the security of the U.S. banking system."

That, of course, is an enormous overstatement. But a steady erosion of confidence in banking and even in money could lead all too easily to dangerous global consequences. Oil states like Saudi Arabia and Kuwait already export far more oil than their own economies require, and instead of selling the extra crude for inflation-eaten dollars that ultimately wind up as sizable bank deposits, the sheiks could well decide simply to leave more of their petroleum in the ground. That would send prices surging as pay-any-price importers rushed for whatever supplies could be found.

The rising price has already forced the oil-importing developing nations to pile up a staggering $300 billion in foreign debts, and some Third World countries are close to bankruptcy. A few big defaults could severely shake the international banking system. As poignant testimony to the squeeze on all the developing countries, Sri Lanka is now begging for mercy from the OPEC price pinch. In a government-sponsored petition that President Junius Jayawardene hopes will be signed by 3 million of his nation's 14.5 million citizens, the island republic pleads plaintively that the cartel grant special concessionary prices to Sri Lanka's "dedicated and hard-working people."

OPEC producers hardly seem in the mood to be particularly generous to anyone. Though Treasury Secretary G. William Miller spent much of last week in Persian Gulf capitals urging price moderation and a boost in production, officials did little more than listen politely.

A stiff rise from the current official maximum of $23.50 per bbl. now seems increasingly likely when the cartel meets in Caracas on Dec. 17. So too do market-tightening cutbacks by a number of cartel members eager to keep oil prices high even as the world economy slows.

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