BLACK LIST PRESSURE ARAB BOYCOTT STARTING TO BITE ON INVESTMENT BANKS

Press, Volume CXV, Issue 33776, 24 February 1975, Page 14

BLACK LIST PRESSURE

ARAB BOYCOTT STARTING TO BITE ON INVESTMENT BANKS

(By MICHAEL BLANDEN and MARY CAMPBELL in the "Financial Time.'.") (Reprinted by arrangement)

For those companies, whether Jewish-controlled or not, which have important business connections with Israel, the Arab boycott is a fact ■ f life which they have had to live with for many years. I npredictable and erratic in its application, the boycott has nevertheless had to be taken seriously.

In many cases companies have felt obliged to choose between the Arabs and Israel. Some, like British Leyland, have opted for the Arabs; though Leyland is still on the boycott list, its business in Israel has now been reduced to a point where removal from it is expected soon.

For banks and financial institutions, the position has been especially delicate. Many leading Jewish houses have’ a deep emotional and financial commitment to Israel; yet the Arabs are an increasingly important source of business. For some well-known Jewish banking names, discrimination of one form or another by Arab financial institutions has been apparent for a long time. They have been unable to get deposits on the inter-bank markets [from some Arab institutions; they could not join in loan or issuing syndicates in which some Arab institutions were also participating; and so on. The important point is, however, that this ban has until now been partial and undefined, while most of the discrimination, real or socalled, had been in the form of pre-arrangement tact rather than last-minute exclusion of an institution from the syndicate. Thus, for example, no interbank deposit broker in his senses, would ever have consiaered matching up an Arab depositor with a bank known to be on the Arabs’ blacklist. Similarly, any lead manager intending to have an Arab co-manager, would not ask Rothschild or Warburg to be another comanager. Partial ban

Until recently, the operation of the ban has been partial — one might almost say, minimal. First, it appears to have extended only to a very few Jewish houses — notably Warburg, Rothschild, and two of the three Lazard banks (Lazard in London is apparently not on the list). Other Jewish houses, including even some with Zionist connections, have continued to deal directly , with Arab institutions. Second, there have been many examples 6f Arab institutions participating in the same syndicates as banks on the blacklist. One recent example summarises the situation. This was the slsm (SNZII.3m) issue for Caisse Centrale de Co-oper-ation Economique. The nine-strong management group for this issue included Banque Arabe et Internationale d’Tnvestisement and Kuwait Investment Company, as well as Banque de Paris et des Pays-Bas, which is closely linked with Warburg’s. The under-writing group also included N. M. Rothschild, Banque Rothschild and Lazard Freres et Cie. Furthermore, there have even been cases where Arab money has been put. into issues managed by one of the blacklist banks. The most notable was a ssom Eurobond issue last year for British Steel. The lead manager was S. G. Warburg, but a substantial quantity of the issue was placed in various Middle East countries. All that happened was that one of the other members of the management group was responsible for this section of the placing. Whether the Arabs are tightening up on the blacklist is still a moot point. Kleinwort Benson points out that the Marubeni issue is not the first issue where the names of Rothschild and

Warburg are surprisingly absent from the underwriting list. This would have been unthinkable even a year ago. Yet on the other hand, iboth Warburg and Rothschild are among the underwriters for the current Volvo and Mexican issues, of which Kuwait International Investment Company is a co-manager. Arab attitude Perhaps the most important factor of all for the future relationship between blacklist and Arab banks will be the publicity which has emerged over the Marubeni issue. In the past the attitude of the Arabs has been extremely pragmatic: they participated in deals which also involved blacklist banks provided they did not come face to face. It is possible that the knowledge of being watched might change their j attitude. As for the attitude of the non-Jewish banks, Mr Gerald Thompson, chairman of Kleinwort Benson, emphasised this month that the prime duty of a banker was to his customers. He commented that the issue for Marubeni, the Japanese trading company,; had been initiated last autumn with Kleinwort as lead manager and two Arab institutions, Libyan Arab 3ank and Kuwait Foreign Trading Company, as co-managers at the request of the borrower. The decision to exclude Rothschild and Warburg from the underwriting group had come later.

Mr Thompson agreed that Kleinwort had not felt able to resist this pressure. But he maintained that banks in London had to bear in mind their responsibility to their principals and loyalty to the customer if the City were to maintain its position as a leading international financial centre.

Rothschild and Warburg maintain that, while they can see the reason for Kleinwort’s action, discrimination among banks of this kind runs quite counter to the traditions of free trading in international banking. It is felt that a strong and united line by the London banks could resist the Arab pressure.

Banks not directly involved in the immediate problem are inclined to doubt whether any kind of general united front could be achieved to resist the pressure.

What is clear is that the diplomatic problems in putting together an underwriting group will become even more acute. Even in Germany both Deutsche Bank and Commerzank admitted yesterday that they found it necessary to be “diplomatic” in putting together an underwriting group. Lack of logic An executive on the issuing side of Deutsche Bank said that his bank had never had a Case in which an Arab bank had refused to remain in an underwriting con-

isortium because a "blackI listed” bank was also a member. But he conceded I that it would be difficult to | include a "blacklisted" bank •as a co-manager alongside ian Arab bank. This was a I situation that Deutsche Bank took care to avoid. Asked what made a bank 1 “blacklisted" the Deutsche [Bank executives said that the question could only be i answered in Arab circles be- | cause there seemed little | logic in the approach. Deutsche Bank had no list as such, he said, but had to 'ring around Arab banks to ifind out whether a specific 'bank was blacklisted or not. The executive stressed that Deutsche Bank did not take a "tough line” on how an underwriting group should Ibe put together. There were ;no hard and fast rules and .every issue was different. [ In Paris, it was confirmed (that Lazard Freres and Cie. [had made an official complaint to the French Govemment because the bank I claimed that it had been exI eluded by Arab pressure from participation in the re[cent s2sm Joan for Air ‘France and another loan for The same amount for the State-controlled Compagnie Idu Rhone.

Lazard’s complaint, it was stated categorically, was not made on the basis of guesswork. The bank was clearly told by Credit Lyonnais, the French State-owned bank which was the lead manager of the loan, that it was being excluded on the demand of the Arab-controlled Intra Investment Company, a co-manager of the issue.

The same happened in the case of the Cie, du Rhone issue, managed by Banque de Paris et des Pays-Bas, where the latter came under pressure from the Kuwait Investment Company, to bar Lazards from the list of underwriters.

On the other hand, a spokesman for Banque Rothschild was much more cautious about the reports of Arab pressure. Making clear that he was speaking only on behalf of the French bank, he said that it did not have a very important position on the international bond market and had therefore not been affected to any discernible extend by the reported Arab boycott. A spokesman for Banque Nationale de Paris (8.N.P.) hotly denied that his bank would bow to Arab pressure. Apart from anything else, as a State institution, it could not afford to do so, he said. If B.N.P. were subjected to any pressure of this kind, it would drop the whole loan, the spokesman added.

On Wall Street, where many of the leading investment banks are controlled and managed by Jews, there has been apprehensive speculation for some time about the possibility of Arab discrimination. But while most bankers are prepared to discuss the question in general terms, specifics are hard to come by.