Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

207. Information Memorandum From the Acting Assistant Secretary of State for Economic and Business Affairs (Lamb) to Acting Secretary of State Whitehead¹

Washington, August 23, 1986

SUBJECT

• Comments on “Secondary Market for bank loans to LDCs”

We have received a good deal of reaction to our discussion paper on secondary markets.² A summary of the comments is attached at Tab 1.³ The Fed, Treasury and the SEC have made preliminary responses. Treasury sees great potential in the secondary market for ameliorating the LDC debt problem and has been devoting considerable attention to the key issues. We also spoke with Citibank, Bankers’ Trust, Drexel, Goldman, First Boston and Shearson. Bankers Trust sent a thoughtful and very complete set of comments (attached at Tab 2).⁴

There is broad consensus that the secondary market could be helpful in resolving the debt crisis. Although a joint Treasury/State seminar promoting the benefits of the secondary market would be useful, the accounting regulations that currently inhibit transactions should be resolved beforehand. It is unlikely State can or should take the lead in this, but indications are that the SEC may be willing to chair a study group to resolve the accounting issues quickly.

The State Department could play a constructive role on secondary market issues by:

○ Publicizing the benefits of the secondary market both in the US and abroad.

○ Encouraging countries to facilitate debt/equity swaps by minimizing red tape and fees, and by creating a friendly environment for foreign investment.

○ Investigating the role of the multilateral development banks in these markets and encouraging them to ply a positive role.

○ Encouraging OPIC and the new Multilateral Investment Guarantee Agency (MIGA) to aid equity investments in debtor countries.

1. Source: Department of State, Executive Secretariat, S/S–I Records, Official Correspondence of Deputy Secretary John C. Whitehead, July 1982–Jan 1989, Lot 89D139: [no folder title]. Confidential. Drafted by Aloysious Siow (EB/PAS) on August 20; cleared by Casse and Milam. A stamped notation on the memorandum reads: “Aug 1986 J.C.W. has seen.” Mueller initialed the memorandum and wrote “8/25.” Whitehead wrote in the top right-hand corner of the memorandum: “Well done. I encourage your further initiatives in this important subject. JCW.”
2. A copy of the paper, “The Secondary Market for bank loans to LDCs,” dated July 1, is in the Department of State, Executive Secretariat, S/S–I Records, Official Correspondence of Deputy Secretary John C. Whitehead, July 1982–Jan 1989, Lot 89D139: [no folder title]. Lamb forwarded the paper to Whitehead under a July 10 memorandum, on which Whitehead wrote: “A good paper. The two most active participants in the secondary market are, I think, Bankers Trust (Charles Sanford, CEO) and Drexel Burnham (Fred Joseph, CEO). I’ll be glad to write them along with Bob Rubin at Goldman Sachs. I like broadening the subject to include securitization and subordination, although the words make the banks nervous.”
3. Tab 1, a paper drafted by Siow on August 21 and entitled “Comments on ‘Secondary Market for bank loans to LDCs,’” is attached but not printed.
4. Tab 2, an August 7 paper prepared by Managing Director of Bankers Trust Richard Martin, is attached but not printed.