The Alternate Chairman of the International Committee of Bankers on Mexico (T. W. Lamont) to the Secretary of State

My Dear Mr. Secretary: I should prefer that you should receive directly from the oil men such information as they may have, but in order to acquaint you beforehand with the view of the bankers in the matter, may I be permitted to explain to you, in confidence, that the proposition which (as explained to us) the Mexican government authorities made to the oil producers was, in effect, that the oil producers should organize a syndicate of bankers to buy up, in the open market, at 40% of par or thereabouts, a large amount of the Mexican government’s external obligations and then to make these available for the oil men to turn in at par in payment of their taxes. In this way the Mexican Government might make an actual remission of the oil taxes to the extent of 60%, yet it might be able to state that it was receiving full value in taxes, accepting its outstanding bonds in payment at par.

The attached draft of our letter to the oil producers explains the impracticability of this plan. Mr. Teagle and the other oil executives [Page 500] fully understand our point of view, and, I may say, are in accord with it. The letter attached is a first draft and may be subject to a slight alteration but nothing material.

Looking forward to seeing you on Monday at twelve o’clock noon,

I am [etc.]

Thomas W. Lamont

Draft of Letter from the Alternate Chairman of the International Committee of Bankers on Mexico (T. W. Lamont) to the Chairman of the Committee of Oil Executives (W. C. Teagle)

Dear Mr. Teagle: Referring to the conferences which I have been holding with you and the other members of your Committee who recently visited Mexico, I beg to state that I called together representatives of leading financial houses, a number of whom in past years were active in the issuance of the Mexican government’s external obligations; and I laid before them, in confidence, your plan with reference to the outstanding Mexican government bonds.

The matter was discussed at length and it was agreed that it would be impossible to undertake such a plan as you proposed. I think you are familiar with the reasons that make this plan, from the point of view of the banks and banking houses, impracticable.

  • First: I would explain that the bankers hold exceedingly small amounts of these securities. At the time the external loans of the Mexican government were offered for subscription only a limited part of these loans was taken in this country. Moreover, an examination of the total amount of money which was remitted to this country to be used in paying interest in the year 1913—the last year in which full interest payments were made on the external loan bonds—indicates that the percentage of such loans owned in this country at that time was relatively small. The bonds were widely distributed to investors, and we are convinced that there are no concentrated holdings in this country. It would therefore be quite impossible to secure these bonds in any considerable blocks.
  • Second: the bankers whom I consulted felt that they might properly be criticized by their clients who look to them to protect their interests, if they made an attempt to secure such bonds at the present nominal market quotations, in view of the general conviction that such external loan bonds are entitled to be recognized in full at par and accrued interest, and that security was pledged to cover such payment which, even today, is probably in excess of the amount necessary to cover the complete debt service on these bonds. The fact is that, inasmuch as banking houses and banks have, in years past, [Page 501] distributed these Mexican government obligations widely and have represented them as a sound investment, they have become, in effect, trustees for the many investors who, relying upon their judgment and recommendation, have put their savings into such securities.

While the foregoing represents the primary reason for the feeling on the part of the bankers that they are unjustified in recommending the sale by clients at the present levels, they also expressed the view that the floating supply of bonds at present prices was only nominal and that an attempt to secure bonds in large volume would be unsuccessful.

Again, if the oil companies should buy bonds with the intention of using them in paying their taxes, they would be confronted by the fact that the taxes in question are pledged, equally and proratably, for the payment of the interest and principal of almost all of these issues of external bonds, and other bondholders, those who have no taxes to pay but are interested in seeing the revenues applied without preference or priority, would doubtless object to this plan or method, since its result would be the absorption of the revenue and the retirement of certain specific bonds, leaving the others outstanding.

We now trust that it will be clear to you why—as a matter of good faith, chiefly, but of expediency as well, it is impossible for the leading financial houses and banks of this city and country to undertake the plan you have proposed to them. These bankers whom I consulted and who are largely represented upon the International Committee of Bankers on Mexico earnestly desire to co-operate in any way possible, and they wish, if possible, to be of service in assisting Mexico to a wise solution of some of her perplexing problems. It is in that spirit that I have been glad to accept the very gracious and flattering invitation that President Obregon’s administration has extended to me; and to all of us it is a source of gratification, but not of surprise, to learn from you that you found all the members of the Mexican government with whom you came in contact frank and straightforward, reasonable and earnest in their endeavor for their country.

Sincerely yours,