824.51/184: Telegram

The Secretary of State to the Minister in Bolivia (Cottrell)

8. Your 23, April 18, 8 a.m.

At their request you are authorized to transmit to the President the following statement submitted by Stifel-Nicolaus Investment Company, Spencer Trask and Company, and the Equitable Trust Company of New York regarding the memorandum presented by the Bolivian Government to you on April 17:

“The Memorandum of the Bolivian Government contains certain statements of fact which are at variance with the record and sets forth a legal opinion which the Bankers regard as unfounded. The statements of fact may be briefly summarized as follows:

That the Trust Contract of May 31, 1922 was ‘a repetition ad pedem litere [ad lites pendentes] of a draft of a Loan Contract which the same Bankers had submitted to the Government on March 17, 1922’ and which the Bolivian Government had promptly rejected.
That the Bolivian Government was not informed as to the provisions of the Trust Contract until 80 days after it had been signed.

The legal opinion referred to may be summarized as follows: That the Trust Contract is in conflict with the laws of February 10th and March [May] 24, 1922, and therefore void.

In answer to the above, the Bankers respectfully submit the following statement:

(1) As regards the identity of the March proposition and the May contract:

The proposition submitted to the Bolivian Government on March 17, 1922 differs radically from the contract as finally concluded. A copy of the March 17, 1922 proposition in the form of a ‘Financial Plan’ dated March 16, 1922, and of a transmitting letter, dated March 17, 1922, addressed to Messrs. Ramón Rivero and Adolfo Ballivian (Fiscal Agents of the Bolivian Government for the purpose of the loan) is herewith submitted. A comparison of this proposition with the Trust Contract and the Bond Purchase Contract of May 31, 1922, discloses notable differences, among which may be mentioned the following:

The March proposition provides that the Permanent Fiscal Commission5 shall itself collect the revenues pledged as security. The May Contract leaves the collection of those revenues in the hands of Bolivian officials.
The March proposition provides that the bonds shall be callable at 110 and shall be purchased through the Sinking Fund at the [Page 448] same figure, except when available in the market at lower prices. The May Contract reduces the above figure to 105.
The March proposition prohibits any further external loans by the Government for 15 years. The May Contract permits such loans after December 5, 1924.
The March proposition contains an ‘offer to purchase the bonds at 90, less 2½ per cent commission,[’] equivalent to 87½ net. Under the May Contract the Bankers paid 92.

In the face of the above differences, the Bankers fail to understand how the Bolivian Government can claim that the two propositions are identical.

(2) As regards the information which the Bolivian Government had of the May Contract:

The Bolivian Memorandum admits that ‘the Bolivian Consul in New York sent a cablegram on May 27th in which the fundamental features of the Loan Contract were expressed’, but adds that this was done ‘very briefly.’ A copy of the ‘May 27th’ cablegram is submitted herewith.6 (The correct date is May 26th).

The Department is requested to examine this cablegram and the replying cablegram of the Bolivian Government, dated May 29th, of which a copy is also submitted herewith.6 No one reading these two cablegrams can fail to be convinced that the Bolivian Government was fully informed regarding every substantial provision of the Trust Contract, and that the statement to the contrary contained in its Memorandum of April 17th last is not in accord with the facts. There are other statements and other documents which could be adduced in support of the Bankers’ contention, but the two cablegrams above referred to seem entirely sufficient. In this connection it may not be improper to point out that the negotiations for the loan covered a period of many months, during which time the Bolivian Government had the benefit of expert advice, not only from the Consul General who finally signed the Contract, but from Mr. Rivero, the Minister of Finance, and Mr. Ballivian, the Bolivian Minister to Washington; and that before closing the loan it retained as its special financial adviser, Mr. Eli H. Bernheim, President of the Columbia Bank of New York City. The Bankers assume that Mr. Bernheim kept the Bolivian Government fully advised. The final contracts were submitted to Mr. Bernheim before execution and were approved by him. It should be added that after the terms of the loan had been practically settled, but before the Contract was signed Mr. Rivero returned to Bolivia and personally reported to his Government. It was not until after such report that the President authorized the signing of the contracts.

As regards the legality of the loan: This of course is a question of opinion and involves issues regarding which no final determination can be had at this time. It should be pointed out, however, that the Bolivian Government was represented in the negotiations and in the final contract by eminent counsel, namely, by the Honorable Samuel Abbott Maginnis, former United States Minister to Bolivia, and by Mr. S. M. Stroock of the New York Bar, and that those experts fully agreed with the Bankers’ counsel that the contracts as signed were [Page 449] in accord with the enabling acts of the Bolivian Congress and were legal in every respect.

The Memorandum of the Bolivian Government suggests that the Bankers agree to make certain changes in the Trust Contract and asks that they make a ‘formal promise’ before the Department ‘to the effect that they will accede to the request of the Bolivian Government for the rectification of the contract to make it conform to the tenor of the laws which authorize it.’”

The Bankers reply:

[“] First, that the Contract already conforms to those laws; second, that they have no power to change the contract in any respect; and third, that even had they such power, they would be unwilling to take upon themselves a commitment so wholly indefinite as that which the Bolivian Government requests.

The one thing that the Bolivian Government seems not to comprehend is that the Trust Contract cannot be changed except with the unanimous consent of all bondholders—of whom there are approximately 8,000—and that it is impracticable to obtain such consent. The objection by a single bondholder or failure on his part to acquiesce would suffice to prevent any change. Furthermore, if a Committee of bondholders should be formed to deal with the situation, the mere appointment of such a Committee would advertise the fact that the Bolivian Government had already defaulted under its contract, and the credit of the country would thereby be seriously affected. So far as the Bankers can see, there is nothing that they can do, and the Bolivian Government is therefore faced with a situation where it must elect either to live up to its contract or to repudiate it. It is hardly necessary to point out what the results of repudiation would be.

For the moment the most important matter is the signing of the definitive bonds. Already innumerable inquiries have been received from bondholders regarding the exchange of temporary for definitive bonds; and the Bankers feel that those inquiries should be answered. They have accordingly prepared a statement, copy of which is enclosed herewith, which they propose to use in that connection.”

The Bankers have informed the Department that Bolivian Government has copies of all enclosures mentioned above except the last one which reads as follows:

“The definitive bonds have been prepared and are now awaiting the signature of a special delegate of the Republic to be appointed for such purpose. The Consul General, originally appointed as such delegate is no longer in office; and no new delegate has yet been appointed. The delay is due to certain misunderstandings which have arisen between the President of the Republic of Bolivia and the Trustee with reference to the meaning of those provisions of the Trust Agreement which deal with the issue of additional bonds; to the desire of the President to obtain modifications of the Trust Contract; and to criticism of some of the provisions of the loan. The Bankers entertain no doubt that the Government intends to pay the interest and sinking fund of the loan; and remittances to cover the May installment [Page 450] are in hand. Apparently, however, the President seems to believe that by delaying the exchange of definitive bonds for temporary bonds he may succeed in obtaining the modifications which he desires. The Bankers have sent representatives to La Paz to clear up the misunderstandings which have arisen and to impress upon the President that the trust contract under which the bonds were issued is an instrument that cannot legally be modified.”

At the same time that you transmit the above you will again earnestly impress upon the President the seriousness of the present situation and the very great harm to Bolivia’s credit, and to the value of the securities bought by American investors trusting in the good faith of the Bolivian Government, should he persist in refusing to authorize the signature of the definitive bonds. You may also renew the representations authorized in section three of the Department’s April 9, 3 p.m.

  1. By a law of March 24, 1922, a commission of three members, all appointed by the President of Bolivia, was established to act as Financial Advisers to the Republic. Two members were nominated by the bankers, the third by the President.
  2. Not found in Department files.
  3. Not found in Department files.