Memorandum of Conversation, by the Chief of the Financial Division (Livesey)

Participants: Dr. Gabriel Turbay, Colombian Ambassador;
Mr. Livesey;
Mr. Walmsley;
Mr. Wright;
Mr. Hooper.4

The Ambassador said that on his recent visit to Bogotá he had inquired very carefully into the Agricultural Mortgage Bank bond situation. He had seen all Mr. Salazar’s correspondence concerning his conversations with the Department of State from last October through January. He had discussed the matter with the Government and with the officers and Board of Directors of the Bank. He had been asked, in view of his past work on the adjustment of the Colombian National Bonds, to carry on with the conversations which Mr. Salazar had begun. He was not charged to negotiate a settlement. His position was the same as that of the others present, namely that of an intermediary helping to bring about an adjustment between the debtor and the creditors.

At Bogotá he had said that he could not do anything with the matter unless he knew the facts with which he was dealing. Before he could say that a proposal was good, he would have to be sure that it was good. He had therefore obtained a balance sheet of the Mortgage Bank, which showed both the published figures and the real figures. He handed a copy of this to Mr. Livesey.

Mr. Livesey said that the Department had been very anxious to have this information. Looking at the memorandum handed him by the Ambassador, he found on page two the breakdown of the assets item entitled “Valores Diversos”, which included dollar foreign bonds of the Bank in the face amount of $4,670,500 of guaranteed bonds and $6,503,000 of non-guaranteed bonds, a total of $11, 173,500. On the last page, which the Ambassador has indicated as giving the real figures, he found on the liabilities side an item: dollar foreign bonds $10,939,000. The Ambassador commented that this means the Bank holds about $11,000,000 of its total dollar bond indebtedness of some $20,000,000, leaving about $5,000,000 of guaranteed bonds and about $5,000,000 of non-guaranteed bonds outstanding in the hands of the American public.

[Page 214]

The Ambassador said that the Department would want to examine the balance sheet figures. In the meantime he wished to discuss several points.

At Bogotá everybody concerned felt that a settlement must comprise all the dollar bonds of the Bank, whether guaranteed or nonguaranteed. A settlement limited to the guaranteed bonds would not clear up the Bank’s situation and have the favorable credit effect which everybody desires.

He found the Bank entirely unable and unwilling to make any payment for arrears of interest. He had discussed the matter before the Board of Directors in the presence of the Minister of Finance. The Bank officials insisted that the income of the Bank was insufficient to permit payment of arrears. The net income of the Bank is some 600,000 or possibly at extreme limits 700,000 pesos, say $400,000 United States currency. The debt settlement, outlined in the Salazar conversations, on the basis of giving the guaranteed bonds the same treatment given Colombia National Bonds and giving the nonguaranteed bonds treatment comparable to that given the sterling bonds of the Lazard issue, would require $600,000. The Bank did not deem it possible to make any payment on arrears of interest.

Any settlement reached must depend on the backing of the Colombian Government. There were two ways by which the Government might directly back a settlement. One would be for the Government to make up the $200,000 per annum shortage by appropriation and another would be for the Government to issue its own bonds in substitution for the Bank’s dollar bonds. Either of these would require approval by Congress. If either proposal were submitted to the Congress by the Executive, it could no doubt be carried through but only after prolonged debate—which among other things would revive the taking over by the Agricultural Mortgage Bank, a Government institution, of the assets and the liabilities of the private mortgage banks. The Government bank had taken over the private banks to meet emergency conditions during the depression. This action has always been attacked particularly by the Conservatives as burdening the taxpayers with the indebtedness of private institutions. The debate would be long and bitter. If either of the proposals were put to the Congress with all this debate and the formalities of registration with S. E. C, no adjustment of the debt could become effective at a date earlier than January 1, 1943. The Government hopes that it may be practical by other means without going to the Congress to reach a settlement effective by June 30 of this year.

The Government can acquire some $5,000,000 of the new issue of 3% National Bonds from petroleum, banking and industrial concerns in Colombia. A San Francisco firm, whose name he did not recall, [Page 215] has offered the Government at a price slightly above the market, $3,000,000 of the old defaulted issue which it has not converted into the new bonds, the proceeds to be used for certain investments in Colombia, with assurances that earnings may be transferred into dollars, etc. A Chicago firm, Welch and Greene, has a block of $2,000,000 of the new bonds which the Colombian Government can acquire. The Government also has the right to purchase its bonds in the open market and can do this even if the purchases force the price to par. It has been suggested that the Agricultural Mortgage Bank with the cooperation of the Colombian Government could acquire bonds of this outstanding issue in amounts sufficient to retire its own dollar bonds held by the public, financing the acquisition through the sale of its own internal obligations within Colombia. It could then offer to exchange these bonds of the Colombian Government for its own dollar bonds. This transaction can probably be put through within two or three months, if no objection to it were found.

The Ambassador produced the Prospectus of the Argentine Republic guaranty of bonds of the Province of Santa Fe, a debt adjustment negotiated by the Foreign Bondholders Protective Council in which holders of 7% bonds were offered an addition to the principal amount of the bonds of a sum equal to 11% of such principal in satisfaction of over-due interest due September 1, 1932 to March 1, 1934. He produced the Prospectus of the Republic of Cuba debt adjustment bonds to show that holders of some bonds were offered $1, 100 principal amount of bonds for each $1,000 while holders of certain other bonds were offered a par for par exchange. What he was attempting to show was that the Council had recommended settlements on the basis of allowing about 10% on arrears of interest. He also said, and this he wished to be treated confidentially, although if the matter ever came up for debate in the Colombian Congress the Government might have to use the information, that Mr. Traphagen of the Foreign Bondholders Protective Council in a letter to the Ambassador in January 1940 had suggested an adjustment of the guaranteed dollar bonds of the Bank by an annuity of $250,000 which for the first five years would provide, on the basis of $5,000,000 of bonds outstanding in American hands, $150,000 for payment of interest at 3%, $50,000 for purchase of past due coupons at $10 per coupon, and $50,000 for sinking fund; after the first five years the interest rate would be stepped up to 3½% and the sinking fund would absorb the difference between the interest and the $250,000 annuity.

The Ambassador said that holders of guaranteed bonds could be offered $1, 100 par value of national bonds for each $1,000 par value of Agricultural Mortgage Bonds. This would require $5,500,000 of National bonds. For the non-guaranteed bonds he had not worked [Page 216] out the amount that would be offered. He submitted a copy of the text of the agreement made some years ago with Lazard Bros, concerning the sterling bonds and said that, all things considered, a comparable settlement in 3% Government bonds might be to offer 700 or 750 dollars of the latter for $1,000 par value of non-guaranteed bonds of the Bank.

The Ambassador asked whether an exchange of securities offer of this kind could not be made without registration with S. E. C. Mr. Wright referred to a recent Argentine exchange of securities which had been handled by J. P. Morgan and Company without registration. Mr. Livesey said that if an exchange of securities could be handled without an underwriter and without solicitation on the part of any American financial house by employing such a house to handle merely the physical exchange of securities for a fee strictly commensurate with such limited service, apparently no registration was required by our laws. The banking house would no doubt seek to protect itself by consulting S. E. C. and giving such information and assurances as S. E. C. might ask with regard to its limited functions and fees. However, the Embassy should consult private counsel on the S. E. C. matter. Mr. Wright inquired whether Mr. Laylin, who had served as counsel for the Embassy in the National Bond adjustment and whether he or another attorney could be consulted. The Ambassador said he supposed the Embassy might still consult Mr. Laylin.

The Ambassador referred to the Foreign Bondholders Protective Council and said he hoped that the Agricultural Mortgage Bank matter might be handled without attack by the Council. Mr. Livesey said that he had gathered from Mr. Francis White5 that the Council would probably regard the settlement already made with the holders of direct bonds of the Colombian Government as the standard of comparison, not expecting the Colombian Government to treat holders of bonds guaranteed by the Colombian Government better than holders of direct Government bonds. This might leave some basis for questioning details of the proposed offer. However, if, as contemplated, the offer was made in the name of the Agricultural Mortgage Bank and not of the Government, there would be less direct occasion for the Council to attack the exchange proposal. The Ambassador said that the proposal would offer holders of the Bank bonds $100 principal amount of bonds in satisfaction of past due coupons whereas the holders of National bonds had been given $150 principal value of bonds in satisfaction of past due coupons. However, the guaranteed bonds of the Agricultural Mortgage Bank are selling at $26 and will be exchanged for bonds which are selling at $34, thus giving the bondholders an immediate increase in value of [Page 217] $80, which should compensate for the $50 less of principal amount that they receive. He said that since observing that in the eight months during which the National Bond adjustment has been on offer, it has been accepted by 80% of the American holders of National bonds (though only by 70% of all holders of the bonds including those in Great Britain, the Netherlands, etc.,) the Colombian authorities attach less importance to the Council’s attitude than they did at the time the offer was announced under the auspices of the Departments of State, Treasury, and Commerce, when there had been considerable doubt whether American bondholders would accept or reject the offer. Colombia attaches more importance to the attitude of the United States authorities and public than to that of the Council.

Mr. Livesey said that it appeared to be the feeling of those members of the American public who were present that an offer on the part of the Bank to exchange Colombian National bonds for its own bonds on a basis comparable in the case of guaranteed bonds with the treatment already given Colombian National bonds, and in the case of non-guaranteed bonds with the treatment already given other holders of such bonds was not objectionable or unreasonable. It was of course possible that some consideration had been overlooked and it would be the function of higher officers of the Department to determine the Department’s attitude toward the proposal.

The Ambassador said that he thought the Council was unreasonable and unfair in its attacks on the adjustment of the National Bonds. He thought it would be unreasonable for it to attack the proposal he had outlined, and in this connection Mr. Traphagen’s letter of January 1940 might be useful either in persuading Mr. Francis White or in rebutting any published attack by the Council. He would send Mr. Livesey a copy of the full text of the letter. Mr. Wright suggested that possibly the Department might take up the matter with Mr. White and smooth the way for the eventual proposal.

The Ambassador said the Department might want several days to examine the papers he was leaving, after which he would take up the matter again. In these unsettled times it is very desirable to complete projects rapidly.

  1. Apparently reference is to Mr. John S. Hooker, of the Board of Economic Operations, Department of State.
  2. President of the Foreign Bondholders Protective Council.