Middle East: The Day the Doors Closed

Little Lebanon, an oasis of stability and old-fashioned economic freedom in the impoverished and riotous Middle East, prospers not only by trade but as a money market. In less than two decades, its bustling capital of Beirut has grown into the world’s newest financial center, the shrewd regional banker to everybody from wealthy Arab sheiks to huge U.S. oil companies. Last week, in a crisis that shook the country’s fiscal structure to the bottom of its vaults, Lebanon was forced to shut its 93 banks for three days.

The trouble began when Intra Bank, the country’s largest, ran out of cash to meet a run of withdrawals and closed its doors—perhaps forever. Among Lebanese, shock spread as it might in the U.S. if a dozen giant banks and industries collapsed together. Intra held 38% of the deposits in Lebanese-owned banks. It owned nine other banks, four of them in Lebanon. It controlled 35 companies, including Beirut’s largest hotel and thriving Middle East Airlines, the Beirut port, the cement industry, a gambling casino and a metalworks; in all, it employed 43,000 persons who with their dependents comprise a tenth of the country’s population. Abroad, Intra’s twelve branches spread from New York to Nigeria, its holdings from a French shipyard to a 27-story office skyscraper on Manhattan’s Fifth Avenue.

Belated Pledge. Ironically, Intra was far from insolvent, with more than $230 million in assets against $170 million in liabilities. But too much was tied up in risky long-term investments, depriving the bank of needed cash. Predictably, Intra’s closing started a run that threatened to bankrupt other Beirut banks. At a twelve-hour emergency night session, the Lebanese Cabinet ordered a three-day bank holiday to stall for time. To avert another kind of panic, Beirut’s stock exchange also closed. So did department stores and shops, bringing business in the city close to a standstill. Finally, the government pledged its $200 million reserves (mostly in gold) to bail out all the banks but Intra, which it feared might involve too large a risk. When the other banks reopened, the panic subsided.

Authorities abroad closed Intra’s branches in Paris, London and Frankfurt. New York’s state banking superintendent seized control of the Manhattan branch to protect its depositors. When the three largest U.S. banks (Bank of America, Chase Manhattan and First National City) defied the superintendent’s demand to turn over $2,529,000 of Intra deposits—on the ground that the defunct bank owed them more than that elsewhere—he sued for the money. Some bankers fear that this wrangle could lead to retaliation against U.S. banks abroad.

Stocks in a Suitcase. Barring near-miracles, Intra’s failure seems sure to cost its brash, engaging founder and chairman, Yusif Bedas, 53, control of his $1 billion empire. Born the second son of an Arab schoolteacher in Jerusalem, Bedas fled Palestine when it became Israel in 1948. Rounding up $4,000, the refugee began his Beirut career as a moneychanger in a dingy fourth-floor office, amassed enough capital in three years of flamboyant dealings to start Intra in 1951. To woo his share of the flood of investment money pouring into Lebanon from oil-rich Saudi princes and frightened capitalists from socialist Egypt, Syria and Iraq, Bedas became adept at handling skittish clients. Once he even hauled a suitcase of stocks from his vault to the mountain mansion of a suspicious sheik to assure him that his hoard was really intact and safe with Intra.

Lebanon encouraged the influx of nervous money with a Swiss-like bank-secrecy law, low taxes and tariffs, complete absence of monetary controls (a freedom found today only in Lebanon and Canada). Spreading his investments farther than his sources of deposit, Bedas moved heavily into European real estate, began issuing traveler’s checks, last year even joined New York’s McDonnell & Co. in starting a mutual fund sold in the Middle East, Germany, Switzerland and Latin America. Despite the increasing complexity of Intra’s operations, Bedas ran it as a one-man show, scoffed at bankers who suggested he might be overextended.

In the end he was, if only because his Arab clients deserted him. For one thing, soaring interest rates have lately made Europe a more profitable haven for cash. Also, Intra became involved in the bitter feud between Egypt’s Gamal Abdel Nasser and Saudi Arabia’s King Feisal, leader of the Middle East’s conservatives. When Nasser-financed newspapers in Lebanon attacked Feisal, Saudi and Kuwaiti sheiks yanked $30 million out of Intra in one month. On top of that, Lebanon’s three-year-old central bank fumbled its chance to prevent the crisis. Asked to help Intra, the bank stalled, then offered only feeble sums in aid, finally failed to advance promised cash on time. Worst of all, as the debacle neared, word of it leaked out from the staff.

Battling against the odds to keep Intra together, Bedas’ directors last week petitioned a Lebanese court for three years’ grace to repay their depositors without forced liquidation of assets. Bedas himself began a desperate hunt in New York for enough cash to keep control. Scenting the possibilities of snagging valuable property at distress prices, the Soviet Union turned bargain hunter, sent out feelers but backed away at the hefty asking price. U.S. Shipping Tycoon Daniel K. Ludwig, who recently tried unsuccessfully to merge his tiny Lebanese International Airways with Bedas’ bigger line, expressed interest in buying stock control of the whole Intra empire. So did a consortium of European banks.

Having muffed its chance to prevent disaster cheaply, the Lebanese government drafted a law allocating $17 million to pay off Intra’s small depositors. Then at last it began considering how to strengthen the supervision of its banks.