INVESTMENT: The Arabs Wield a Banking Ban

An ugly power play has unsettled the discreet and usually gentlemanly world of investment banking. Using their new financial strength, a number of Arab banks have threatened to pull their money out of major international bond issues unless the managers barred some U.S. and European banking houses from participating. The Arab move was aimed at houses that were founded by Jews, and in some instances—but not all—are run by Jews and have dealings with Israel. In at least three instances, the underwriting managers caved in, and the excluded houses were barred from putting up their capital, collecting commissions and selling bonds.

Two of Britain’s most prestigious investment banking houses, N.M. Rothschild & Sons and S.G. Warburg & Co., were barred from participating in a $20 million bond issue for Marubeni, a Japanese trading company. In a startling admission, officials of the lead bank in the deal, London’s Kleinwort, Benson, Ltd., admitted that they had acceded to pressure from two other participants in the underwriting, the Libyan Arab Foreign Bank and the Kuwait Foreign Trading, Contracting and Investment Co. If Kleinwort had not given in, said its chief, Sir Cyril Kleinwort, the Arabs would have invested their money elsewhere. But other London bankers noted skeptically that Kleinwort, Benson was all too happy to exclude its competitors, Rothschild and Warburg, which are bigger and better established than Kleinwort in the Eurobond market.

Earlier this month, Lazard Frères & Co., a Paris banking house associated with Lazard of Manhattan and of London, was excluded from any role in floating a $25 million bond issue for Air France. One of the participants, Intra Investment Co., which gets its money from Kuwait, Qatar and Lebanon, insisted that Lazard be shut out. Intra officials put pressure on the two lead banks in the deal, Credit Lyonnais and Banque Nationale de Paris, both of which are government owned. Lazard was also excluded from a $25 million issue for another client, the state-owned utility, Compagnie Nationale du Rhone.

Lazard’s officers were so upset that they took a rare step in the genteel world of investment banking; they complained to the French Finance Ministry. It seemed most unsettling that the Arabs had forced French banks to exclude French businessmen from financings for French government companies. But Premier Jacques Chirac refused to get involved, declaring the exclusion to be “a matter of relations among banks and between banks and their clients.”

Sign of Resistance. Elsewhere, however, there were growing signs of resistance to the Arab muscle. In Manhattan, Merrill Lynch, Pierce, Fenner & Smith refused to capitulate to demands by the Kuwait International Investment Co. to drop the U.S. branch of Lazard Frères as a participant in two lending syndicates that will raise $50 million for the Mexican government and $25 million for Volvo. Merrill Lynch Chairman Donald Regan was not about to exclude Lazard or slight its chairman, 76-year-old Andre Meyer. The Kuwaitis then dropped out of the deals. Echoing the typical sentiments among investment bankers, Paul Judy of Chicago’s Becker and Warburg-Paribas beamed: “I’m glad that somebody stood up to them.”

Indeed, when bankers have resisted, the Arabs have often relented. The West Germans have been particularly toughminded in repelling the pressure. The Deutsche Bank, the Dresdner Bank and the Westdeutsche Landesbank have refused to bar any banks from deals, and the Arabs have given in. Said a London banker: “It is only the supine weakness of some banks which has given the Arabs any encouragement.”

The Arabs’ attempts to exclude banks with close Jewish connections are not new. For almost a quarter-century, the Arab Boycott Office in Damascus has included on its “blacklist” some two dozen U.S. and European banking houses with which Arab governments and businessmen were officially prohibited from dealing. Until fairly recently, the ban has been loosely enforced; Arabs have consummated some deals through blacklisted banks because they needed their services and did not have the financial power to be choosy. With their new power in financial affairs, however, the boycotters are refusing to deal with the blacklisted banks.

The ban is part of the overall Arab boycott of some 2,000 U.S. and European companies that because they have done business with Israel, are not to be dealt with by Arabs. There is only one official, regularly updated blacklist, in the Boycott Office in Damascus, although an aide at the Saudi Arabian consulate in Manhattan last week briefly showed TIME Reporter-Researcher Janice Castro something few non-Arabs have seen: a thick yellowed boycott book, as well as several ledgers with recent entries added in ink. But he refused to let it be closely examined.

Zionist Causes. Lucien Dahdah, president of Intra Investment, reiterates the Arab position that the boycott is aimed not against Jewish bankers or businessmen but against companies and individuals that contribute to Zionist causes or actively support Israel’s military effort. “Significant” trade with Israel is cause enough to be blacklisted, although a company can appeal to have its name deleted upon demonstrating that it has severed “objectionable” trade relations. Currently, Ford Motor Co., Xerox Corp. and Coca-Cola are negotiating to have their names removed.

In practice, the boycott list is inconsistent. Says a director of a British bank that is owned by Jews: “There is no rhyme or reason to the blacklist. It is haphazard, illogical, capricious and full of contradictions.” Perhaps the Rothschilds got on the list because they have helped refugee Jews settle in Israel. S.G. Warburg and the Paris-based Lazard have been active in arranging financial deals that involved Israel. But the Arabs still do some business with Lazard in London, and they have had dealings with Lazard in the U.S. The blacklisted French branch of Lazard was founded by Jews in 1854, but is now staffed mainly by Roman Catholics. Among U.S. houses, Lehman, Goldman Sachs and Kuhn, Loeb are not on the blacklist. Reason: unknown. Indeed, in most of the Our Crowd banking houses, half or more of the partners are Christian.

The blacklist of banks threatens to backfire on the Arabs. In a strong editorial last week, the Wall Street Journal called on the U.S. Government to press for an early end to the whole blacklist and argued that it “appears less to be an attempt to undermine Israel than an attempt to inject anti-Semitism into Western business practice.” Worst of all from the Arabs’ standpoint, the whole episode raises doubts about the political pressures that some of them might try to exert when they invest their billions abroad.