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Banking on Empire

by Mitch JeserichSpecial to CorpWatch
February 4th, 2004

Cartoonist: Khalil Bendib

Iraqi ministries will now be able to borrow billions of dollars to buy much-needed equipment from overseas suppliers, but only by mortgaging the national oil revenues through a bank managed by New York-based multinational JP Morgan Chase.

Hussein al-Uzri, president of the Trade Bank of Iraq, which is managed by JP Morgan Chase, announced last week in Kuwait City, that the bank had raised $2.4 billion in export guarantees for trade between Iraq and foreign companies and governments.

"Those oil revenues will be used to support the Iraq Trade Bank letters of credit," said David Chavern, a senior official with the U.S. Export-Import Bank, when he addressed attendees at a recent briefing organized by Equity International for potential investors in Iraq. "And we will ensure those letters of credit for the U.S. exporter."

The management contract, which is worth $2 million over two-and-a-half years, was awarded to a consortium of thirteen banks representing fourteen countries, led by JP Morgan, last July after a competitive bidding process against four other international consortia. JP Morgan Chase, which was formed from the merger in December 2000 of one of the world's largest commercial banks, the Chase Manhattan Corporation, and the investment bank J.P. Morgan & Company, declined to comment about its role in the Trade Bank of Iraq.

The Trade Bank of Iraq was formed partially to replace the trade guarantees established by the United Nations oil-for-food program, imposed on Iraq in 1995 during the sanctions regime against Saddam Hussein. The program provided a means of controlling Iraq's purchase of humanitarian goods from other countries in exchange for Iraqi petroleum, while prohibiting the purchase of goods that could theoretically be used for military purposes. The oil-for-food program, which in total used $46 billion in Iraqi export earnings, was brought to an end last November.

Unlike the oil-for-food program, the guarantees of the Trade Bank are administered not by an UN agency but by the private sector and its corporate allies in various national governments. The export credits are to provide backing for purchases of raw materials, medical supplies, bulk food imports, fertilizer, and capital equipment. According to al-Uzri, the Trade Bank of Iraq has issued $300 million worth of letters of credit so far.

"Without the agreement with these export credit agencies, the Trade Bank of Iraq would have had to concentrate exclusively on state purchases," said Marek Belka, the head of economic policy in Iraq's temporary administration. "Iraqis at the moment have to pay cash for pretty much everything, which is hugely cumbersome and risky. The fact that the Trade Bank of Iraq can now issue letters of credit will make it easy for Iraqis to buy goods in a more civilized and safer fashion. It will also reduce their costs."

But critics say that the occupation authorities and multinational banks may be shackling a future Iraqi government with an unknown quantity of debt. "The oil figures are very murky and secretive," said Nomi Prins former investment banker and author of the forthcoming book Other People's Money: The Corporate Mugging of America. "That same oil for which no one has the appropriate...information is being used to collateralize multiple things. You're effectively leveraging oil for which the revenues are non-transparent."

Oiling the Wheels

Although it is true that the Occupation Authority and JP Morgan Chase are making it possible for Iraq to trade with the outside world and buy necessities such as food and oil refining equipment despite its bad credit, Prins points out that the situation is more complicated, especially since the "government of Iraq" is not an independent body, but rather an agent of occupation which doesn't necessarily have the best interests of the Iraqi people in mind.

Like the Iraq reconstruction contracts that have favored US companies with political connections, the export credits of the Trade Bank of Iraq favor companies from contributing nations, whether or not their products are cheap or well-made.

Take the case of the US export credit agency that underwrites the Trade Bank of Iraq. Of the $2.4 billion that the Trade Bank of Iraq has secured in export guarantees, the U.S. Export-Import Bank has approved $500 million in letters of credit. The money from the U.S. Ex-Im Bank ensures that the investments of U.S. corporations in Iraq are risk-free. If Iraqi ministries default on any of their payments to US companies, the U.S. Ex-Im Bank will pay in their place. Then the Ex-Im Bank gets its money back from Iraq's Development Fund, the acting budget for Iraq that is 95% made up of oil revenues, which is under the Occupational Authority's control.

Open government advocates have complained that the Iraqi Development Fund lacks transparency and that decisions concerning the fund are not subject to scrutiny or public comment. Thus the U.S. can chose to set the rules to pay itself back but using money from Iraqi oil to do it.

Other members of the occupation coalition also benefit: Japan's export credit agency NEXI also provided $500 million, the Italian SACE contributed $300 million while export credit agencies from thirteen other European countries are also contributors, according to J.P. Morgan Chase managing director Daniel Zelikow.

Meanwhile the arrival of JP Morgan also marks the possible takeover of Iraq's banking system by foreign banks. Two months after the establishment of the Trade Bank of Iraq, the Coalition Provisional Authority enacted Order 39: the opening up of all of Iraqs resources to foreign ownership except for oil. Shortly afterwards the appointed Iraqi Finance Minister Kamel Al-Gailani began major reforms to Iraq's banking system by allowing foreign financial corporations to own 100% of the banks in Iraq. The move marks the first time since the 1950s that foreign banks will have access to Iraq's financial system, whose main asset is the second largest oil reserves in the world.

According to Prins, the foreign ownership of Iraqi banks will make it practically impossible for locally owned banks to participate in the forging of a new economy. The Iraqi banks that are able to avoid a foreign take over will then have to compete with foreign banks and their many subsidiaries that have an unlimited source of capital and lending abilities that, if it doesn't cause the local banks to crash, could force surviving Iraqi-owned banks to operate in step with the foreign model, creating a free market that's not so free.

"Are these the kind of laws that help Iraq rebuild for Iraqis or are these the kind of laws that open Iraq up for corporations to come in and profit off of Iraq's resources?" asked Rania Masri, Program Director with the Institute on Southern Studies and Co-Director of the Campaign to Stop the War Profiteers. "It reeks of colonialism. It does not represent a rebuilding."

Servicing Despotism

JP Morgan Chase is no stranger to the architects of the occupation, having contributed $158,000 to the Bush-Cheney ticket. The bank will fit right into occupied Iraq, given that it already has close relationships with companies that have received billions of dollars contracts there. On JP Morgan Chase's Board of Directors sits Riley P. Bechtel, the Chairman and Chief Executive Officer of the Bechtel Group, which has received over $2 billion.

Other notables on JP Morgan Chase's board include Lee R. Raymond, the Chairman of the Board of the Exxon Mobil Corporation, which is also looking to benefit from cheap oil prices coming out of Iraq.

Lest critics suggest that JP Morgan Chase is unqualified to run Iraq's banking system, the company does have experience working in the Middle East. Chase has been assisting Qatar's national bank for the past 30 years by managing the country's export of oil and natural gas, thus making Qatar one of the wealthiest countries in the region and helping to solidify Qatar's monarchy.

Qatar is just one of several non-democratic institutions that JP Morgan Chase has given financial assistance to. In fact it has a long history of it going as far back as to U.S. slavery and as recently as to the Enron scandal. A study by California's Insurance Commissioner shows the former company Chase, which is now a part of JP Morgan Chase, as one of several insurance companies that provided life insurance on slaves for slave owners. When a slave died, according to the study, Chase paid the slave owner for the loss.

The bank has never paid reparations and JP Morgan Chase's spokeswoman Charlotte Gilbert-Biro said, "We don't believe there's any basis for liability on the part of the bank."

And luckily for the Nazis in World War II, Chase National Bank and JP Morgan both assisted the Third Reich by seizing bank accounts of Jewish customers, whose assets they did not return after the war. A 1945 U.S. Treasury Department report on U.S. banking activities during the war stated that the "record of the [Chase] Paris branch is one of uncalled-for responsiveness to the desires of the Germans and an apparent desire to enhance its influence with them."

JP Morgan and Chase's unsavory assistance of racist governments is not limited to the US and Europe. The company has been the subject of a lawsuit for providing financial assistance to the apartheid government of South Africa to expand its police and security apparatus, even after the United Nations urged a boycott of the racist government in 1964 when it declared apartheid a crime against humanity. JP Morgan refuses to comment on the case, as it is still under litigation.

More recently, in 2002 the US Securities and Exchange Commission indicted JP Morgan Chase for assisting Enron to manipulate its financial records. And a Senate Committee found that JP Morgan Chase, along with Citigroup, knew the money they were giving to Enron was used to manipulate its financial statements rather than meet its legal business goals. This manipulation left Californians with skyrocketing power bills while at the same time causing rolling power outages throughout the state.

Free Market, Hold the Democracy

Allowing Iraq's banking system to be controlled by a consortium of foreign corporations, headed up by a bank with a history of corruption and working with non-democratic regimes, is not a positive start towards quelling the people's skepticism of U.S. motives for being there. What is clear is that the Iraqi reconstruction money is being used to implement a politicial economy chosen by the Occupation Authority rather than waiting for the Iraqi people to elect a government that can make democratic choices on how to run their own economy.

"One way to actually control an economic system is going in and putting your pieces before there is a representative government," said banking expert Prins. "So far there has been almost $200 billion raised in various components to supposedly liberate and reconstruct Iraq and none of that has been done with a fully working democratic government in place."

The Bush administration is betting that the Iraqi people will want to continue what the administration has already started. "The only thing we can do is hope that when there are elections in Iraq they will look at the governing council and see the type of progress that they have made and they'll just continue with that progress," said Jay Brandes with the Commerce Department.

That's a $200 billion bet. Unless the Bush administration opens up its books on the running of the Iraqi economy, and makes transparent all actions concerning oil and contracts, it will be hard for the critics not to believe that democracy is on hold so that multinational corporations can takeover the Iraqi economy during this window of opportunity before a government of the people can stop it.

Mitch Jeserich is the Washington D.C. correspondent for Free Speech Radio News.