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.