by Prins, Nomi
By the spring of 1973, the Watergate cover-up was unraveling, and Nixon became obsessed with saving his presidency. McCloy, who had operated for decades in elite policy circles, his power and influence growing in tandem with that of American presidents, was appalled by Nixon’s shenanigans. Now he felt disillusioned.51
McCloy believed that Watergate distracted Nixon from Middle East initiatives, just as Vietnam had distracted him from his European ones. He was increasingly focused on his oil company clients, the “Seven Sisters,” and their position in the mix of oil and money politics. It was on their behalf that McCloy would flex his muscle.
With respect to other Middle East political-economic ventures, on September 22, 1973, Rockefeller and his assistant, Chase Bank vice president Joseph Reed, arrived in Cairo to meet with President Anwar Sadat. The two men were flown by an Egyptian air force plane to Alexandria, then driven west along the Mediterranean coast to Sadat’s summer retreat.
Rockefeller recalled Sadat as warm. During the meeting, Sadat asked, “Mr. Rockefeller, would you be interested in establishing an office of your bank in Egypt?”52 He responded by reminding Sadat of Chase’s long-standing relationship with Israeli banks (though at the time there was no Chase branch in Israel). “Mr. President,” he said, “how would you feel if we opened a branch in Tel Aviv at the same time we open one in Cairo?”
Sadat replied, “It is all a matter of timing.”53
A week earlier, Citibank executive vice president G. A. “Al” Costanzo had flown to Beirut and announced that Citibank would lend $1 billion in the Middle East. He then flew on to Nairobi for an IMF annual conference.54 Bankers were circling the region like sharks. They smelled money, and they assumed that political problems would be resolved if and when they arose.
But first, there would be blood.
Blood, Then Money
On October 6, 1973, Egypt and Syria launched a war against Israel. The conflict would come to be called the Yom Kippur War because it coincided with the Jewish holiday.55 In the wake of the attack, Arab nations halted oil shipments to the United States. As a result of that embargo, oil prices would quadruple by early 1974.56
Two days after the Yom Kippur War began, a delegation of oil company officers, operating under the authority of McCloy’s London administrative group, began negotiations with OPEC about prices. McCloy cleared the oil companies’ collective bargaining strategy with the Justice Department, specifically working with Attorney General John Mitchell to circumvent antitrust issues. A lawyer from McCloy’s firm, Milbank, Tweed, monitored the London group meetings.57
McCloy, working with officials of the Arab American Oil Company, wrote a letter to Nixon urging him not to side with Israel. “The real stakes are both our economy and our security,” he said. Three days after he sent the letter, Nixon and Kissinger sent military supplies to Israel.58 Lines were clearly drawn between what the banker and the president considered beneficial.
As the battle raged in the Sinai, McCloy continued to represent the big oil interests.59 He defended his clients before a Senate subcommittee on multinational corporations. His monthly retainer from each of the five major oil companies jumped from $1,500 to $2,250 per month.60
On October 16, 1973, when OPEC members met in Kuwait City and decided to increase oil prices by 70 percent, to $5.11 a barrel, McCloy’s clients found themselves to be partners-in-profit with the Arab nations.61 It was a win for them. The “chairman of the establishment” had struck black gold. And so it would continue.
While Nixon continued to navigate Watergate, Arab members of OPEC unleashed their “oil weapon” in response to his October 20, 1973, $2.2 billion US-Israeli military aid package. The resulting spike in oil prices triggered a bear market that sent the Dow to 578 in a year, shaving about half off from its 1973 high.
But Nixon’s political scandals also served as a distraction from bankers’ initiatives in the wake of the war: recycling petrodollars. Global oil price shock presented US bankers with the perfect opportunity to bolster their international business and augment revenues. During the first half of 1974, foreign assets of US commercial banks quadrupled from $8.5 billion to $34 billion, more than double the 1973 pace.62
Ramifications of the war proved economically devastating around the rest of the world, though. Oil and energy spikes jolted the financial markets and threw many national economies into recession. US unemployment soared to 7.1 percent by December 1974 and stagflation (inflation at a time of economic stagnation) set in.63 Developing countries were hit worse, as the dollars they had been loaned by US banks flowed back to the Middle East to pay for oil and the interest rates on their debt soared.
For those on the right side of the oil equation, however, crisis meant profit. The high oil prices brought excellent revenues to the bankers. From 1973 to 1974, earnings from oil-exporting nations in the Middle East grew 600 percent, to $140 billion, led by Saudi Arabia and Kuwait. OPEC countries sought new places to stash their petrodollar windfalls.64 Though they kept most of the money in their own local banks, a sizable surplus found its way to western banks, including through the open doors of the bustling Eurodollar market.
Rockefeller returned to Egypt to secure a joint venture with the National Bank of Egypt, forming Chase National Bank of Egypt with a 49 percent share. (Later, Chase opened more branches in Cairo, Alexandria, and Port Said.) Elsewhere, Chase’s relationships with SAMA and Iran’s central bank gave it exceptional access to the region’s funds. Chase also enjoyed a strong Eurocurrency market position where the “surplus” could be recycled and the bank could direct funds beyond the Fed’s purview and restrictions.65
In January 1974, a few months after the first “oil shock,” Rockefeller jaunted over to the Swiss luxury locale of Saint Moritz, where the Shah of Iran was skiing.66 His motive was to discuss Chase’s effort to buy an interest in an Iranian commercial bank; from that vantage point, the bank could take in more petrodollar deposits.
He succeeded in spades. Over the next eighteen months, Chase created a joint venture with Iran’s state-owned Industrial Credit Bank to form the International Bank of Iran, which was established in 1975. Chase retained a 40 percent share in the bank worth about $10.5 million initially.67 More important than the size, though, was the access it provided Chase to the area.
By the mid-1970s, Chase was the leading bank for the National Iranian Oil Company. As oil prices rose, Iranian deposits at Chase escalated, along with Chase’s trade finance business in the country. A high proportion of Iran’s oil export money flowed through Chase’s finance department—as much as $60 million a day.
According to Treasury Secretary William Simon, who succeeded Shultz after Rockefeller declined the position in 1974, $11 billion in foreign oil money was directly invested in the United States in 1974 alone.68 Saudi Arabia, the biggest oil producer in the region, stowed its new petro-billions with US banks as CDs or in US Treasury bonds. Less conservative investors, like the Kuwaitis, stuck revenues into US and European stock markets, buying up large chunks of shares in companies like Daimler-Benz. The Iranians bought portions of steel companies, but the most notable purchase was of US weaponry. The Pentagon’s foreign sales of arms more than doubled in 1974, to $8.3 billion, with almost half accounted for by Iran.69
Though political relationships with the Saudis were somewhat strained during the 1973 oil embargo, Wriston remained optimistic about a long-term relationship with his bank. He was right. The billionaire Saudi prince al-Waleed bin Talal became one of Citigroup’s largest shareholders, with 218 million shares by 2008.
As for Israel, though US foreign policy was supportive, this was an area in which financial and political intentions diverged. US bankers remained less engaged financially. The country held little interest for them from a profit or power perspective. During a January 17, 1975, meeting with Deputy Prime Minister Yigal Allon, Israeli ambassador Simcha Dinitz convened with Vice President Nelson Rockefeller and Henry Kissinger to discuss US banking in Israel. B
ut they held little sway over David Rockefeller regarding the merits of banking there.
Allon suggested “it would be nice if he [David Rockefeller] could arrange $150 million when he visits Israel, because the other banks are waiting to see what Chase does.” To this proposal, Nelson Rockefeller replied, “I can’t really get into the family business.”70
When David Rockefeller later visited Israel, Israeli finance minister Yehoshua Rabinowitz asked him to open a Chase branch there. But Rockefeller decided there wouldn’t be enough local business to justify opening a branch. Other US banks followed his lead and also decided against opening branches in the country. They knew they stood to make far more money siding with the Middle Eastern countries that possessed oil reserves. With such potential, it didn’t really make a difference to them what US foreign policy was regarding Isreal.
Recycling Oil into Loans
In London, US banks were able to perform investment bank activities outlawed within US borders by Glass-Steagall. These included loan syndication, private placements (the private sale of securities to a small number of select investors, such as other large banks, mutual funds, insurance companies, and pension funds, to raise capital), foreign currency trading, bond underwriting, corporate finance, and mergers and acquisition advice.
In the United States, commercial banks could offer clients financial advice, but they could not charge fees for it like the investment banks could. Merchant banks, which were designed to deal mostly with international loans and financings to large multinational corporations, provided another way to recoup some of that inequity. As such, Citibank had established its London merchant bank, Citicorp International Bank Limited, in January 1973.71
CIBL became the world’s largest repackager of syndicated Eurocurrency loans. It was sort of like a major hub airport, but instead of being a focal point for flights it was a fulcrum for international loans. In terms of banking culture, CIBL spawned a new breed of “salesman bankers” who “spent more time in the first-class cabins of Boeing 747s than they did in New York and London.”72 With good reason: fees for syndication were collected up front. A $100 million loan could net bankers about $500,000 in fees.
More and more commercial banks opened offices in London to circumvent Glass-Steagall. Soon, the commercial banks were beating the investment banks at their own fee-driven game.
With petrodollars gushing through its doors during the oil embargo, Citibank aggressively pursued Latin America, particularly Brazil, as a target for loans. The response was enthusiastic. Brazil agreed to pay higher rates for the ability to have fifteen-year loans as opposed to the normal eight-year ones. As a result, Brazil’s trade deficit surged from $1 billion in 1973 to $6.2 billion in 1974. Citibank’s loans to Brazil shot from $2 billion to $5 billion in six years. The country provided 13 percent of the bank’s earnings in 1976.73 Other US bankers clambered to lend to Venezuela, an OPEC member located outside the tense Middle East region that had potential to become a cash cow. But Citibank was the only foreign bank permitted to operate relatively freely in Colombia and Venezuela.
US bankers were also lending liberally to Mexico, Argentina, Bolivia, and Peru, forgetting the 1930s Peruvian military junta and the problems associated with its struggle to aggregate power, and ignoring the violent dictatorial bent of US-trained Bolivian president Hugo Banzer, who had been placed into power after a Nixon-ordered coup.74 Investors wanted more Peru bonds than were available in 1973 and 1974.
Leverage and Lending
The Arab nations restricted their own lending to neighbors in Sudan, Egypt, and Kenya. Otherwise, they used the western banks’ recycling programs. Wriston focused on developing a “successful” strategy for recycling petrodollars. As a result, he came in “first place” in the profits sweepstakes. Rockefeller took second, and John McGillicuddy, president of Manufacturers Hanover, was third.
US regulators enabled the recycling process by allowing banks to extend more than half of their capital to Brazil without worrying about the consequences if petrodollar profit faucets stopped flowing or Brazil stopped being able to repay its loans. This ratio of capital to loans was already 10 percent lower than it had been during the post-Depression years.
As bank capital ratios plummeted (more money was being loaned out than taken in despite the excess petrodollar funds) and regulators equivocated, Wriston advocated further reductions in capital standards, asserting that “countries never go bankrupt.”75 The entire banking industry adopted his mantra in a strategy that would lead to a nearly decade-long debt crisis in the 1980s.
When Treasury Secretary George Shultz resigned in April 1974, Wriston was tapped for the position of Treasury secretary. But like Rockefeller, who had rejected the offer twice, Wriston also refused; there was much more money and power in banking. “I have a young wife. I need the capital,” he said when he got the call from General Alexander Haig.76
Flipping the tables on the president, Wriston offered Shultz the post of vice chairman of Citicorp (the same position future Citigroup chairman Sandy Weill would offer Robert Rubin, President Clinton’s Treasury secretary, after Rubin resigned from public office in May 1999).77 However, Shultz decided to take an executive vice president position at Bechtel Company; he rose to the post of president and remained there until 1982.78
Treasury Secretary William Simon, who replaced Shultz (and who would later be chairman of the Nicaraguan Freedom Fund, which would be involved in the Iran/Contra scandal), took his cues from Wall Street. He responded to the oil crisis by backing the bankers’ strategy; he tried to persuade oil-producing nations to place their petrodollar surpluses in US bank deposits while discouraging them from direct investment in US corporations.79 Foreign policy had again overlapped with banker policy.
The abundance of petrodollar money flows caused the IMF and commercial banks to engage in their own version of a lending war. In September 1974, the IMF set up a special oil facility unit from which to help struggling oil-importing nations, although it was mostly used by Britain and Italy.80
The World Bank established a recycle unit as well. But Simon shared Wriston’s view that the banks didn’t need the extra competition, and repeatedly refused World Bank president Robert McNamara’s requests for funding the unit.
Years later, Wriston, Simon (who also became a Bechtel consultant), and Shultz wrote a piece in the Wall Street Journal claiming that “the IMF is ineffective, unnecessary and obsolete” and called for its abolishment from the global system.81
Ford and the Bankers
Nixon finally resigned in August 1974. Governors, bankers, and close advisers accused him of being the key catalyst to the faltering economy.82 Vice President Gerald Ford stepped in, declaring, “Our long national nightmare is over.”83
Ford established some important connections to the banking community. On September 1974, Wriston joined his White House Labor Management Committee. The committee of seventeen was split between eight management members, eight labor members, and a neutral coordinator. The business side contained Bechtel chairman Stephen Bechtel, Mobil Oil Corporation CEO Rawleigh Warner, and General Electric chairman and CEO Reginald Jones. Big Labor’s representatives included AFL-CIO head George Meany and United Steelworkers president I. W. Abel.
The group was assembled to advise the White House on domestic policy as it pertained to “free and responsible collective bargaining, [and] industrial peace . . . which could contribute to the longer-run economic well-being of the Nation.”84
In the halls of Chase, the nation’s well-being took a back seat to the bank’s speculating. In the fall of 1974, Hilliard Farber, senior vice president in charge of the bond department, bought $800 million (the equivalent of $3.6 billion in today’s terms) worth of government bonds, betting rates would drop and prices would rise. The opposite happened. He neglected to report the loss, causing Chase’s third-quarter statement in 1974 to be overstated by $34 million.
Chase president Willard C. Butcher and Rockefeller were in Wash
ington, DC, hosting Chase’s annual dinner for the World Bank/IMF financial elite, when they heard the news. They immediately secured a flight back to New York, arriving at Rockefeller’s five-story townhouse on Sixty-fifth Street just before midnight. His wife, Peggy, served hamburgers and mugs of hot chocolate while they mulled their course of action. This was, to them, far more a public relations crisis than a matter of criminal fraud.
They decided to face the issue head-on. Rockefeller released a statement about the “serious errors of judgment” that had been made, noting that Chase had asked Farber to resign. There was no mention of accountability at the top.85 The incident was the precursor to another move by a future head of JPMorgan Chase, Jamie Dimon, who blamed reporting errors for a $6.2 billion loss in 2012. The firm was ultimately instructed to pay a paltry $1.02 billion fine, less than 1 percent of its total asset base at the time, just more dust swept beneath the carpet of banker impunity.
As it turned out, several months later, interest rates did drop. Rockefeller announced that Chase would restate its financial statements once it had done a complete securities inventory.86 (On September 21, 1976, Chase accepted the SEC’s findings of “inadequate controls,” and that was the end of the matter.)
The nation’s nightmare was not over by a long shot. A steep recession had engulfed the country following the energy price hikes and related inflation in 1974.87 Hundreds of thousands of autoworkers had been laid off by Christmas of that year. New York City hovered on the brink of bankruptcy. The “me decade” investors got hosed. Mutual funds would experience eight years of declines during which customers extracted their money rather than see it diminish to nothing. The “misery index” (the rate of unemployment plus inflation) was 17 percent, with inflation at 11 percent.
Wriston leveraged the economic malaise to strengthen his influence over domestic economic policy. In late December 1974, he inserted an extra $15 billion personal income tax cut into Ford’s 1975 tax reduction package through the back door of the Labor Management Committee. President Ford decided this tax reduction should be expedited and asked Congress to streamline the process for the next two years.88
