by Prins, Nomi
Global Shock and Opportunity
By early 1975, all that oil-related money in the hands of bankers began to concern Congress, particularly the multinationals subcommittee of the Senate Foreign Relations Committee, which had begun investigating the political implications of American investment abroad in 1971.89 Chairman Frank Church began asking banks to reveal the details of their petrodollar deposits from each OPEC nation.
The senators were unconcerned that these money flows crisscrossing the globe were evading US banking laws. The committee’s concern centered on the question of whether these Arab billions could be used to influence American foreign policy. Of course, the answer was yes. The committee sent a list of questions about the OPEC country funds to all the major banks. The biggest ones, Citibank, Chase, Morgan, and the Bank of America, refused to reply. In fact, they were outraged.
“Much of the information you requested would involve a break of our obligation to keep confidential the affairs of particular clients,” wrote J. P. Morgan chairman Ellmore Patterson to the committee.
“We consider information of the type requested to be highly confidential,” wrote Chase vice president Michael Esposito, “since its disclosure would be very useful to our competitors.”
Church responded defiantly by holding another hearing in the Capitol. David Rockefeller flew to DC in his private plane to attend. When he arrived, he warned Congress that disclosing the banks’ figures could bring down the whole western banking system.90
The banks that were later too big to fail were, in the 1970s, too big to tell. Though Rockefeller later wrote that throughout the 1960s and 1970s, whenever he traveled to the Middle East he checked to see if there had been any US policy changes since the last time, and debriefed Washington upon his return,91 the idea of sharing the finances that stemmed from his liaison was too much to ask.
Chase’s Ridiculous REIT
For David Rockefeller, the problems were multiplying. Congress had passed a bill that allowed investors to speculate in collections of real estate assets, as long as 90 percent of the profits were returned to them. This spawned a flimsy product called Real Estate Investment Trusts, which ignited the biggest domestic lending debacle since the 1930s. The REITs enabled banks and lenders to go into speculative overdrive, borrowing big from investors on the back of shady real estate deals (a reoccurrence with slightly different characteristics would spark the financial crisis of 2008). Ultimately, the REITs had to pay out far more than the underlying real estate contained in them was worth, and as a result many went bust.
Under Rockefeller’s guidance, Chase Manhattan had been the first major bank to create its own REIT. The REIT was established in April 1970 within a subsidiary, CMART (pronounced “smart”), which collected approximately $1 billion in assets to back it. The First National City Bank and First Chicago Bank each made $750 million worth of loans to their own REITs.92
For four years, CMART netted big fees and paid juicy dividends to its shareholders. As speculative capital flooded in to take advantage of these trusts, though, pressure mounted to keep sourcing more real estate projects to line the trusts—in other words, for banks to lend more money to bad real estate deals. Just as in the 1920s, lenders lowered their standards and fraudulent real estate evaluations escalated, just to make the REITs appear profitable. From 1971 through 1974, Chase more than doubled its real estate lending from $2 to $5 billion. Four times the value of its equity capital was exposed to real estate including $827 million in loans to REITs.93
Thus when the bustling real estate market came to a screeching halt, CMART was hit hard. A chain reaction that tanked many REITs had begun in December 1973. The dominos fell fast. Chase real estate loans got crucified. By mid-1975, its nonperforming loans totaled $1.87 billion, reaching a July 1976 peak of $2.2 billion.94
From 1975 to 1979 Chase would charge-off $600 million in real estate loans. That plus other nonperforming assets produced a total loss of $1 billion (nearly $4 billion today). Only the international loans and operations saved Chase from greater failure.95 Hence, it was more important than ever to Rockefeller that all his high-powered friends in the Middle East remained business partners. As domestic finances went south, the banker’s international arms would save the day. That was a major reason global expansion was crucial, not just to Rockefeller but to any big US bank chairman. There would always be some geographical area or emerging market producing profits to offset losses from bad bets or risky practices.
The Big Apple Faces Bankruptcy
New York City was facing dire financial straits by early June 1975. The Big Apple had nearly run out of funds to pay for its daily operations and had no way of refinancing its short-term debt. Mayor Abraham Beame gathered a group of Wall Street bankers to come up with solutions to his debt problem, even though the city’s biggest banks, notably Chase and Citibank, had happily extended much of New York City’s debt to begin with. But the bankers didn’t get very far.
Beame even turned to the bankers for a bridge loan to keep the city running. Chase rejected the request. J. P. Morgan CEO Ellmore Patterson demanded that the mayor balance the city’s budget “immediately” in exchange for financial assistance.96 The mayor responded by releasing a public letter to Patterson criticizing the bankers’ efforts to pass laws restricting taxes as part of the initial $641 million package, which included taxes on the financial industry to balance the budget. But that was the kind of tit-for-tat that could only be won by the side with the money.
On June 14, the day before New York City would have defaulted, the state deferred to the bankers’ demands for effective austerity measures, and created the Municipal Assistance Corporation (MAC) to audit city operations and issue long-term bonds, backed by sales-tax revenues, that would replace short-term debt and give the city some breathing room.
But investors shunned MAC’s $3 billion in bonds.97 Bankers didn’t really try to sell them very hard either. As a result, the city flirted with defaulting again. Finally, the bankers agreed to purchase more MAC bonds—for a price. Wriston was largely heralded for saving New York City, but in actuality, he refused to buy MAC bonds unless New York City made austerity concessions. So to satisfy Wriston, Mayor Beame froze wages, cut twenty-seven thousand city jobs, hiked subway fares, and allowed the state to “nationalize” certain city programs. He also cut social programs to pay for banker and bondholder bailouts. In response, the banks agreed to buy $2 billion of the $3 billion MAC securities. However, investors still balked.
The MAC couldn’t sell enough of the rest of the bonds to keep the city from tanking.98 To get their money back, the bankers decided to try to persuade President Ford to aid the city. On September 23, 1975, Rockefeller, Wriston, and Patterson met with Ford, Treasury Secretary Simon, and Fed chairman Arthur Burns to talk about a government bailout for the loans they had extended to New York City. It would be a banker bailout, not a citizens’ one.99
By early October, the Fed and other central banks intervened to prop up the dollar, which was being hurt by the New York City credit problem. They promised to lend more money to banks in case of a default. New York City owed $2 billion to the banks at this point, including $400 million to Chase and $340 million to Citicorp.
New York City desperately awaited Ford’s decision. On October 20, 1975, Ford responded, “This nation will not be stampeded. . . . It will not panic when a few desperate politicians and bankers try to hold a gun to its head.”100
Nine days later, Ford rejected New York City’s request for federal aid, a slap in the face to the city and its bankers. The next day, the New York Daily News ran the infamous headline “Ford to City: Drop Dead.”101 Ford would later claim that headline cost him the 1976 presidential election, though it took some months before the bankers abandoned him.
Billy Joel memorialized the perils facing New York in his hit song “Miami 2017 (Seen the Lights Go Out on Broadway).” His lyrics evoked the stark class divide between the bankers on Wall Street and the politicians in
Washington, and the citizens of all the boroughs of New York City—the difference between the haves and the have-nots.
On November 15, 1975, New York State passed the Emergency Moratorium Act, putting a three-year freeze of principal payments on $4.54 billion of short-term loans. The act increased taxes and cited the inability of New York City to “provide those basic services essential to the health, safety and welfare of its inhabitants.” In practice, this was a default, but not in language.102 The act wound up saving the city’s finances and the bankers’ loans, but it inflicted much hardship on its citizens through austerity measures. The entire episode revealed the extent to which the bankers would refuse to use their power to even help their own city.
Just before the 1976 election, with Jimmy Carter holding a decisive lead, the New York Times ran an article headlined “Anxious Wait of Business for Carter’s Economic Lineup.” Carter’s choice for Treasury secretary was already “the favorite guessing game in business and economic circles.” The best odds were given Bank of America chairman and “expert” in the international field A. W. Clausen.103
After Carter won the election, Ford returned to private life. He was noted primarily for pardoning Nixon, turning his back on New York City, and two assassination attempts during his presidency.
Perhaps it was the fact that Nixon wasn’t inclined to fully embrace the bankers, or that Ford had rejected New York citizens and its bankers—whatever the case, the fracture between the president and the bankers in the early 1970s would open up to reveal the Frankenstein nature of the financiers by the end of the decade. In the past few decades, an alignment with US foreign policy had helped the financiers expand globally. But now they realized that whether their power and goals were aligned with, or divergent from, those of the Oval Office, they would be perfectly fine.
CHAPTER 14
THE LATE 1970S: INFLATION, HOSTAGES, AND BANKERS
“Our people are losing that faith, not only in government itself but in the ability as citizens to serve as the ultimate rulers and shapers of our democracy.”
—Jimmy Carter, “Crisis of Confidence” speech, July 15, 1979
WHEN JIMMY CARTER TOOK OFFICE ON JANUARY 20, 1977, HE INHERITED AN agitated country on economic thin ice. In his inaugural speech, Carter was requisitely humble. He told the nation that “your strength can compensate for my weakness, and your wisdom can help to minimize my mistakes.”1
The annals of history paint Carter as a caring, populist governor, a former peanut farmer, and a man whose heart was with the people, all of which was true. But he was also savvy enough to know that he had to turn to the Eastern Establishment to pick his cabinet. To retain the bankers’ support, he embarked upon a domestic policy of widespread deregulation. With respect to foreign policy, he attempted to reduce the cost of US military might for peace and economic reasons, a strategy that would have severe repercussions when it came to the Middle East.
Just as Carter entered the White House, Eugene Black sent Secretary of State Cyrus Vance a Morgan Guaranty report describing the status of the billowing Less Developed Countries (LDC) debt.2 The report was very popular among the Wall Street crowd because it didn’t consider this debt a warning of potential problems to come. Instead, Black noted that Morgan Guaranty’s chief international economist, Rimmer de Vries, advocated even more lending to these nations. The major bankers continued to see tremendous opportunity in extending loans to the developing countries. They wanted to ensure the Carter administration would concur and back their strategy.
By 1977, the LDC were running a $100 billion deficit. (In contrast, the OPEC countries posted $128 billion in revenues.)3 Approximately $75 billion in loans, accounting for 40 percent of their debt, had been originated by US commercial banks, with debt extension levels having increased by 20–25 percent each year since 1973. Brazil and Mexico were the largest debtors, owing nearly half of the total. The speed of debt accumulation continued to exceed the ability of LDC to pay it. The debt was simply growing faster than their economies could sustain it. Yet the Morgan report, widely cited throughout the banking industry, proclaimed a confidence that the “enormous buildup of external debt by deficit countries [was] manageable.”4
Like his fellow bankers at Morgan Guaranty, Wriston believed that liberal lending to the third world remained a safe proposition. Ever since the worldwide recession and OPEC price spikes in 1973, and despite the debt overhang, Wriston argued, non-oil-producing LDCs had doubled their exports and their international reserves had risen by $23 billion. His bank continued to pile even more debt upon a region beginning to stagger economically.
But despite the enthusiasm with which the bankers portrayed the region, the bankers privately worried that the party might not last forever. For the US banks to continue lending and expanding their activities into the developing nations, they needed to ensure there would be enough capital on hand in case the LDC defaulted on their loan payments. Capital would also be necessary if speculators soured on the notion of purchasing the bonds banks were selling to augment their funding of the LDC debt. On that score, Wriston was constantly seeking new ways to push for banking deregulation within the United States and to promote his dual agenda of domestic and international expansion. His goal was to consolidate more power by aggregating more deposits and capital into his bank. This wasn’t a matter of free-market philosophy alone; it was one of practicalities. If Citibank could gain access to more customer deposits, these could be translated into more loans to the current golden goose: the third world.
Wriston hit upon a new argument on behalf of his goal: technology. On May 19, 1977, he set out to persuade Carter that deregulating the banks and embracing their technological advances was critical to US financial growth and thus to US strength internationally. Cutting-edge financial technology would not only revolutionize banking. It also offered a compelling motive for deregulating the entire industry. If funds could travel between accounts at the speed of a keyboard tap, it stood to reason that past restrictions on banks that prohibited them from operating across state lines would be obsolete. By the same token, any geographical or other form of border inhibiting capital flow should logically be pushed aside.
Wriston arranged a meeting between his protégé, John Reed, and Carter’s assistant director of domestic policy, Franklin Raines, regarding Citibank’s new electronic funds transfer (EFT) systems. (Raines later served as chairman of Fannie Mae from 1999 to 2004, during which time it “misstated” billions of dollars of earnings.)
This meeting was one of Reed’s first forays into the realm of political influence. Raines took warmly to Reed, confiding in him that his department was “continuing work on a financial institutions reform package.” He added that he hoped “to be able to call on Reed” for advice and assistance on EFT policy.5 This was exactly the result that Wriston and Reed wanted.
As it turned out, EFT did indeed become a pillar of the administration’s policy to adopt a more “streamlined” regulatory framework. About a month after Reed’s meeting, his advisory team—Stuart Eizenstat, Bert Lance, Charles Schultze, and Jack Watson—presented Carter with the first of many memos on banking deregulation that reflected the banker-promoted logic. Incorporating Wriston’s technological argument, they concluded, “Current regulation impedes innovative changes such as the use of Electronic Fund Transfers and various banking services among institutions.”6
Domestic deregulation and third world debt were two of three sides of a triangular expansionary agenda within the banking community. Domestic deregulation would corner more US depositors, and third world debt would push the boundaries of financial neoliberalism. The third side entailed maintaining a solid relationship with the oil-rich leaders of the OPEC nations whose petrodollars funded those LDC loans. On that accord, the Shah of Iran would be visiting the White House on November 15, 1977.
Rockefeller, the Shah, and Carter
On November 10, 1977, Secretary of State Vance outlined key objectives for Carter in anticipa
tion of that meeting. The first goal, he said, was to “establish a close personal relationship” with the Shah and assure him of the US commitment to continue its “long-standing special relationship.” The second was to discuss the future of the US-Iranian military supply arrangement.7
Over the decades since the British- and CIA-led Iranian coup of 1953 instated the regime of Prince Mohammad Reza Pahlavi, a serious quid pro quo between the US government and the Shah had developed. This was augmented by personal relationships between the Shah and Chase bankers David Rockefeller and John McCloy. The United States received foreign policy assistance from the Shah in the form of regional support for its Cold War operations, including intervention on behalf of the United States in Oman, providing jets on short notice to the United States for fighting in Vietnam, providing space for US military bases on the Iranian border from which the CIA could monitor Soviet missile installations, and many other military maneuvers. Plus, the Shah ensured a regular supply of oil to the United States. For his part, the Shah also had paid for and amassed an extensive stockpile of US weaponry.
According to the State Department, the Shah was committed to sustaining the “security of the vital Persian Gulf waterway” and to acting on behalf of the western powers “vis-à-vis the Soviet Union and radical regional forces.”8 The Shah’s ongoing support was an essential component of US foreign policy. It was also a critical part of US banker policy for growth in the Middle East—not just in Iran but also across the region. On this score, Carter and the Chase bankers were in solid agreement in the fall of 1977 that they would stand behind the Shah—though the bankers would prove more steadfast in that support later.
