by Prins, Nomi
Citing the freeze, Chase refused to accept the $4 million interest payment on the loan on November 15, the date it was due. As a result, Chase declared the Iranian government in default on the entire loan without consulting any of the other banks that had been involved in the syndicate. On November 23, Chase informed Bank Markazi that it had seized its accounts and used the monies in them to offset its debts.42 The action was akin to Chase taking over a mortgage borrower’s home after one missed payment.
Tempers immediately flared. The Special Coordination Committee (SCC) rushed to convene in the White House Situation Room to address Chase’s default decision (which had not been disclosed in advance to the White House).
Chase’s declaration had potentially vast implications—not just regarding hostage negotiations but also on the entire realm of global financial relationships with allied countries. Foreign bankers and governments were livid over the bank’s unilateral move.43
Tensions were rapidly escalating to the level of a full-blown crisis. Then things got worse. The State Department received word that Morgan Guaranty, under president (and ex-marine) Lewis Preston’s directive, would copy Chase’s lead and declare Iran in default of its loan obligations. The bank had filed a court order in Essen, Germany, that would “attach” Iran’s shares in Friedrich Krupp, a German industrial giant, to their outstanding claims of $40 million. In other words, Morgan Guaranty was planning to take unrelated assets and use them to pay for the loans. In addition, the Export-Import Bank was contemplating declaring Iran in default, which would be the first such instance in Iran’s history.44 The United States didn’t want to run the risk of antagonizing the captors any further during negotiations, yet these financial moves were doing just that.
Further, the SCC worried that “the declarations of default may spread and accelerate.” The group decided to intervene to attempt to mitigate the fallout. Treasury Secretary Miller informed other German banks of the impending Morgan action and warned European bankers of the threat to their own positions if they spread Iranian default.45 He was concerned about repercussion to the hostages if the bank situation got out of hand. German courts allowed the seizure of Iranian assets on November 29.
At that point, Bank Markazi sued Chase in England, alleging Chase owed it $320 million that had been on deposit at Chase’s London branch at the time of the “off-set.”46 On December 6, Chase countersued Bank Markazi in New York, seeking damages of $366 million against the Iranians. (Judge Thomas Griesa rejected Chase’s motion on February 15, 1980, to stop the Iranian suit.47 After that, the case stalled.)
Rockefeller was the target of multiple public criticisms from Iran’s central bank, which claimed that he had capitalized on his close connections with the Shah and benefited personally from oil money profits.48 He later devoted a full chapter in his Memoirs to explain that his relationship with the Shah wasn’t as tight as reporters claimed, concerns about the Shah’s sister’s kids in Connecticut schools notwithstanding. He stressed that he hadn’t spent much time with the Shah. But it is noteworthy that the two men held a similar position in their societies: as princes of lineage, both men wielded tremendous unelected power.
Mark Hulbert, author of Interlock: The Untold Story of American Banks, Oil Interests, the Shah’s Money, Debts, and the Astounding Connections Between Them, put the matter into sharper perspective, noting, “At the time there was a lot of discussion that a default of Third World debt could bankrupt the entire banking system, and yet, here was a country flush with oil money, going out of its way to make sure the money would be paid and Chase was trying to punish the country.”49 This made no economic sense.
Considering the timing of the interest payment notification came before Carter’s asset freeze, it did seem that egos played a role in rejecting the payment. Plus, it was coming into an account; it was not deposit money that would have been frozen under Carter’s decree.
By December 22, the SCC had made some headway in undoing the damage Chase had unleashed. “The French and British were now unanimously opposed to the default mechanism,” it reported, “fearful that they would bear legal responsibility for any losses suffered by their banks in carrying out such action.”50
Yet the situation in the Middle East remained far from resolved. On Christmas Eve, the Soviet Union invaded Afghanistan. As the decade drew to a close, Carter’s foreign policy was unraveling at the seams.
Desperation Grows: The 1980s Began in the 1970s
On January 17, 1980, Chase’s lawyers informed the White House that the bank had been served with a writ regarding the seized funds. At that point, Chase was the only American bank served with such a writ.51
Yet the bankers appeared to emerge from the crisis unscathed financially, as for them, the turmoil that had resulted from the block of Iranian assets largely diminished.52 On March 10, 1980, an intelligence memo on the long-term implications of an Iranian asset freeze concluded, “The competitive position of US banks is unlikely to be significantly affected. . . . The surge in OPEC surpluses will provide most banks with huge new deposits. US bankers are reportedly flooded with requests to accept Arab deposits . . . other than Iran.”53 The bankers, in short, were secure, even if the hostages were not.
Amid the fallout of the Iran situation and general economic upheaval, Carter had an election to consider. He had to raise money for his campaign, and like many presidents before him, he turned to the banking community for help. His staff suggested he schedule a series of luncheons with Wall Street executives, such as Walter Wriston and the emerging Democratic power broker Robert Rubin, to rally their support for the fall.54
The banking community, in turn, saw a way to push its deregulation agenda as a quid pro quo. On March 31, seven months before the election, Carter signed what he characterized as a “landmark financial reform bill”: the Depository Institutions Deregulation and Monetary Control Act of 1980. It was a gift to the banking community. The act began phasing out Regulation Q caps on interest rates that commercial banks could pay for deposits. It authorized savings and loan associations to issue credit cards; removed the geographic restrictions on S&Ls to make real estate loans; and expanded their ability to make acquisition, development, and construction loans. It also exempted mortgages and other types of loans from state usury laws that prohibited excessive or abusive interest rates charges, and it permitted banks to provide automatic transfers from savings to checking accounts. The act allowed national banks to circumvent individual state interest rate limits regarding what they could pay on deposit accounts, and ultimately led to the banks’ ability to charge higher subprime lending rates in later decades. The bankers had been waging the battle against Regulation Q since the 1950s, and they had finally won. To commemorate the event, Carter sent each major banker a signing pen.55
Failed Rescue and the Election
The hostage negotiations were slowly creeping forward. At the initiative of the Iranian government, a group of people representing high government officials had made contact with US officials. Secret negotiations were conducted between the United States and Iran until it became apparent that “Iranian powers—particularly Khomeini—had neither the will [n]or desire to peacefully resolve the crisis,” according to a summary report compiled by Carter’s chief of staff, Hamilton Jordan.56
Carter authorized a rescue mission to extract the hostages.57 But on April 24, 1980, Operation Eagle Claw was aborted. “Equipment failure in the rescue helicopters made it necessary to end the mission,” he had to admit. “Two of our aircraft collided on the ground in a remote desert location in Iran . . . to my deep regret, 8 of the crewmen on the two aircraft were killed, and several other Americans were hurt in the accident.”58
The mission was a disaster on many levels. Not only did it fail to rescue the hostages, and not only did it take the lives of eight American military professionals, it also provoked the resignation of Cyrus Vance. His loyalty had been vital to Carter. Deputy Secretary of State Warren Christopher assumed his role.<
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The Shah was eventually relocated to Panama and later to Egypt, where he died in June 1980. Official funeral arrangements were handled by the Carter administration. Former president Nixon was the only US dignitary in attendance.59
As Americans went to the polls in November, the hostages weighed heavily on the minds of the population. Months of negotiations had failed to reach a resolution in time. Carter lost the election to California governor Ronald Reagan, another Beltway outsider.
Progress had occurred, albeit too slowly, in the background. A few days after the election, Christopher happily confirmed his trip to Algeria, where he would oversee the release of the hostages and the simultaneous unfreezing of Iranian assets, the second piece of the negotiations. He had prepared ten Iran-related declarations and presidential orders that would become effective once the hostages had safely departed from Iran.60
The talks had come down to anger about money, specifically the freezing of Iranian assets and the use of the Iranian deposits to offset the loans that had been declared in default. The speaker of the Iranian Parliament stressed lingering difficulties over how to lift American claims against Iran and lift the freeze on Iranian assets in the United States. The sticking point was that US banks’ overseas offices had held more than $4 billion of Iranian deposits at the time of the freeze, and had also made large unsecured loans to the Iranian government and Iranian government entities. However, US government officials, somewhat still headlocked by the bankers, were forced to inform Iran that full compliance regarding lifting private claims by American companies was beyond its power.61
By late 1980, the White House had adopted Rockefeller’s line of defense, that “largely, because of the U.S. freeze, Iran was unable to pay installments of interest and principal due on the loans and the loans went into default. As a result, these banks exercised their right to require full payment of the loans and used Iranian bank deposits to pay off the loans in a process called ‘setoffs,’” whereby banks would reduce the size of the loans by the amount they took from Iranian deposits.62
In mid-December the State Department proposed a solution amid ongoing lawsuits about the “propriety of these set-offs” in foreign courts. Iran would be given access to its current balances in the banks, and the banks and the Iranian government would collaborate to bring the loans up-to-date.63 In other words, the White House left it up to the banks to act responsibly.
Closing the Deal
As Carter’s presidency approached its end, hope remained that a resolution to the hostage crisis would occur during his administration. But the outcome would lie in the balance until issues related to the frozen Iranian funds and the bankers’ whims were resolved. The beginning of the end of the hostage ordeal began when Warren Christopher arrived in Algeria on January 8, 1981. (The Algerian government was acting as intermediary between the United States and Iran.)
From the onset, the exchange of hostages for Iranian assets was plagued with delays, recalcitrance on the part of the Iranian central bank and private banks involved, and heated negotiations over the minute details of what was then the largest international funds transfer in history.64
First, about $8 billion of frozen assets would be placed in an escrow account encompassing the $5.5 billion of deposits in overseas branches of US banks and $2.5 billion of gold, securities, and other assets in the Federal Reserve. The remaining frozen assets (more than $3 billion) would be unfrozen.
Closing the “deal” was no simple matter. It involved three governments, four central banks, twelve US commercial banks, and hundreds of officials and lawyers in Washington, New York, London, Algiers, and Tehran.65
Throughout the closing period, which began on the evening of January 18, 1981, Carter and his advisers remained in tight communication with US team members in the Treasury, State, and Justice Departments, as well as with Christopher and his team in Algiers. A labyrinth of steps was designed to calm the distrust between the United States and Iran.
The Algerian government notified the United States and Iran that both were ready to proceed. In Washington, Carter signed the official US statement of adherence and nine executive orders. By phone, he authorized Christopher to sign the Declarations of Algiers, which would facilitate the transfer.66
Iran’s minister of state, Behzad Nabavi, signed the documents on behalf of Prime Minister Mohammad-Ali Rajai of Iran. Algeria proclaimed the two Declarations of Algiers effective at 2:17 A.M. EST on January 19. It seemed as if Carter would see at least part of his negative legacy cleared.
That’s when the trouble started. Iran refused to sign an annex with the text of Bank Markazi’s instructions to US banks regarding the payment of Iranian deposits to the Federal Reserve for transfer into an escrow fund on its behalf. Iran denounced the US bankers and their “underhanded” maneuver of altering the balance amounts on the Iranian accounts. After stern words from the White House, the US banks agreed to a corrective, but Bank Markazi rejected the overture.
Finally, after intense arguing, a telex with new directives was transmitted across the seas, forcing the twelve banks involved to transfer precise amounts of deposits, aggregating $5.5 billion, to the Federal Reserve.67
It was now early morning of the day that Reagan would become president. Politics, banking, and lives still hung in the balance.
Once the telex was received, Treasury Secretary Miller delivered an executive order to the US bank officials huddled in his office to pay the frozen deposits in their overseas branches over to the Federal Reserve Bank of New York.
But now another potentially agreement-killing crisis arose. The telex that the bankers had sent contained errors in the code numbers of Iranian accounts. At last, an amended telex was received at the London solicitor’s office representing all twelve US banks. The ensemble of lawyers, bankers, and Fed and Treasury officials in Washington and at the US embassy in Algiers awaited an “all-clear” sign.68
Enough Was Enough
At 3:45 A.M. Miller broke another impasse over language that would satisfy the US bankers. He instructed the US banks to transfer the money. By 4:10 they had transferred most of the $5.5 billion to the Federal Reserve Bank of New York, which then transferred the funds to its account at the Bank of England. Once the stipulated $7.97 billion was sitting at the Fed’s account in Britain, it was transferred to the escrow account of the Algerian Central Bank at the Bank of England.69
To everyone’s great relief, the hostage release now seemed certain.
After another round of disputes, at 6:18 A.M., the escrow and depository agreements were finally signed in Algiers. The transfer of the New York Fed money to the escrow at the Algerian central bank at the Bank of England was completed at 6:45, and at 8:06, the Algerian central bank certified it had the money.70
Five hours later, Ronald Reagan took the oath of office. At precisely 12:33 P.M., the first aircraft of hostages was allowed to take off from Iran. The second aircraft followed ten minutes later. The planes departed Iranian airspace and flew over Turkey en route to Athens. After a brief stop for refueling, the planes arrived in Algiers at 7 P.M. In a ceremony of solemnity and emotional intensity, Algerian foreign minister Mohamed Ben Yahia turned over the fifty-two American hostages to Warren Christopher shortly after 8 P.M. Their 444 days of captivity were over.71
As Reagan began his presidency, the lawsuits between the US banks and the Iranian government were ongoing. Wriston and Rockefeller stood poised to extend their influence and profits into the 1980s. They had outlasted three presidents in the process of tipping the balance of political-financial power away from the collaborative, more aligned, and publicly spirited alliance between the president and the key bankers that had defined the postwar and early Cold War decades, and in favor of the bankers.
The importance of oil and energy policy as an adjunct of economic and financial policy had provided bankers the impetus to seek their own Middle Eastern alliances, whether or not they dovetailed with those of the president. This precedent would re
nder the bankers less concerned with toeing the presidents’ line from a foreign policy perspective, for they had become powerful enough in their own right over increasingly rapid movements of capital. They would still want US government protection and alliances with presidents, who would return the favor anyway, but they would not need federal support except in times of trouble.
Bankers’ increasingly reckless behavior would lead to more global economic strife in the 1980s. The petrodollar-fueled loans that carried the bankers through an inflationary domestic economy that hurt the United States and other populations would push the third world into a global debt crisis in which the government would subsidize the bankers’ losses and bail them out. Going forward, elite US financiers would face no real challenges on the road to further deregulation and open financial policy from presidents, whether they were Republicans or Democrats, and regardless of the state of the global or national economy. Bankers’ rapaciousness would translate into riskier, more speculative practices. Their influence over monetary and economic policy would flourish. In that vein, US bankers would strive to enhance their power by remaining “competitive” with foreign banks, and presidents would support this stance as critical to maintaining the US status of international financial superpower.
CHAPTER 15
THE EARLY TO MID-1980S: FREE-MARKET RULES, BANKERS COMPETE
“If you say you’re a capitalist, then the next thing you must say is, ‘I compete.’”
—Donald Regan, Treasury Secretary for Ronald Reagan1
THE BEGINNING OF THE NEW DECADE COULD NOT ESCAPE THE LINGERING HANGOVER of the previous one. The American hostages had been released from Iran and Ronald Reagan had won the White House, but other than that, not much had changed. Inflation hovered above 14 percent, Treasury bills yielded more than 15 percent, and the unemployment rate persisted at 7.5 percent. The Dow sat at 937, lower than its mid-1960s levels. US economic power was being compromised by the growing strength of Europe and, increasingly, Japan, which was competing for superpower status. Though Reagan would focus on the US economy and ideological dominance, the financial muscle of the US bankers would be integral to retaining international control in the face of that competition. Ensuring bankers’ ability to compete on the global stage would become US foreign policy for presidents of both parties from that point onward.
