The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

by Ron Chernow

  CHAPTER THIRTY

  SHEIKS

  FOR Morgan Guaranty, too, the recession of 1973–74 disclosed a turbulent new world. The Arab oil embargo and consequent jump in world oil prices produced inflation and skidding financial markets. With an end to fixed exchange rates in the early 1970s, foreign-exchange trading became a wild poker game. In November 1973, Morgan president Walter Hines Page warned friends at Franklin National Bank against excessive foreign-exchange gambling and quietly alerted the New York Fed to the problem. In May 1974, Franklin’s foreign-exchange losses led to the first major bank run since the Depression and the biggest bank failure in U.S. history. When Bankhaus Herstatt, West Germany’s biggest private bank, mysteriously failed in June, it saddled Morgan Guaranty with a $13-million loss. That fall, Fortune warned, “The nation’s financial system is facing its gravest crisis since the Bank Holiday of 1933. The crisis is one of confidence. The public has become increasingly worried about the solvency of even the most profitable banks.”1

  With this thick pall hanging over the banking world, the banks were suddenly tempted by Arab petrodollars. If the Arabs caused the financial crisis, they also presented an apparent cure. For Morgan Guaranty, which had struggled to retain balances, the shower of petrodollars had a surreal beauty, like a rainbow in a storm. “We were so worried about dollars,” said Walter Page. “Then here came the Saudis with more dollars than we knew how to keep. You almost had to become Saudi Arabians—quickly.”2 The petrodollars flowed mostly into four U.S. banks—Morgan Guaranty, Chase, Citibank, and the Bank of America. Thoroughgoing snobs, the Arabs preferred conservative blue-ribbon banks and prized Morgan’s old-money aura, its discreet style, and its resolutely Christian past (the bank had no high-ranking Jewish officer until the 1980s).

  As bankers swarmed across the Middle East groveling before Saudi sheiks, Morgan Guaranty enjoyed access no carpetbagger could duplicate. The secretive Morgan-Saudi relationship dated back to Ibn Saud’s forging of the Saudi kingdom in the early 1930s, when money-changing shops with mud floors served as makeshift banks. In April 1933, Standard Oil of California (Socal) negotiated the first oil concession with the Saudi finance minister, Abdullah Sulaiman. They agreed to an initial £30,000 gold loan, plus the first year’s rent of £5,000 in gold. Making payment posed a riddle, for the antediluvian Saudi monetary system employed only chunky metal coins; the kingdom wouldn’t adopt paper money for another twenty years. So gold—massive heaps of it—was shipped in to make the payments.

  The deal was nearly scuttled when FDR, heeding the advice of Walter Lippmann and Russell Leffingwell, embargoed U.S. gold exports. As an American company, Socal required U.S. Treasury permission to ship gold to Saudi Arabia. As it awaited the official go-ahead, its Saudi Arabian future seemed to ride on that one gold shipment. On July 26, 1933, Dean Acheson, then Treasury under secretary, turned down Socal’s request. So the panicky oil company bought thirty-five thousand gold sovereigns from a Guaranty Trust branch in London, flouting the new regulations.

  In early August 1933, this black-market gold sailed for the Persian Gulf aboard a P&O liner. When it arrived, a Socal representative counted out thirty-five thousand coins under Sulaiman’s vigilant gaze. When the Saudis asked what they should do with the money, Socal recommended Guaranty Trust. For years, American oilmen shipped millions of British gold sovereigns to the Saudis by boat or plane. By the 1940s, Socal had taken Texaco, Standard Oil of New Jersey, and Mobil into its desert oil kingdom in a new operation christened the Arabian-American Oil Company, or Aramco. Aramco erected structures ranging from hospitals to camel troughs, exerting an influence in the kingdom rivaling that of the Saudi royal family itself. By importing a great deal of material, Aramco had a constant need for letters of credit and other old-fashioned banking services. And its stalwart banker was Guaranty Trust.

  Guaranty’s Harold Anderson was probably the only American banker who traveled regularly to Saudi Arabia after World War II, although the Dutch and French were well entrenched there. (The Netherlands Trading Society serviced Indonesian pilgrims to Mecca.) As long-time camel traders, the Arabs valued personal relationships, and the genial, easygoing Anderson brought them colorful gifts, like studded saddles, to win their friendship. Guaranty made loans to Saudi Arabia against oil revenues (possibly including small personal loans to King Saud) and also managed dollar accounts for leading Saudis. As Aramco’s banker, Guaranty also managed Saudi oil revenues in dollars.

  Although J. P. Morgan and Company had no dealings with Saudi Arabia in the 1950s, it was banker to that other ubiquitous giant in the Arabian Peninsula, Bechtel, the shadowy global construction giant that did the actual building for Aramco. Bechtel formed a close partnership with Saudi entrepreneur Suliman Olayan, a once penniless Aramco dispatcher who ended up with over $1 billion and a 50-percent stake in Saudi Arabian Bechtel Company. As a member of Morgan Guaranty’s International Council, Olayan would form part of a dense, impenetrable web whose strands bound Morgan Guaranty, Bechtel, the Saudi royal family, and American oil companies.

  Like a storybook miser, Finance Minister Suliman was often said to hoard the nation’s wealth—silver riyals and gold sovereigns—in a chest tucked under his bed. It was one of the world’s few portable central banks. After 1950, as the Saudis split royalties with Aramco on the more equitable fifty-fifty basis, the coins came to fill a vault seventy feet long, seventy feet wide, and eight feet high. The old medieval finances would no longer suffice. Yet any attempt to modernize the monetary system ran up against the Islamic injunction against paying or receiving interest.

  In 1952, when the Saudis created a central bank, they shrank from so labeling it, in order to avoid inflaming the faithful. Instead, they cunningly anointed it the Saudi Arabian Monetary Agency or SAMA, which started out with about $15 million. It issued Saudi gold coins and the kingdom’s first paper money for use by pilgrims to Mecca. This gradually replaced the weighty coin of the realm. But many desert warriors and kingdom retainers preferred solid, precious metals, and King Faisal himself would keep bags of silver in the basement of the Netherlands Trading Society.

  Morgan Guaranty helped reform Saudi finance through a remarkable man named Anwar Ali, a Pakistani who first went to Saudi Arabia on a two-week tour of duty as head of the IMF’s Middle East department. In 1958, the Saudis drafted him to be SAMA’s governor. His mission was to straighten out the kingdom’s finances, then in critical disarray as a result of corruption, inflation, and extravagant spending. (The Saudi royal palace had the world’s second largest air-conditioning systern after that of the Pentagon.) Ali was gentle and scholarly, a devout Muslim in silver-rimmed glasses and urbane Western suits. He became personal financial adviser to King Faisal. As SAMA governor, he commanded more petrodollars than anyone on earth, more gold than Midas. As journalist Tad Szulc wrote in 1974, “Not many kings and presidents held such personal power.”3 With nice semantic juggling, he turned interest into return on investment, permitting SAMA to amass a modern securities portfolio without offending Allah. “One of the first things Anwar told me about the messy finances he faced was that he had discovered to his dismay that many Saudi accounts in New York were not drawing any interest,” recalled William D. Toomey, then with the U.S. embassy in Saudi Arabia. “He found it touching that the banks were so sensitive to the Saudis’ religious scruples against acceptance of interest.”4

  To map portfolio strategy, Ali recruited a tiny group of Western bankers, sometimes called the White Fathers or the Three Wise Men in this myth-shrouded operation. Among them was the tall, beetle-browed John M. Meyer, Jr., then head of Morgan’s International Division and later chairman. Ali favored such conservative investments as Treasury securities, and Meyer was just the old-school type to appeal to him. (Inside the bank, he was nicknamed Moody Meyer because he remembered in excruciating detail Moody’s entry on every security, down to the smallest indenture.) Meyer was also secretive, inscrutable, and trusted for his plain truthfulness. He, in turn, adm
ired Ali’s incorruptibility in a land rife with corruption. (Harold Anderson’s assistant, John Bochow, would tell colleagues sarcastically, “Never do business in a country where they don’t wear overcoats part of the year.”) Diverting SAMA deposits to Morgan Guaranty, Ali made it the major Saudi depository. The bank, in turn, hired Ali’s son Pasha, a Yale graduate.

  For several years, Morgan Guaranty provided SAMA with investment counseling. In the 1960s, however, the American bank became a casualty of its own success. As government adviser, it couldn’t solicit Saudi business without encountering a conflict of interest. Morgans needed to open some breathing space between itself and the Saudis. “You couldn’t have advisers in a government agency and deal with it at the same time,” explained an ex-Morgan executive. So Morgans bowed out and brought in White, Weld of New York and Baring Brothers and Richard Fleming of London.

  When the petrodollar gusher erupted, Morgan Guaranty was beautifully positioned. It could pose as protector of the defenseless Saudis against rapacious, self-serving bankers. Recognizing a need for new Saudi financial expertise, Ali toyed with the idea of an international merchant bank. In 1973, SAMA still operated out of a ramshackle building near the Riyadh airport and lacked telex machines. It was moving tens of billions of dollars in deposits around the world with a slim staff of only ten professionals.

  At a 1973 IMF meeting in Nairobi, Meyer, Walter Page, and Lew Preston cornered Ali with a plan for a London-based Saudi merchant bank to be the kingdom’s Euromarket outlet. Page recalled, “We told him, ‘You have to have a window on the world of finance. You have to invest in the right way and keep current with what’s going on in the world.’ ”5 The Eurodollar market was then moving into high gear in London, and the timing seemed auspicious.

  At first, the Saudis wanted to share this largesse in a consortium arrangement with their five principal bankers in Europe and Japan. Instead, Morgans deprecated the voguish consortium concept. “We told the Saudis that they had to tie someone with a bigger share to make it work,” said Page.6 And who, pray, would that responsible party be? When the Saudi International Bank was announced in 1975, SAMA owned 50 percent and Morgan Guaranty 20 percent, with 5-percent shares distributed to other banks. Edgar Felton of Morgans was dispatched to London to manage the new bank. This seemed an inimitable coup for Morgan Guaranty—a partnership with the Saudi central bank.

  News of the SIB deal, secretly crafted by Morgan Guaranty, dealt the coup de grace to the special relationship with Morgan Stanley. These were the waning days of the Paris partnership, and Morgan Stanley, learning the news only shortly before its public announcement, was stunned. A SAMA board member, Ali Alireza, told his nephew Hisham, then at Morgan Stanley, about the deal. The firm couldn’t believe its total ignorance of the negotiations. According to a former Morgan Stanley partner, “It was a big disappointment to Morgan Stanley and Morgan Grenfell. The lure of the vast Saudi Arabian fortune and all the money to be made was too much for Morgan Guaranty. There wasn’t an alliance any longer. Morgan Guaranty had clearly made its mind up to go its own way at the Bermuda meeting.” A former Morgan Guaranty official concurs: “When the petrodollars came along, we no longer needed Morgan Stanley.”

  The Saudi International Bank was a fertile source of fantasies at 23 Wall. Some thought the Saudis might funnel all their export-import financing through the bank; others thought the SIB might have a big account at 23 Wall. The most specific expectation was that the SIB would train Saudi Arabia’s future financial elite, allowing Morgans to seed loyal people throughout the Saudi power hierarchy. The country desperately needed a stratum of competent financiers, and the SIB promised to deliver them. The House of Morgan thus looked to be the one bank that would profit from a stress on Saudiizing Saudi finance.

  In practice, the SIB never retained the rich young Saudis sent to train there. The explosion of oil prices in late 1973 and early 1974 put too much wealth at the disposal of young Saudis; business opportunities at home beckoned. These Bedouin Arabs were also too attached to culture and family to remain in London for an extended period. “There were never enough Saudis,” said one Morgan person. “They all wanted to make their name in Saudi Arabia or peddle influence. Banking was too boring. We ended up dealing with the technocrats, not the royal family.” Some Morgan people argue that the Saudi royal family never put its full weight and prestige behind the bank. It took small pieces of sovereign loans but never really blossomed. So its main utility to 23 Wall was simply in preserving the SAMA relationship.

  Morgan Guaranty was protective of Saudi Arabia in U.S. politics. In early 1975, Senator Frank Church tried to extract figures on petrodollar deposits. He feared that by threatening to pull out their short-term deposits, the Arabs could blackmail the U.S. government. Morgans and other banks wouldn’t divulge the information. Morgan chairman Ellmore Patterson declared: “Much of the information you request would involve a breach of our obligation to keep confidential the affairs of particular clients.” Morgans was petrified that the Swiss banks would steal away the deposits. Fed chairman Arthur Burns brokered a deal with the banks, releasing aggregate deposit figures for Middle East states. Of $14.5 billion in deposits by the OPEC states, 78 percent resided in six banks—Morgan Guaranty, Bank of America, Citibank, Chase, Manufacturers Hanover, and Chemical.

  Senator Church proved correct in worrying that petrodollars would enlist the political allegiance of bankers in disturbing ways. The sheiks wanted to use letters of credit as a way of enforcing compliance with the Arab boycott of Israel. Under this arrangement, banks had to certify that goods being exported to the Middle East didn’t originate in Israel or with blacklisted American companies, didn’t bear the Star of David, and wouldn’t travel aboard Israeli planes or ships. In 1976, the American Jewish Congress singled out Morgan Guaranty and Citibank for loyally executing this dirty work and cited their “pivotal role in the implementation of the Arab boycott.”7 Morgan Guaranty executed 824 letters of credit including the language of the boycott, although they protested and successfully expunged the offensive language in two dozen cases. While some banks welcomed tough anti-boycott legislation, Chemical Bank and Morgans testified against it; it was finally enacted in 1977.

  As a general rule, the postwar Morgan bank had avoided the sort of political lobbying or proselytizing for foreign governments in which Tom Lamont had specialized. Yet in the case of the Saudis, the bank seemed to hark back to the old days. Along with Bechtel, GM, GE, Ford Motor, and the oil companies, Morgan Guaranty contributed to Georgetown University’s Center for Contemporary Arab Studies. “Violent criticism of Israel and American support for Israel are the single most dominant themes of the center’s extremely active program,” explained one observer.8 In 1980, the august Morgans also made an uncharacteristic foray into public television, after the broadcast of a British television movie, Death of a Princess. This controversial documentary told the story of a Saudi prince who ordered the execution of his own granddaughter after she balked at an arranged marriage. The woman was shot while the husband she had chosen instead watched; he was then beheaded. The Saudis were outraged, and the State Department tried to mollify them. So Morgans joined with Texas Instruments, the Harris Corporation, and Ford Motor to sponsor a glossy, benign three-part series on Saudi Arabia designed to counteract the movie.9

  UNLIKE Morgan Guaranty, Morgan Stanley had no experience in the Middle East. In its clumsy, often farcical rush to woo Arabs, it ended up in bed with the shady Adnan Khashoggi, then commonly billed as the world’s richest businessman. The son of a court physician to King Saud, Khashoggi brokered billions of dollars in arms deals with Saudi Arabia and skimmed off fees from over three-quarters of all defense contracts. He kept palatial homes in ten cities, had his own DC-8 and a yacht fitted with gold fixtures. In 1974, the Saudi ambassador to the U.N. steered Khashoggi to Morgan Stanley. Allegedly worried about a two-tier Arab world in which Saudi sheiks drove Cadillacs while the masses starved, Khashoggi told the Saudi royal fa
mily that they couldn’t live so luxuriously while the Sudan lay poverty stricken. The conservative oil states feared Sudan’s flirtation with socialism. To correct this, Khashoggi wanted to introduce agribusiness into the region. With the blessings of Egyptian president Anwar Sadat, he planned to create a seventeen-thousand-acre dairy farm near the Suez Canal and a millionacre cattle ranch near the Blue Nile in Sudan. Needing the appropriate technology, Khashoggi eyed an American company called Arizona-Colorado Land and Cattle, which had huge property tracts and cattle herds out West. But the company wouldn’t sell until Morgan Stanley came in and negotiated a $9-million stake for him.

  In pursuing his vision, Khashoggi was often accompanied by Jan Stenbeck, a handsome blond bachelor from one of Sweden’s richest families who was affiliated with Morgan Stanley. Stenbeck seemed to thrive on intrigue and entertained friends with stories about sitting on the tarmac at Khartoum with Sudan’s president while the sand swirled around them. Khashoggi would spout a thousand inventive ideas about irrigation and agricultural development but then quickly lose interest and turn to other matters. Mostly he delighted in playing pranks on Stenbeck. Once arriving late at a Cairo hotel for a rendezvous with the Arab, an exhausted Stenbeck told the desk clerk not to disturb him with phone calls. After midnight, when Khashoggi arrived, he was told of Stenbeck’s instructions, which suggested to him a practical joke. Mimicking an operator’s voice, he dialed the sleeping Stenbeck’s room and said his Morgan Stanley boss would soon come on the line from New York. As Stenbeck fought to stay awake, Khashoggi enjoyed his dinner. Periodically, he would pick up the phone to reiterate that Stenbeck’s boss would soon be on the line and he must hold on. Stenbeck held on in desperation until he finally succumbed to sleep.