THIS IS A FULL REPORT OF A SECRET BETWEEN AMERICA AND SAUDI ARABIAN
The Untold Story behind
Saudi Arabia’s 41-Year U.S. Debt Secret
How a legendary bond trader from Salomon Brothers brokered a
do-or-die deal that reshaped U.S.-Saudi relations for generations.
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President Nixon walks with Saudi King Faisal in Saudi Arabia in June 1974. |
It was July 1974. A steady predawn
drizzle had given way to overcast skies when William Simon, newly appointed
U.S. Treasury secretary, and his deputy, Gerry Parsky, stepped onto an 8 a.m.
flight from Andrews Air Force Base. On board, the mood was tense. That year,
the oil crisis had hit home. An embargo by OPEC’s Arab nations—payback for U.S.
military aid to the Israelis during the Yom Kippur War—quadrupled oil prices.
Inflation soared, the stock market crashed, and the U.S. economy was in a
tailspin.
Officially, Simon’s two-week trip was
billed as a tour of economic diplomacy across Europe and the Middle East, full
of the customary meet-and-greets and evening banquets. But the real mission,
kept in strict confidence within President Richard Nixon’s inner circle, would
take place during a four-day layover in the coastal city of Jeddah, Saudi
Arabia.
The goal: neutralize crude oil as an
economic weapon and find a way to persuade a hostile kingdom to finance
America’s widening deficit with its newfound petrodollar wealth. And according
to Parsky, Nixon made clear there was simply no coming back empty-handed.
Failure would not only jeopardize America’s financial health but could also
give the Soviet Union an opening to make further inroads into the Arab world.
It “wasn’t a question of whether it
could be done or it couldn’t be done,” said Parsky, 73, one of the few
officials with Simon during the Saudi talks.
Treasury Secretary William Simon,
left, sits with Nancy Kissinger and Secretary of State Henry Kissinger as they
listen to former President Nixon talk to his staff prior to leaving the White
House for the last time, August 9, 1974.
Treasury Secretary William Simon,
left, sits with Nancy Kissinger and Secretary of State Henry Kissinger as they
listen to former President Nixon talk to his staff prior to leaving the White
House for the last time, August 9, 1974.
At first blush, Simon, who had just
done a stint as Nixon’s energy czar, seemed ill-suited for such delicate
diplomacy. Before being tapped by Nixon, the chain-smoking New Jersey native
ran the vaunted Treasuries desk at Salomon Brothers. To career bureaucrats, the
brash Wall Street bond trader—who once compared himself to Genghis Khan—had a
temper and an outsize ego that was painfully out of step in Washington. Just a
week before setting foot in Saudi Arabia, Simon publicly lambasted the Shah of
Iran, a close regional ally at the time, calling him a “nut.”
But Simon, better than anyone else,
understood the appeal of U.S. government debt and how to sell the Saudis on the
idea that America was the safest place to park their petrodollars. With that
knowledge, the administration hatched an unprecedented do-or-die plan that
would come to influence just about every aspect of U.S.-Saudi relations over
the next four decades (Simon died in 2000 at the age of 72).
The basic framework was strikingly
simple. The U.S. would buy oil from Saudi Arabia and provide the kingdom
military aid and equipment. In return, the Saudis would plow billions of their
petrodollar revenue back into Treasuries and finance America’s spending.
It took several discreet follow-up
meetings to iron out all the details, Parsky said. But at the end of months of
negotiations, there remained one small, yet crucial, catch: King Faisal bin
Abdulaziz Al Saud demanded the country’s Treasury purchases stay “strictly
secret,” according to a diplomatic cable obtained by Bloomberg from the
National Archives database.
With a handful of Treasury and
Federal Reserve officials, the secret was kept for more than four decades—until
now. In response to a Freedom-of-Information-Act request submitted by Bloomberg
News, the Treasury broke out Saudi Arabia’s holdings for the first time this
month after “concluding that it was consistent with transparency and the law to
disclose the data,” according to spokeswoman Whitney Smith. The $117 billion
trove makes the kingdom one of America’s largest foreign creditors.
Yet in many ways, the information has
raised more questions than it has answered. A former Treasury official, who
specialized in central bank reserves and asked not to be identified, says the
official figure vastly understates Saudi Arabia’s investments in U.S.
government debt, which may be double or more.
The current tally represents just 20
percent of its $587 billion of foreign reserves, well below the two-thirds that
central banks typically keep in dollar assets. Some analysts speculate the
kingdom may be masking its U.S. debt holdings by accumulating Treasuries
through offshore financial centers, which show up in the data of other
countries.
Drivers line up for fuel at a U.S.
gas station during the worldwide fuel shortages caused by the oil embargo
imposed by OPEC, circa 1974.
Drivers line up for fuel at a U.S.
gas station during the worldwide fuel shortages caused by the oil embargo
imposed by OPEC, circa 1974.
Exactly how much of America’s debt
Saudi Arabia actually owns is something that matters more now than ever before.
While oil’s collapse has deepened
concern that Saudi Arabia will need to liquidate its Treasuries to raise cash,
a more troubling worry has also emerged: the specter of the kingdom using its
outsize position in the world’s most important debt market as a political
weapon, much as it did with oil in the 1970s.
In April, Saudi Arabia warned it
would start selling as much as $750 billion in Treasuries and other assets if
Congress passes a bill allowing the kingdom to be held liable in U.S. courts
for the Sept. 11 terrorist attacks, according to the New York Times. The threat
comes amid a renewed push by presidential candidates and legislators from both
the Democratic and Republican parties to declassify a 28-page section of a 2004
U.S. government report that is believed to detail possible Saudi connections to
the attacks. The bill, which passed the Senate on May 17, is now in the House
of Representatives.
Saudi Arabia’s Finance Ministry
declined to comment on the potential selling of Treasuries in response. The
Saudi Arabian Monetary Agency didn’t immediately answer requests for details on
the total size of its U.S. government debt holdings.
“Let’s not assume they’re bluffing”
about threatening to retaliate, said Marc Chandler, the global head of currency
strategy at Brown Brothers Harriman. “The Saudis are under a lot of pressure.
I’d say that we don’t do ourselves justice if we underestimate our liabilities”
to big holders.
What's the Untold Story of Saudi
Arabia's Debt Secret?
President Nixon shakes hands with
Saudi King Faisal in June, 1974, in Saudi Arabia.
President Nixon shakes hands with
Saudi King Faisal in June, 1974, in Saudi Arabia.
Photographer: Dirck Halstead/Liaison
via AP Photo
Saudi Arabia, which has long provided
free health care, gasoline subsidies, and routine pay raises to its citizens
with its petroleum wealth, already faces a brutal fiscal crisis.
In the past year alone, the monetary
authority has burned through $111 billion of reserves to plug its biggest
budget deficit in a quarter-century, pay for costly wars to defeat the Islamic
State, and wage proxy campaigns against Iran. Though oil has stabilized at
about $50 a barrel (from less than $30 earlier this year), it’s still far below
the heady years of $100-a-barrel crude.
Saudi Arabia’s situation has become
so acute the kingdom is now selling a piece of its crown jewel—state oil
company Saudi Aramco.
What’s more, the commitment to the
decades-old policy of “interdependence” between the U.S. and Saudi Arabia,
which arose from Simon’s debt deal and ultimately bound together two nations
that share few common values, is showing signs of fraying. America has taken
tentative steps toward a rapprochement with Iran, highlighted by President
Barack Obama’s landmark nuclear deal last year. The U.S. shale boom has also
made America far less reliant on Saudi oil.
“Buying bonds and all that was a
strategy to recycle petrodollars back into the U.S.,” said David Ottaway, a
Middle East fellow at the Woodrow Wilson International Center in Washington.
But politically, “it’s always been an ambiguous, constrained relationship.”
Yet back in 1974, forging that
relationship (and the secrecy that it required) was a no-brainer, according to
Parsky, who is now chairman of Aurora Capital Group, a private equity firm in
Los Angeles. Many of America’s allies, including the U.K. and Japan, were also
deeply dependent on Saudi oil and quietly vying to get the kingdom to reinvest
money back into their own economies.
“Everyone—in the U.S., France,
Britain, Japan—was trying to get their fingers in the Saudis’ pockets,” said
Gordon S. Brown, an economic officer with the State Department at the U.S.
embassy in Riyadh from 1976 to 1978.
For the Saudis, politics played a big
role in their insistence that all Treasury investments remain anonymous.
Tensions still flared 10 months after
the Yom Kippur War, and throughout the Arab world, there was plenty of
animosity toward the U.S. for its support of Israel. According to diplomatic
cables, King Faisal’s biggest fear was the perception Saudi oil money would,
“directly or indirectly,” end up in the hands of its biggest enemy in the form
of additional U.S. assistance.
Treasury officials solved the dilemma
by letting the Saudis in through the back door. In the first of many special
arrangements, the U.S. allowed Saudi Arabia to bypass the normal competitive
bidding process for buying Treasuries by creating “add-ons.” Those sales, which
were excluded from the official auction totals, hid all traces of Saudi
Arabia’s presence in the U.S. government debt market.
“When I arrived at the embassy, I was
told by people there that this is Treasury’s business,” Brown said. “It was all
handled very privately.”
By 1977, Saudi Arabia had accumulated
about 20 percent of all Treasuries held abroad, according to The Hidden Hand of
American Hegemony: Petrodollar Recycling and International Markets by Columbia
University’s David Spiro.
Another exception was carved out for
Saudi Arabia when the Treasury started releasing monthly country-by-country
breakdowns of U.S. debt ownership. Instead of disclosing Saudi Arabia’s
holdings, the Treasury grouped them with 14 other nations, such as Kuwait, the
United Arab Emirates and Nigeria, under the generic heading “oil exporters”—a
practice that continued for 41 years.
The system came with its share of
headaches. After the Treasury’s add-on facility was opened to other central
banks, erratic and unpublicized foreign demand threatened to push the U.S. over
its debt limit on several occasions.
An internal memo, dated October 1976,
detailed how the U.S. inadvertently raised far more than the $800 million it
intended to borrow at auction. At the time, two unidentified central banks used
add-ons to buy an additional $400 million of Treasuries each. In the end, one
bank was awarded its portion a day late to keep the U.S. from exceeding the
limit.
Most of these maneuvers and hiccups
were swept under the rug, and top Treasury officials went to great lengths to
preserve the status quo and protect their Middle East allies as scrutiny of
America’s biggest creditors increased.
Over the years, the Treasury
repeatedly turned to the International Investment and Trade in Services Survey
Act of 1976—which shields individuals in countries where Treasuries are
narrowly held—as its first line of defense.
The strategy continued even after the
Government Accountability Office, in a 1979 investigation, found “no
statistical or legal basis” for the blackout. The GAO didn’t have power to
force the Treasury to turn over the data, but it concluded the U.S. “made
special commitments of financial confidentiality to Saudi Arabia” and possibly
other OPEC nations.
Simon, who had by then returned to
Wall Street, acknowledged in congressional testimony that “regional reporting
was the only way in which Saudi Arabia would agree” to invest using the add-on
system.
“It was clear the Treasury people
weren’t going to cooperate at all,” said Stephen McSpadden, a former counsel to
the congressional subcommittee that pressed for the GAO inquiries. “I’d been at
the subcommittee for 17 years, and I’d never seen anything like that.”
Today, Parsky says the secret
arrangement with the Saudis should have been dismantled years ago and was
surprised the Treasury kept it in place for so long. But even so, he has no
regrets.
Doing the deal “was a positive for
America.”
Source:Bloomberg
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