All the Presidents' Bankers (58 page)

—Jimmy Carter, “Crisis of Confidence” speech, July 15, 1979

W
HEN
J
IMMY
C
ARTER TOOK OFFICE ON
J
ANUARY 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.”
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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.
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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.)
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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.”
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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.
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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.”
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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 anticipation 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.
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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.”
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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.

Rockefeller remained committed to this policy, not only as a self-appointed ambassador to the world but also as chairman of a major private US bank that facilitated important international financial transactions. After he returned from a short Middle East trip on March 5, 1978, National Security Council head Zbigniew Brzezinski recommended Carter speak with Rockefeller for intel. “David has been helpful to us on a number of issues,” Brzezinski said, “and this would seem to be a useful opportunity for a meeting.”
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Chase continued to profit from its earlier ventures into the Middle East, including from Iranian monies. By late 1978, the bank’s Iranian deposits exceeded $1 billion. In addition, Chase had led $1.7 billion of syndicated loans for Iran to fund large public sector projects.

Chase International Investment Corporation, which had been established by John McCloy in the 1950s, had maintained several long-standing joint ventures in Iran. According to McCloy, the Shah kept $2.5 billion of his personal wealth at an account with Chase, as did his private family trust.
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(Rockefeller denied the Shah was a Chase customer, and said he kept most of his money in Switzerland.)
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From a national standpoint, Iran kept $6 billion on deposit with Chase.
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The amount, as Rockefeller would often point out later, was not much relative to Chase’s overall deposit base. However, in the game of global finance, it is not always size that matters but position and the opportunities that come with the deposit.

By late 1978, Rockefeller’s relationship with the Shah was so well known within the Carter administration that the White House decided to contact him about a possible visit to Iran on which he could “talk to the Shah about the political and financial situation” there.
¹³
Iran was undergoing a severe economic crisis amid growing revolutionary tensions on the streets and workplaces. From late 1978 through March 1979 oil production for oil exports dropped from 5.5 million barrels a day to zero, and twenty-seven thousand workers within the oil industry lost their jobs. The Carter administration, facing the “petro-pinch,” as
Time
magazine called it, feared that the situation could threaten Iran’s alliance with the United States, as well as with other countries in the region. With his close ties to the Shah, Rockefeller could be useful to them as a stabilizing force. He could gather intelligence for the administration while reassuring the Shah about US backing for him.

But Rockefeller didn’t stop by Iran or the Middle East during the tension-lined days of late 1978. Instead, he spent the last five weeks of 1978 traveling across Europe and Asia in his hybrid capacity as a representative of the Treasury and State Departments. Just before Christmas, he returned to the United States and offered Carter his impressions of the international views on the US dollar and Carter’s anti-inflation policies.

“I have had an opportunity to visit five countries in Asia, including Japan and Australia, and three countries in Europe, including the UK, the USSR and West Germany,” he told Carter. “In each case, I have met with high government officials, as well as bankers and businessmen, and I also held press conferences.”

He assured Carter, “I did my best at private, as well as public, meetings to express my conviction that you and the members of your Administration are deeply concerned about inflation and the weakness of the dollar . . . and to indicate that, in my judgment, the measures which you announced . . . were the right steps.”
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Flirting with Bankruptcy

Part of the reason Rockefeller and other bankers were spending extra time abroad was to unearth profitable opportunities to offset the brewing economic instability in the United States. By early 1979, US inflation was rising, the dollar was falling, and gas prices and unemployment were escalating.

American corporations were flirting with bankruptcy due to increasingly expensive debt, lack of access to private loans, and lower demand for their products. The rest of the population was feeling the squeeze more acutely. On January 20, 1979, domestic policy adviser Stuart Eizenstat was worried about a full-scale corporate meltdown. He informed Carter that the nation’s major corporations were bombarding the government with loan guarantee requests to ensure their survival.

The largest requests emanated from the auto industry, specifically American Motors Corporation and Chrysler Corporation. Chrysler needed $1.8 billion over the next four years to stay afloat. Despite the assistance that the government had provided to Penn Central and Lockheed (and their bankers) a few years earlier, Eizenstat wanted to restrict government bailouts. His task force recommended limiting loan guarantees to $50 million per firm.
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But the companies and their bankers pressed for more. (In August 1979, Treasury Secretary G. William Miller proposed $1.5 billion in guaranteed loans. On December 20, 1979, Congress ratified the Chrysler Corporation Loan Guarantee Act, which Carter subsequently signed into law.)

As the broader hardships of tighter credit befell the population, Wriston’s fight for deregulation remained on point. His suggested remedy was to provide citizens with higher interest rates for their savings accounts, which Citibank and other commercial banks were still prohibited from doing because of Regulation Q restrictions.

The administration decided to take the bankers’ side. On May 23, an enthusiastic Wriston wrote Carter’s secretary, Anne Wexler, “I was delighted to read in the paper about the President’s program to raise the ceilings on interest rates. . . . This is a program, which has our wholehearted support.” Wriston cemented his push by also meeting with Schultze on the topic.
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Inflation served as a potent reason for deregulation.