All the Presidents' Bankers (61 page)

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 render 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

T
HE
E
ARLY TO
M
ID
-1980
S
: F
REE
-M
ARKET
R
ULES
, B
ANKERS
C
OMPETE

“If you say you’re a capitalist, then the next thing you must say is, ‘I compete.’”

—Donald Regan, Treasury Secretary for Ronald Reagan
¹

T
HE 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.

According to Reagan’s former assistant secretary of the Treasury for economic policy, Paul Craig Roberts, “The Reagan administration had no banking agenda.” He said that “Reagan wanted to renew the economy so that pressure could be put on the Soviets to end the Cold War. Those were Reagan’s two main goals.”
²

Wall Street commercial and investment banks and insurance companies were angling to obliterate the restrictions of Glass-Steagall and the Bank Holding Company Act so that they could acquire one another’s business, while relying on Glass-Steagall borders as lines of defense around the services they already provided to keep their domestic competitors out. The S&Ls and smaller financial firms sprinkled across the United States were battling the big commercial banks for depositors and borrowers and the right to invest in riskier assets. These bit players would prove no match for the commercial banks, which would thrive as their little brethren hit a crisis.

Alliances between the powerful bankers and Presidents’ Reagan and Bush would continue, but the relationships would be more perfunctory and less personal than in the past. They would also be less important, increasingly replaced by an implicit understanding that the perspective of free-market capitalism suited both Reagan’s political doctrine and the bankers’ expansionary agenda, and fortified by a growing group of well-paid lobbyists and lawyers working to deregulate policy to suit the bankers’ ambitions. The notion of “free market,” though, was code for freedom to dominate ever more “liberalized” countries from a financial perspective, to amass profits at the expense of the local populations. Global competition, cited as the reason to spread financial capitalism in ever riskier manners, was also a means to persuade Washington to back the bankers in preparing for whatever global atmosphere would follow the end of the Cold War. But just as in military wars, the country with the greatest financial arsenal (a nation of depositors and a government with parallel ideologies to the bankers) would dominate on the world scene.

As global recession loomed, additional clouds gathered on the economic horizon. On the international front, developing countries were treading water beneath waves of bank debt. Ultimately, US bankers would force a government- and multinational-entity-backed bailout of their third world loans. The deal, which brought harsh austerity measures in return for extra financial aid to the regions affected, would save the bankers billions of dollars.

Domestically, a burgeoning S&L bank crisis born of deregulation, fraud, and moves by Wall Street banks eager to “pump and dump” toxic securities into thrifts following Carter’s 1980 “reforms” (along with the ones Reagan offered in 1982) threatened to crush the national economy—battering the real estate market and the population’s confidence in banks, which had taken five decades to rebuild.

Once big banks stopped lending as much to developing countries, a new crop of chairmen reinvigorated their predecessors’ efforts to exploit regulatory loopholes at the state level so they could acquire noncommercial banking businesses as well as deposits across state lines. Rather than stopping them, a group of men within the Reagan administration, led by Vice President George H. W. Bush and his deregulation task force, pressed to convert these loopholes into national policy. They were aided by former Wall Street executives in cabinet roles and in the private sector. Meanwhile, investment and commercial banks fought both against one another and against the New Deal regulations that kept their businesses separated.

Merrill Lynch Chairman Donald Regan Becomes Treasury Secretary

Reagan won the presidency on a tide of campaign promises: ending the hostage crisis, cutting the deficit, reducing the size of government and the amount of regulations, and cutting taxes.
³
Though his participation in the final hostage release negotiations was negligible, to the public it appeared that Reagan had facilitated the release of the hostages on his inauguration day. That provided a shot in the arm of the American body politic.

Reagan and his team wasted no time using the warm feelings of the public to usher through foreign and domestic policies—including the ones dealing with deregulation. Reagan’s unofficial group of advisers, or “kitchen cabinet,” was a cadre of about a dozen free-market-embracing businessmen.
⁴
They had already selected Merrill Lynch chairman Donald Regan to be Treasury secretary in the fall of 1980. Reagan himself hadn’t proactively scouted the man who would run the world’s most powerful treasury. As Reagan later wrote in his autobiography,
An American Life,
“I had appointed Don Sec. of the Treasury on the advice of some of the members of my old kitchen cabinet in California; they called him a wizard on economic matters. [Don did] an outstanding job at the Treasury Department, especially by helping get tax reform off the ground and winning Wall Street support of [my] economic recovery program.” Like President Johnson, Reagan would cut taxes with the support of bankers.

The idea of running the Treasury had never crossed Regan’s mind before Reagan offered him the post. But Regan’s pedigree was unquestionable. A member of the elite Council on Foreign Relations, he graduated from Harvard University in 1940, entered the Marine Corps, and retired after World War II as a lieutenant colonel.

Regan had joined Merrill Lynch in 1946 and steadily rose through its ranks. In 1951 he was appointed to run the scandal-ridden trading department, which handled “10 [percent] of the total volume traded on the New York markets.”
⁵
He replaced John Thompson as chairman when Thompson retired in January 1971.
⁶

In the 1970s Regan’s political activity had been “marginal,” he later noted, consisting of personal donations to Republican candidates and voting in every election. In 1976, he backed Gerald Ford, whose primary opponent was Ronald Reagan. When Reagan campaigned in New York that fall, Regan was invited to meet him at “a small luncheon for Wall Streeters.” Regan’s memories of that first meeting consisted of a joke Reagan made about the pronunciations of their names.

Regan met him again in the spring of 1980, when Reagan was campaigning for the presidential nomination. Bill Rogers, whom Regan had put on the board of Merrill Lynch after Rogers resigned as Nixon’s secretary of state, suggested Regan support Reagan. Shortly thereafter, Regan was invited to a fundraiser at the elite New York City Sky Club. There, Reagan had difficulty remembering Regan, name pronunciation notwithstanding.

In September, once Reagan’s nomination was secured, he revisited New York. Bill Casey, Reagan’s campaign manager, suggested Regan help raise money. Along with John Whitehead, a Goldman Sachs partner who later became deputy secretary of state, Regan organized a $1,000 per plate fundraiser.
⁷

Just before the election, a Wall Streeter in Reagan’s camp informed Regan that his name was on a shortlist of candidates for the Treasury secretary post. Another name was William Simon, who had served as Treasury secretary under Nixon and Ford. Once Simon withdrew, Regan’s name floated to the top, courtesy of Casey. On December 3, 1980, Regan was at home in Colts Neck, New Jersey, when the phone rang.