Number of words: 3,070<\/p>\n\n\n\n
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\u2019s Arab nations\u2014payback for U.S. military aid to the Israelis during the Yom Kippur War\u2014quadrupled oil prices. Inflation soared, the stock market crashed, and the U.S. economy was in a tailspin. Officially, Simon\u2019s 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\u2019s inner circle, would take place during a four-day layover in the coastal city of Jeddah, Saudi Arabia.<\/p>\n\n\n\n
The goal: neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America\u2019s 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\u2019s financial health but could also give the Soviet Union an opening to make further inroads into the Arab world.<\/p>\n\n\n\n
It \u201cwasn\u2019t a question of whether it could be done or it couldn\u2019t be done,\u201d said Parsky, 73, one of the few officials with Simon during the Saudi talks.<\/p>\n\n\n\n
At first blush, Simon, who had just done a stint as Nixon\u2019s 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\u2014who once compared himself to Genghis Khan\u2014had 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 \u201cnut.\u201d<\/p>\n\n\n\n
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).<\/p>\n\n\n\n
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\u2019s spending.<\/p>\n\n\n\n
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\u2019s Treasury purchases stay \u201cstrictly secret,\u201d according to a diplomatic cable obtained by Bloomberg from the National Archives database.<\/p>\n\n\n\n
Where Next for Saudi Arabia?<\/a><\/p>\n\n\n\n With a handful of Treasury and Federal Reserve officials, the secret was kept for more than four decades\u2014until now. In response to a Freedom-of-Information-Act request submitted by Bloomberg News, the Treasury broke out Saudi Arabia\u2019s holdings for the first time this month after \u201cconcluding that it was consistent with transparency and the law to disclose the data,\u201d according to spokeswoman Whitney Smith. The $117 billion trove makes the kingdom one of America\u2019s largest foreign creditors.<\/p>\n\n\n\n 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\u2019s investments in U.S. government debt, which may be double or more.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Exactly how much of America\u2019s debt Saudi Arabia actually owns is something that matters more now than ever before.<\/p>\n\n\n\n While oil\u2019s 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\u2019s most important debt market as a political weapon, much as it did with oil in the 1970s.<\/p>\n\n\n\n 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<\/a> to the New York Times<\/em>. 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.<\/p>\n\n\n\n Saudi Arabia\u2019s Finance Ministry declined to comment on the potential selling of Treasuries in response. The Saudi Arabian Monetary Agency didn\u2019t immediately answer requests for details on the total size of its U.S. government debt holdings.<\/p>\n\n\n\n \u201cLet\u2019s not assume they\u2019re bluffing\u201d about threatening to retaliate, said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman. \u201cThe Saudis are under a lot of pressure. I\u2019d say that we don\u2019t do ourselves justice if we underestimate our liabilities\u201d to big holders.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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\u2019s still far below the heady years of $100-a-barrel crude.<\/p>\n\n\n\n Saudi Arabia\u2019s situation has become so acute the kingdom is now selling a piece of its crown jewel\u2014state oil company Saudi Aramco.<\/p>\n\n\n\n What\u2019s more, the commitment to the decades-old policy of \u201cinterdependence\u201d between the U.S. and Saudi Arabia, which arose from Simon\u2019s 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\u2019s landmark nuclear deal last year. The U.S. shale boom has also made America far less reliant on Saudi oil.<\/p>\n\n\n\n \u201cBuying bonds and all that was a strategy to recycle petrodollars back into the U.S.,\u201d said David Ottaway, a Middle East fellow at the Woodrow Wilson International Center in Washington. But politically, \u201cit\u2019s always been an ambiguous, constrained relationship.\u201d<\/p>\n\n\n\n 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\u2019s 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.<\/p>\n\n\n\n \u201cEveryone\u2014in the U.S., France, Britain, Japan\u2014was trying to get their fingers in the Saudis\u2019 pockets,\u201d said Gordon S. Brown, an economic officer with the State Department at the U.S. embassy in Riyadh from 1976 to 1978.<\/p>\n\n\n\n For the Saudis, politics played a big role in their insistence that all Treasury investments remain anonymous.<\/p>\n\n\n\n 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\u2019s biggest fear was the perception Saudi oil money would, \u201cdirectly or indirectly,\u201d end up in the hands of its biggest enemy in the form of additional U.S. assistance.<\/p>\n\n\n\n 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 \u201cadd-ons.\u201d Those sales, which were excluded from the official auction totals, hid all traces of Saudi Arabia\u2019s presence in the U.S. government debt market.<\/p>\n\n\n\n \u201cWhen I arrived at the embassy, I was told by people there that this is Treasury\u2019s business,\u201d Brown said. \u201cIt was all handled very privately.\u201d<\/p>\n\n\n\n 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<\/em> by Columbia University\u2019s David Spiro.<\/p>\n\n\n\n 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\u2019s holdings, the Treasury grouped them with 14 other nations, such as Kuwait, the United Arab Emirates and Nigeria, under the generic heading \u201coil exporters\u201d\u2014a practice that continued for 41 years.<\/p>\n\n\n\n The system came with its share of headaches. After the Treasury\u2019s 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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\u2019s biggest creditors increased.<\/p>\n\n\n\n Over the years, the Treasury repeatedly turned to the International Investment and Trade in Services Survey Act of 1976\u2014which shields individuals in countries where Treasuries are narrowly held\u2014as its first line of defense.<\/p>\n\n\n\n The strategy continued even after the Government Accountability Office, in a 1979 investigation, found \u201cno statistical or legal basis\u201d for the blackout. The GAO didn\u2019t have power to force the Treasury to turn over the data, but it concluded the U.S. \u201cmade special commitments of financial confidentiality to Saudi Arabia\u201d and possibly other OPEC nations.<\/p>\n\n\n\n Simon, who had by then returned to Wall Street, acknowledged in congressional testimony that \u201cregional reporting was the only way in which Saudi Arabia would agree\u201d to invest using the add-on system.<\/p>\n\n\n\n \u201cIt was clear the Treasury people weren\u2019t going to cooperate at all,\u201d said Stephen McSpadden, a former counsel to the congressional subcommittee that pressed for the GAO inquiries. \u201cI\u2019d been at the subcommittee for 17 years, and I\u2019d never seen anything like that.\u201d<\/p>\n\n\n\n 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 \u201cwas a positive for America.\u201d\u2014With assistance from Sangwon Yoon. Saudi Arabia , which has long provided free health care ,gasoline subsides, and routine pay raises to its citizens <\/em>with its petroleum wealth, already faces a brutal fiscal crisis.<\/p>\n\n\n\n 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\u2019s still far below the heady years of $100-a-barrel crude.<\/p>\n\n\n\n Saudi Arabia\u2019s situation has become so acute the kingdom is now selling a piece of its crown jewel\u2014state oil company Saudi Aramco.<\/p>\n\n\n\n What\u2019s more, the commitment to the decades-old policy of \u201cinterdependence\u201d between the U.S. and Saudi Arabia, which arose from Simon\u2019s 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\u2019s landmark nuclear deal last year. The U.S. shale boom has also made America far less reliant on Saudi oil.<\/p>\n\n\n\n \u201cBuying bonds and all that was a strategy to recycle petrodollars back into the U.S.,\u201d said David Ottaway, a Middle East fellow at the Woodrow Wilson International Center in Washington. But politically, \u201cit\u2019s always been an ambiguous, constrained relationship.\u201d<\/p>\n\n\n\n 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\u2019s 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.<\/p>\n\n\n\n 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\u2019s still far below the heady years of $100-a-barrel crude.<\/p>\n\n\n\n Saudi Arabia\u2019s situation has become so acute the kingdom is now selling a piece of its crown jewel\u2014state oil company Saudi Aramco.<\/p>\n\n\n\n What\u2019s more, the commitment to the decades-old policy of \u201cinterdependence\u201d between the U.S. and Saudi Arabia, which arose from Simon\u2019s 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\u2019s landmark nuclear deal last year. The U.S. shale boom has also made America far less reliant on Saudi oil.<\/p>\n\n\n\n \u201cBuying bonds and all that was a strategy to recycle petrodollars back into the U.S.,\u201d said David Ottaway, a Middle East fellow at the Woodrow Wilson International Center in Washington. But politically, \u201cit\u2019s always been an ambiguous, constrained relationship.\u201d<\/p>\n\n\n\n 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\u2019s 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.<\/p>\n\n\n\n \u201cEveryone\u2014in the U.S., France, Britain, Japan\u2014was trying to get their fingers in the Saudis\u2019 pockets,\u201d said Gordon S. Brown, an economic officer with the State Department at the U.S. embassy in Riyadh from 1976 to 1978.<\/p>\n\n\n\n For the Saudis, politics played a big role in their insistence that all Treasury investments remain anonymous.<\/p>\n\n\n\n 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\u2019s biggest fear was the perception Saudi oil money would, \u201cdirectly or indirectly,\u201d end up in the hands of its biggest enemy in the form of additional U.S. assistance.<\/p>\n\n\n\n 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 \u201cadd-ons.\u201d Those sales, which were excluded from the official auction totals, hid all traces of Saudi Arabia\u2019s presence in the U.S. government debt market.<\/p>\n\n\n\n \u201cWhen I arrived at the embassy, I was told by people there that this is Treasury\u2019s business,\u201d Brown said. \u201cIt was all handled very privately.\u201d<\/p>\n\n\n\n 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<\/em> by Columbia University\u2019s David Spiro.<\/p>\n\n\n\n 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\u2019s holdings, the Treasury grouped them with 14 other nations, such as Kuwait, the United Arab Emirates and Nigeria, under the generic heading \u201coil exporters\u201d\u2014a practice that continued for 41 years.<\/p>\n\n\n\n The system came with its share of headaches. After the Treasury\u2019s 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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\u2019s biggest creditors increased.<\/p>\n\n\n\n Over the years, the Treasury repeatedly turned to the International Investment and Trade in Services Survey Act of 1976\u2014which shields individuals in countries where Treasuries are narrowly held\u2014as its first line of defense.<\/p>\n\n\n\n The strategy continued even after the Government Accountability Office, in a 1979 investigation, found \u201cno statistical or legal basis\u201d for the blackout. The GAO didn\u2019t have power to force the Treasury to turn over the data, but it concluded the U.S. \u201cmade special commitments of financial confidentiality to Saudi Arabia\u201d and possibly other OPEC nations.<\/p>\n\n\n\n Simon, who had by then returned to Wall Street, acknowledged in congressional testimony that \u201cregional reporting was the only way in which Saudi Arabia would agree\u201d to invest using the add-on system.<\/p>\n\n\n\n \u201cIt was clear the Treasury people weren\u2019t going to cooperate at all,\u201d said Stephen McSpadden, a former counsel to the congressional subcommittee that pressed for the GAO inquiries. \u201cI\u2019d been at the subcommittee for 17 years, and I\u2019d never seen anything like that.\u201d<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Doing the deal \u201cwas a positive for America.\u201d<\/p>\n\n\n\n \u2014With assistance from Sangwon Yoon.<\/em><\/p>\n\n\n\n Excerpted from <\/em>https:\/\/www.bloomberg.com\/news\/features\/2016-05-30\/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret<\/em><\/a><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"