On September 22, 1973, Joseph Reed and I arrived in Cairo for an appointment with President Anwar Sadat. He wasn’t there. We were told he was at his summer retreat on the Mediterranean, and an Egyptian air force plane would fly us to Alexandria. I had requested the meeting before leaving New York in order to deliver a message from Secretary of State Henry Kissinger, who wanted Sadat to know unofficially that he was eager to explore ways to lessen the tensions between the United States and Egypt.
From Alexandria we were driven west along the old coastal highway to Sadat’s residence near the village of Burg-el-Arab, where he ostensibly had fled the heat of Cairo for the cool breezes of the Mediterranean coast. We were escorted to a small anteroom by an official who told us Sadat was meeting with the Soviet ambassador. Nearly an hour later the ambassador emerged from Sadat’s office, nodded curtly to us, and hurriedly left the building.
During our only previous meeting two years earlier, Sadat had been distant toward me and unable to repress his hostility toward Israel, his disdain for the United States, and his contempt for Henry Kissinger. I braced for more of the same. But he greeted me warmly and seemed calm, relaxed, and very much at peace with himself. Nevertheless, he seemed distracted as I delivered Kissinger’s message. Without any preliminaries he asked, “Mr. Rockefeller, would you be interested in establishing an office of your bank in Egypt?” I was taken totally by surprise. Fifteen years earlier Sadat’s predecessor, Gamal Abdel Nasser, had nationalized not only foreign banks but all Egyptian banks as well. But here was his successor inviting Chase to become—just as we had in Russia and China—the first American financial institution allowed back into the country.
I responded cautiously. I said Chase would be interested in exploring the possibility but that a final decision would have to be based on a careful business analysis. I also reminded Sadat of Chase’s long-standing relationship with Israeli banks and our position as an agent for State of Israel bonds. “Mr. President,” I said, “how would you feel if we opened a branch in Tel Aviv at the same time we open one in Cairo? Would this be acceptable to you?” I readied myself for an angry outburst, but instead Sadat responded with an enigmatic smile and said, “Mr. Rockefeller, it is all a matter of timing.”
Two weeks later I understood what Sadat meant.
We were on our way home from an extensive tour of Africa when the pilot informed us that Egypt had launched a massive air-land assault across the Suez Canal into the Sinai Desert. I thought immediately of our meeting with Sadat and his cryptic remark. I said as much to Joseph, who suggested that perhaps we should have been forewarned by the many warplanes on the tarmac at the Alexandria air base. Obviously, even as he spoke to us that afternoon in Burg-el-Arab, Sadat had been preparing the attack.
AN EARLY WARNING SIGN
A great deal was changing in the United States during the second half of the 1960s: the musical tastes of the young, hairstyles for men, and the length of women’s dresses. Everything but the price of gasoline. Cheap energy, especially gas at about thirty cents a gallon, had become an “entitlement” to most Americans. These halcyon days came to an end in December 1973 when OPEC raised the posted price for Saudi Arabian light crude to $11.65 a barrel.
This fourfold increase in oil prices within a year had little to do with the law of supply and demand. It was the direct result of the unresolved Arab-Israeli dispute and the protracted contest between the oil-producing states of the developing world and the great American and European oil companies as to who would benefit most from the “rents” resulting from the extraction, refining, and marketing of petroleum. Whatever its causes, the increase in the price of petroleum would have a profound economic and psychological impact on the entire world. It would also greatly enhance the role of American commercial banks like Chase that served as depositories for the enormous volume of “petrodollars” generated by these price increases and also became financial intermediaries between the OPEC countries and the oil-importing nations facing an unprecedented “liquidity crisis.”
My first intimation that oil prices were in for a dramatic jump came in Algeria in September 1973. I had stopped in Algiers at the request of President Houari Boumedienne prior to my meeting with Sadat; he wanted to discuss the financing of his country’s enormous petroleum reserves and natural gas fields in the wake of his nationalization of France’s interests in 1971.
Boumedienne was a quixotic character. He had fought for more than a decade in his country’s bloody war of independence and was intensely anti-French, but it was clear that Napoleon was his hero. A very short man, he wore a flowing black cape and was given to lavish gestures that emphasized his sense of grandeur and self-importance. Boumedienne was playing a leading role in the efforts of the nonaligned countries of the third world to forge a “new international economic order” and consistently demanded increases in the price of crude oil. Despite his reputation we spoke pleasantly in French for more than an hour, about the role Chase might play in his country’s economic development.
After meeting with Boumedienne I attended an extravagant luncheon at Chez Madelaine, a superb French restaurant overlooking the sparkling Bay of Algiers. An otherwise pleasant meal with succulent seafood and surprisingly good Algerian wines was marred by the truculent minister of finance, who recited a litany of complaints about the policies of Western corporations and banks, and then proclaimed that those days were over. He promised the price of crude oil would be up to $10 a barrel—a more than 300 percent increase—by the end of the year. Already offended by his manner, I was outraged by the absurdity of his prophesy. Unfortunately, the ominous forecast by this arrogant character turned out to be correct.
OPEC AND THE ARAB OIL EMBARGO
From Algiers I proceeded to my meeting with Anwar Sadat. My conversations in Algeria and Egypt alerted me that something was about to break in the Middle East, but I had no idea what.
When Sadat ordered his army across the Suez Canal on October 5, 1973, he probably knew he would not be able to defeat the Israeli army. While he lost the war, his bold gamble paid off in other ways. First, he created the conditions that allowed him to negotiate with Israel as an equal. Henry Kissinger, recognizing that the balance of power in the region had shifted, began his campaign of “shuttle diplomacy” that would eventually produce cease-fire agreements with Egypt and Syria, and then establish the basis for more comprehensive negotiations between Israel and the other frontline Arab states. And while the landmark peace treaty between Egypt and Israel was not signed until the Carter administration, it was based on the foundation of trust that Henry had so arduously constructed from late 1973 to early 1977.
Sadat’s decision to roll the dice had a second, even more profound consequence: the Arab oil embargo. Following Egypt’s initial military success in the Sinai, the United States had resupplied the beleaguered Israeli forces. This action further inflamed Arab opinion against the United States and led the Arab oil-producing countries to agree to the proposal by the Saudi oil minister, Sheik Ahmed Zaki Yamani, to cut oil production by 5 percent each month until their political objectives—Israeli withdrawal to the borders existing prior to the 1967 war—were accepted.
When President Nixon proposed on October 20 a $2.2 billion military aid package for Israel, the Saudis, soon joined by the other Arab producers, announced a total embargo on oil shipments to the United States. By the end of the year the Algerian finance minister’s prediction had become a reality. A new oil weapon—or, in Henry Kissinger’s words, “a weapon of political blackmail”—had been forged that strengthened the hand of the Arabs in their political struggle against Israel and in their economic contest with the West.
The massive increase in the cost of energy roiled financial markets in Western Europe and throughout the Western Hemisphere, disrupted international patterns of trade, and threw the industrial world into a deep and prolonged recession. In the United States unemployment soared, and the inflationary spiral that had emerged in the late 1960s intensified. By mid-decade �
��stagflation,” rampant inflation combined with sluggish economic growth, had sapped economic growth and eroded income for everyone. Anyone who lived through those days remembers the long lines of cars waiting at service stations and the feeling of almost desperate helplessness that afflicted policy makers.
While it was difficult for us, it was disastrous for nations in the developing world whose fragile economies teetered on the brink of collapse. In many nations, ill-considered “import-substitution” policies made the process of adjustment to higher energy prices almost impossible to accomplish.
The most immediate effect of the oil shock was the surge in the flow of dollars from oil-importing nations into OPEC’s coffers. Between 1973 and 1977 the earnings of the oil-exporting nations expanded 600 percent, to $140 billion. The capital that had fueled economic growth across the globe was now diverted to a few oil-producing states.
Ultimately the adjustment process would require conservation, improved technology to increase energy efficiency, and exploration to find new sources of oil. But all this would take time—in the best of circumstances several years. The crisis confronting the world monetary system was immediate. It was imperative that some way be found to pump that capital back into the oil-consuming nations to “recycle” the petrodollars, or recession and stagnation might turn into a full-blown worldwide depression.
RECYCLING PETRODOLLARS
The task of recycling dollars and maintaining the system of global trade and finance fell to the major international commercial banks, including Chase. The OPEC nations, too, faced a serious problem: how to invest the huge sums they were generating. In the case of the major Middle Eastern countries, their central banks and finance ministries were more than willing to cooperate in the recycling process. Each nation, however, pursued a different course of action.
Saudi Arabia, the world’s largest exporter, placed most of its enormous new revenues with U.S. banks as CDs or in U.S. Treasury bonds. Their cautious policy enabled us to efficiently recycle funds to oil-consuming nations.
The Kuwaitis, less conservative, invested most of their revenues in the U.S. and European money and stock markets, and saw their financial reserves grow proportionately even faster than those of Saudi Arabia. The Shah of Iran dedicated a large portion of his new oil wealth to a visionary plan of internal investment, including economic diversification, defense spending on an enormous scale, the building of a new hydroelectric grid, and the expansion of his nation’s educational system.
Chase’s long-standing relationships with the Saudi Arabian Monetary Agency and the Bank Markazi, Iran’s central bank, gave us ready access to the region’s funds. Our strong position in the Eurocurrency markets, through which much of the surplus was recycled, enabled us to place funds outside of the regulatory restrictions imposed by the Federal Reserve, and was essential in preventing the long-term disruption of capital markets.
We recycled most of the petrodollars as loans to foreign businesses and industries, although in Latin America, Africa, and parts of East Asia most went to state-owned enterprises that dominated those economies. On occasion we lent directly to governments to finance balance-of-payment deficits. One memorable incident occurred in early 1974. Italy faced a multibillion-dollar account deficit and was having trouble financing the purchase of petroleum. In the middle of lunch at the Bank of Italy, Guido Carli, the bank’s governor, asked me for an emergency $250 million loan. I must say I wasn’t in the habit of granting loans of that size over cups of espresso, nor did we encourage loans to governments unless they were tied directly to productive investments. But in this case, because of the urgency of Italy’s situation and Chase’s long-standing relationship with the Bank of Italy, I agreed on the spot to the loan. Chase’s prompt action was hailed in Italy, and, most important, the loan was repaid on schedule.
Chase and the other international banks were able to forestall the breakdown of the global financial system that so many feared. The banks could only manage the process for a time; coordinated action by governments was needed to deal with the fundamental problem. But these failed to materialize, and broader global economic problems ensued.
THE DEBT CRISIS
While most of Chase’s foreign loans had been extended to the industrialized world and the OPEC nations, about one-third went to the developing countries of Latin America. By 1982 the lingering effects of the recession and the impact of the 1979 oil shock initiated a massive withdrawal of liquid capital from many of these countries. First Mexico, then Brazil and many others announced a moratorium on interest payments on their debt, thereby precipitating a banking crisis and a second, even more serious threat to the world monetary order.
One consequence was that Chase and the other recycling banks suffered huge losses during the 1980s. As this process unfolded, bankers received a great deal of criticism for lending to state enterprises rather than to private companies. Since large, privately owned companies were a rarity in Latin America and the developing nations of Asia and Africa, we had no alternative if petrodollars were to be recycled. Most critics conveniently ignored this point in their efforts to prove that commercial bankers were, at best, irresponsible.
The debt crisis of the 1980s was the longer-run consequence of the oil crisis of 1973 and the abrupt restructuring of the world economy that followed. The fact was that both governments and the private sector had more than enough time during the intervening years to make the difficult budgetary cuts and regulatory reforms necessary to minimize the impact of large-scale borrowing on future productivity. Instead, the major industrial nations of the world and the governments of the emerging nations chose the easier and less confrontational course. Despite the intermediating role the major American and European commercial banks performed during these years—a role I would call heroic—it was not enough to stave off the day of reckoning.
EXPANDING IN THE MIDDLE EAST
While the Arab-Israeli dispute and the OPEC oil increases imposed tremendous burdens on Chase, they also presented us with unusual opportunities. In response we developed a strategy of aggressive growth in the Middle East and North Africa. The basic objective was to develop a presence everywhere we were permitted, provided that economic conditions justified the effort and expenditure. In 1970 our regional network consisted of a single branch in Lebanon, a representative office in Bahrain, and a joint venture bank in Dubai. By mid-decade we had opened another representative office in Tunis and a new branch in Amman, Jordan, and created joint venture banks in Iran, Egypt, Saudi Arabia, Kuwait, Qatar, and Abu Dhabi.
By traveling frequently in the region I got to know the rulers and senior political officials who allowed Chase to establish banking operations. In Egypt, for example, within four months of the time Sadat had asked us to open a branch, I returned to give him an affirmative answer.
A COMPLICATED PERSONAL RELATIONSHIP
Sadat was in an expansive mood when I saw him in Cairo in January 1974. By then he had met Kissinger, and his opinion of American diplomacy had undergone a marked change since my first conversation with him in 1971, when he had angrily denounced Kissinger’s preoccupation with “power politics” and Nixon’s refusal to deal evenhandedly with Egypt. “I liked Henry,” he said. “We did much together. He is the first American politician I have met that I have respected.”
Sadat was eager to discuss his plans for Egypt, which included a duty-free zone along the Suez Canal, an oil pipeline from the Red Sea to Alexandria, and what he called “something big enough for a Rockefeller,” the building of a new Suez canal. Suddenly he leaned forward, interrupting me in the middle of a sentence, smiled, and said, “You know, David, if I had slipped that day we talked in Burg el-Arab and told you about my plans, I would have had to keep you here. I could not have allowed you to leave and tell everyone of my intentions.”
We returned to banking matters, and I told him Chase thought it best to create a joint venture with the National Bank of Egypt instead of opening a wholly owned branch with a mor
e limited scope of operations. Sadat said, “I think your business activities here may cause trouble for you at home. The Israelis will raise hell for you in the States.” I indicated that so far the opposite was proving to be the case; in fact, “the Israelis were very positive about our economic relations with Egypt. In effect, the Israelis have given us their blessing.”
In January 1975 we signed the joint venture agreement with Sadat creating the Chase National Bank of Egypt (with Chase owning 49 percent), and over the next few years we opened branches in Cairo, Alexandria, and Port Said.
A COMPLICATED BANKING RELATIONSHIP
My own and Chase’s relationship with Israel continued to be complicated and tortuous. During a visit to Jerusalem in January 1975, Finance Minister Yehoshua Rabinowitz asked me to consider opening a Chase branch in Israel. This put me in a difficult position as I was about to close the Chase National Bank of Egypt deal with Sadat. Nonetheless, I told the Finance Minister we would consider the proposal.
Again I decided to check first with Sadat. Two days later in Cairo I asked him what the reaction would be if Chase opened a branch in Israel. He said Libya, Syria, and Iraq would cause trouble but that he would not oppose it and would resist efforts to put Chase on the Arab boycott list. Sadat counseled, however, that it would be useful to advise the Saudis and King Hussein of Jordan of our plans. He said I could tell them that Sadat approved our proposal.
Both King Hussein and Prince Fahd readily agreed. In fact, Fahd noted, “It is delicate and sensitive, but since Anwar Sadat knows and approves, I will go along with him.”
In the end our internal analysis concluded that we would not be able to generate enough local business in Israel to justify opening a branch there. All the major U.S. banks had reached the same conclusion. While we based our decision solely on economic criteria, the Israelis were very unhappy and told us so.
Memoirs Page 37