The Chairman

by Kai Bird

  Then, in September 1979, the administration stumbled into another foreign-policy crisis, in which it again needed McCloy’s assistance. Someone in the administration leaked the news that the intelligence community had “discovered” a Soviet combat brigade in Cuba. Conservatives alleged that such a force was a violation of the agreement reached during the October 1962 missile crisis, whereby the Soviets agreed not to introduce offensive weaponry into Cuba in exchange for a pledge by the United States not to invade the island. The “news,” of course, was old news, and anyone who was familiar with the 1962 negotiations, as McCloy was, knew that the Soviets had maintained a small combat brigade in Cuba for years.43 Nevertheless, there was considerable furor, both in the press and in Congress, about a new Soviet threat in Cuba.

  Before ascertaining the facts, President Carter rashly pledged that his administration would not tolerate the presence of a Soviet combat brigade in Cuba. This neatly boxed him into a hard-line position, and by the time he learned that there was considerable doubt as to whether the Soviet brigade was really anything new, his pledge not to accept the status quo was threatening to sour Soviet-American détente and derail ratification of the SALT II Treaty. To extract himself from this political dilemma, Carter made a public show of calling together a panel of “Wise Men” to advise him on the matter.

  McCloy was one of the initial group of seven “Wise Men”—later expanded to sixteen—who flew down to Washington to consult with the intelligence community. He was joined by such other Establishment luminaries as John A. McCone, McGeorge Bundy, Brent Scowcroft, Henry Kissinger, George W. Ball, Roswell Gilpatric, Dean Rusk, William P. Rogers, Clark Clifford, and Averell Harriman. McCloy, however, was in a unique position to reconstruct for the administration what had been promised during the Cuban missile crisis. Only he and the late Adlai Stevenson had conducted the phase of the negotiations with the Soviets relevant to the question of what kind of Soviet military personnel would be allowed to remain in Cuba after the withdrawal of the missiles.

  Among other things, McCloy flatly asserted, the subject of Soviet military personnel “arose only incidentally” in the 1962 negotiations. He had merely told the Soviets that any troops associated with the missiles would have to be removed; he had not requested or obtained a ban on all Soviet troops in Cuba. The presence in Cuba of a Soviet combat brigade was therefore not a violation of the 1962 “understanding.” As to the troops that were there, after spending nine hours one day at the CIA scrutinizing the evidence, “McCloy said he was not worried about a few thousand Soviet troops in Cuba since they presented no strategic threat to the United States.”44 His unequivocal opinion quickly put an end to any effort by conservative Republicans to make an issue of the brigade. McCloy and the other “Wise Men” went to the White House at the end of September 1979 to report their conclusions to Carter, and after the administration promised to monitor Soviet military activity in Cuba, the issue died down.45

  On all these issues—SALT, Cuba, the Panama Canal Treaty, Germany, China—the Carter administration had called upon McCloy for advice and assistance. Not surprisingly, by the autumn of 1979 it was becoming harder to resist his insistence that the shah be given a haven in America. That September, Cy Vance went up to New York and visited the Council on Foreign Relations. In an off-the-record private session before the Council’s membership, he tried to explain why the shah was being denied an entry visa. McCloy was not impressed, and in private even Vance was beginning to have second thoughts. In Iran, the conservative Muslim clergy were in the political ascendancy, making it less likely that normal relations could be achieved with Iran anytime soon. Then, in mid-October, David Rockefeller’s assistant, Joseph Reed, called the State Department and revealed that the shah had cancer and needed immediate treatment in a U.S. medical facility.46 By then, the shah had found another temporary haven in Cuernavaca, Mexico.

  Upon hearing this news, Vance changed his mind and told the president that, as a matter of “common decency,” the shah should be admitted to the United States. Even Carter’s chief of staff, Hamilton Jordan, found domestic political reasons to reverse the administration’s decision.

  “Mr. President,” Jordan argued, “if the Shah dies in Mexico can you imagine the field day Kissinger will have with that? He’ll say that first you caused the Shah’s downfall and now you’ve killed him.”

  “To hell with Henry Kissinger,” Carter responded, “I am the President of this country.”47

  But, faced with the now unanimous opposition of his closest advisers, the president reluctantly agreed to admit the shah. He instructed his aides to make sure that the shah’s medical condition required treatment in the United States, and he asked that the embassy in Teheran be apprised of the decision so they could make their own security preparations. Then he turned to everyone in the room and asked, “What are you guys going to advise me to do if they overrun our embassy and take our people hostage?”48

  His fears were shortly realized. The shah checked into New York Hospital on October 22, 1979, whereupon Joseph Reed circulated a memo to McCloy and other members of Project Alpha, congratulating them: “Our ‘mission impossible’ is completed. . . . My applause is like thunder.”49 Less than two weeks later, Iranian militants stormed the U.S. Embassy in Teheran and took hostage almost seventy Americans. During the next 444 days, the hostage crisis mesmerized America and took hostage the remaining days of the Carter administration.

  It is easy to see that the decision to admit the shah to the United States created the political atmosphere in which the Ayatollah Khomeini could purge the revolutionary government of any figures—religious or secular—who opposed the creation of a harsh Islamic theocracy. It was a disaster for both the American and Iranian peoples. Soon after the hostages were taken, the Establishment’s perennial dissenter, George Ball, told “Meet the Press” that, “had it not been for Mr. Kissinger and a few others making themselves enormously obnoxious for the administration, trying to force the Shah into this country, maybe we wouldn’t even have done it, even for reasons of compassion.”50

  But McCloy, Kissinger, and Rockefeller always refused to say they might have misjudged the situation. Kissinger immediately blamed the Carter administration for the embassy’s takeover, and told the press that Americans were “tired of getting pushed around. . . .”51 Rockefeller suggested that, if the embassy couldn’t be protected, it should have been closed down before the shah came to America.52 Four days after the hostages were seized, McCloy met with Undersecretary Newsom and Ambassador McHenry and warned them that “any negotiation with the Iranians must be preceded by the release of the hostages.” Furthermore, he said it was “quite clear” that the administration “must take charge of the situation,” and communicate directly with the shah. The next day, he visited the hospitalized shah and reassured him that Washington had no intention of pressuring him to leave the country.53 After more than a month in the hospital, the shah was flown to a Texas air base, and then on to yet another temporary haven in Panama.

  As the hostage crisis stretched into 1980, McCloy was defiantly unrepentant, and he continued to lobby various administration officials to take a tough line with the Iranians.54 In retrospect, it is difficult to distinguish when McCloy was acting in his public role as elder “Wise Man” and when he was simply representing the private interests of his legal clients. The Rockefeller-Kissinger-McCloy team, after all, represented Chase Manhattan Bank, an institution that was particularly exposed as a result of the Iranian revolution.55 In the first eight months of 1979, the new government in Teheran transferred some $6 billion out of Chase accounts. It became apparent by the summer of 1979 that Chase would soon not have enough Iranian funds on deposit to cover the bank’s loans to the Pahlevi regime. Chase was the lead syndicator of a $500-million loan that might easily be repudiated by the revolutionary government. Chase had approved the loan in 1977 even though its own Iranian lawyers pointed out that the shah had not won Parliament’s endorsement as required by
Article 25 of the Iranian Constitution. Technically, it was unconstitutional. If Teheran were to repudiate the loan, Chase would have to answer to the other banks that had participated in the syndicate. Chase’s good name was at stake, as well as its loans.56

  Despite this exposure, Chase made out remarkably well as a direct result of the hostage crisis. So too did McCloy’s law firm, which represented Chase and in some instances directed its strategy. The day after the embassy was seized, Chase received a telex from the Iranian government authorizing the payment of $4.05 million in interest due on the $500-million loan. Chase was to take the payment, due on November 15, from one of Iran’s accounts in its London branch. Chase did not acknowledge these instructions. In the meantime, Milbank, Tweed lawyers consulted with the Treasury Department on freezing Iranian assets. This contingency had been considered by both Treasury Department and Chase officers as early as February 1979, when Khomeini came to power. But now it took on a certain urgency. And when, early on the morning of November 14, it was reported that Iran’s acting foreign-affairs minister, Abol Hassan Bani Sadr, had announced that his country was going to withdraw all deposits from American banks, the Carter administration froze all Iranian assets in any American banks, both in the United States and abroad. The foreign banking community was taken aback by the sweeping nature of the order. It was one thing to freeze Iranian assets within the United States, but to extend the freeze order to U.S. banks operating under foreign jurisdiction was highly unusual.

  Guided by its Milbank, Tweed counsel, Chase went a step further. Since Carter’s freeze order had taken effect one day prior to the day on which Iran’s $4.05-million interest payment was due, the payment was not made from Chase’s London branch. Over the vigorous objections of the foreign banks in the syndicate, Chase then declared Iran’s $500-million loan in default. Moving with deliberate haste—and even before receiving the required Treasury Department authorization—Chase seized all of Iran’s Chase accounts and used those monies to “offset” any outstanding Iranian loans. “When the dust had cleared,” wrote financial analyst Mark Hulbert, “Chase had no loans to Iran left on its books.”57

  All of these steps were taken with the close supervision of Chase’s legal counsel at Milbank, Tweed, which of course included McCloy. And so, while the firm’s leading name partner was once again attempting to advise Washington, he was also representing a private interest that had a major financial stake in the outcome. In McCloy’s mind, there was no conflict of interest; the interests of Chase Bank and the interests of the country were pretty much the same. America, he thought, should not appear to be weak or on the defensive in its dealing with the revolutionary regime. He even went so far as to tell one State Department official in 1980 that “national honor is more important than American lives.”58 Simultaneously, Chase’s fiduciary responsibilities required it to do everything it could to retrieve its Iranian loans.

  Until negotiations finally led to a settlement on January 20, 1981, the hostage crisis seemed on the face of it to be driven by deep-rooted anti-American passions and Shia religious intrigue. But over time it became clear that the fate of the hostages was intimately bound up with Teheran’s desire to retrieve its frozen assets, and the demands of the American and European bankers, led by Chase, to be repaid on their Iranian loans. One lawyer involved in the negotiations later commented, “It was obvious that there would be no hostage release without a financial settlement.” One of McCloy’s senior Milbank, Tweed partners, Francis D. Logan, forty-nine, who sat on the firm’s ten-member governing “Firm Committee,” was one of the handful of lawyers who made secret trips to London and Algiers to negotiate the deal. In the end, not only Chase, but all the banks walked away with a generous settlement. Iran eventually paid out $3.7 billion; when the American bankers learned their loans were to be repaid in full, they “nearly fell off their chairs.”59 Wall Street’s lawyers—and none more so than the lawyers at Milbank, Tweed—earned millions of dollars in legal fees. The hostage crisis, in the words of author and legal reporter Paul Hoffman, was nothing less than a “bonanza for the bar.”60

  Twilight Years

  When Ronald Reagan won the November 1980 presidential election, McCloy was greatly relieved to see Jimmy Carter out of the White House. He thought the Georgian had been a weak and indecisive president. And even though the Goldwater-Reagan ideologues were not his kind of Republicans, he hoped he would have an inside track to the new administration. The president-elect’s campaign manager was William Casey, an old friend and fellow member of the Council. No doubt at Casey’s urging, Reagan appointed McCloy to his foreign-policy transition team. So, during the late autumn, the eighty-five-year-old McCloy took the shuttle to Washington twice a week to participate in meetings at the State Department. The transition team had a fair number of Reaganites, such as Richard V. Allen, Jeane J. Kirkpatrick, and Anne Armstrong, but there were also old friends and Establishment figures like Kissinger, Eugene Rostow, George Schultz, and Edward Bennett Williams, a prominent Washington corporate attorney.

  McCloy’s presence on the transition team was not merely window-dressing; this was to be an extremely conservative administration, but not so rigid as entirely to exclude liberal Republicans like McCloy. There were some complaints from within Reagan’s “New Right” constituency that this leading member of the Eastern Establishment should not be advising the new administration. Any worries, however, that McCloy would be too liberal proved groundless. The Carter years, and the humiliating experience of the Iran-hostage crisis, had convinced him that America had to reassert its control over global events. Working with the transition team, he signed on to a foreign-policy “strategy” which endorsed a “long term rebuilding of military strength.” He believed America’s position in the world was now “a dangerous one—balance is shifting against us in terms of military strength, cohesion of alliances, perception of leadership and economic competitiveness. . . .” Reagan, he recommended, should “get out a coherent message to the world to re-establish purpose and confidence.” New monies had to be invested in cruise missiles, the B-i bomber, and even an antimissile defense.1 Reagan accepted this blueprint for his foreign policy, and McCloy was gratified in the early 1980s by what he thought was a restoration of America’s image abroad. From time to time, he saw the president, but his only real friend in the administration was William Casey, the new CIA director, with whom he occasionally socialized.2 The two men shared a love for reminiscing about the OSS and the early days of the CIA.

  McCloy generally approved of Reagan’s policies, though he was disturbed by the administration’s fixation on Central American issues. In one Council on Foreign Relations meeting, he was heard to grumble, “El Salvador doesn’t amount to a hill of beans.”3 He still believed that Germany, and not various Third World conflicts, should be Washington’s first priority. As he had told Cy Vance at the beginning of Carter’s term in office, “The Germans can be exasperatingly nervous about their security. . . . If not a super power, they are certainly emerging as a great European power and with thoughtful effort they can continue to be a really friendly power.”4 He had been disappointed by the Carter administration’s coolness with Helmut Schmidt’s Germany, and now, at the beginning of a new administration, he emphasized to Reagan’s secretary of state, Alexander Haig, the importance of getting “off on the right foot, in the way the last administration was unable to do.”5

  Although too old to serve any longer as a discreet conduit for the private views of German chancellors, McCloy was considered an institution in German-American relations. Through the Council on Foreign Relations, the American Council on Germany, the Atlantic Council, and a new foundation called the McCloy Fund, his influence on German-American relations continued to be felt long after he was able to play any active personal role in these organizations. The McCloy Fund was established in 1975 with a grant from the German government. In 1982, the chairman of the Krupp Foundation, Berthold Beitz, gave the Fund a $2-million grant, nearly triplin
g its capital base.6 With this money, the McCloy Fund organized symposiums between German and American policy-makers, and funded academic studies on policy issues of importance to the West German government.

  As the Cold War seemed to revive under Reagan, McCloy once again began emphasizing his faith in international law and arbitration as a means of settling sovereign disputes. He was displeased when the Reagan administration refused to recognize the World Court’s jurisdiction over a case brought about by the CIA’s mining of Nicaraguan harbors. He disliked the Sandinista regime in Nicaragua as much as his friend Bill Casey, but he thought it a bad precedent for the United States to ignore the World Court.7

  McCloy also made his influence felt on one other issue of longstanding personal interest. He had supported the Reagan defense buildup as a necessary response to the Brezhnev regime’s invasion of Afghanistan. But by the end of Reagan’s first term in office, he was worried about the president’s extreme rhetoric and the failure to achieve any kind of arms-control agreement with the Soviets. The Soviets may have been an ideological adversary—even an “evil empire/’ in the president’s words—but in the nuclear era McCloy believed that a refusal to negotiate seriously on arms control was not in the U.S. national interest. “We seem to be talking past each other,” he complained to visitors in his Milbank, Tweed office. “We should have the best people on both sides meet, instead of figuring out the best missile to throw at each other. . . . No two countries have more to lose by having bad relations, or to gain by good relations. We need to figure out what we have in common, and enter a period of more cooperative attitudes.” He thought “especially a president as popular as Reagan” should be able to take such an initiative.