This is kind of an inter­est­ing quirk about the US’s rela­tion­ship with the Sau­di King­dom over the past 40 years: Despite the fact that it was no secret at all that the Saud­is were buy­ing large amounts of US trea­suries and bil­lions of dol­lars in in US mil­i­tary aid and hard­ware as part of the ‘petrodol­lar recy­cling’ sta­tus quo, spe­cial arrange­ments were still set up to make sure the actu­al pur­chas­es were either a secret entire­ly or obscured by group the pur­chas­es in gener­ic “oil exporter” cat­e­gories with the US trea­sury pub­licly released trea­sury pur­chase data. Appar­ent­ly this was all sup­posed to be a secret. Shh­hh...:

Bloomberg

The Untold Sto­ry Behind Sau­di Arabia’s 41-Year U.S. Debt Secret
How a leg­endary bond trad­er from Salomon Broth­ers bro­kered a do-or-die deal that reshaped U.S.-Saudi rela­tions for gen­er­a­tions.

May 30, 2016
Andrea Wong

Fail­ure was not an option.

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’s Arab nations—payback for U.S. mil­i­tary aid to the Israelis dur­ing the Yom Kip­pur War—quadrupled oil prices. Infla­tion soared, the stock mar­ket crashed, and the U.S. econ­o­my was in a tail­spin.

Offi­cial­ly, Simon’s 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’s inner cir­cle, would take place dur­ing a four-day lay­over in the coastal city of Jed­dah, Sau­di Ara­bia.

The goal: neu­tral­ize crude oil as an eco­nom­ic weapon and find a way to per­suade a hos­tile king­dom to finance America’s 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’s finan­cial health but could also give the Sovi­et Union an open­ing to make fur­ther inroads into the Arab world.

It “wasn’t a ques­tion of whether it could be done or it couldn’t be done,” said Parsky, 73, one of the few offi­cials with Simon dur­ing the Sau­di talks.

At first blush, Simon, who had just done a stint as Nixon’s 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—who once com­pared him­self to Genghis Khan—had 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 “nut.”

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).

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’s spend­ing.

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’s Trea­sury pur­chas­es stay “strict­ly secret,” accord­ing to a diplo­mat­ic cable obtained by Bloomberg from the Nation­al Archives data­base.

With a hand­ful of Trea­sury and Fed­er­al Reserve offi­cials, the secret was kept for more than four decades—until now. In response to a Free­dom-of-Infor­ma­tion-Act request sub­mit­ted by Bloomberg News, the Trea­sury broke out Sau­di Arabia’s hold­ings for the first time this month after “con­clud­ing that it was con­sis­tent with trans­paren­cy and the law to dis­close the data,” accord­ing to spokes­woman Whit­ney Smith. The $117 bil­lion trove makes the king­dom one of America’s largest for­eign cred­i­tors.

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’s invest­ments in U.S. gov­ern­ment debt, which may be dou­ble or more.

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.

Exact­ly how much of America’s debt Sau­di Ara­bia actu­al­ly owns is some­thing that mat­ters more now than ever before.

While oil’s 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’s most impor­tant debt mar­ket as a polit­i­cal weapon, much as it did with oil in the 1970s.

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 to the New York Times. 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.

Sau­di Arabia’s Finance Min­istry declined to com­ment on the poten­tial sell­ing of Trea­suries in response. The Sau­di Ara­bi­an Mon­e­tary Agency didn’t imme­di­ate­ly answer requests for details on the total size of its U.S. gov­ern­ment debt hold­ings.

“Let’s not assume they’re bluff­ing” about threat­en­ing to retal­i­ate, said Marc Chan­dler, the glob­al head of cur­ren­cy strat­e­gy at Brown Broth­ers Har­ri­man. “The Saud­is are under a lot of pres­sure. I’d say that we don’t do our­selves jus­tice if we under­es­ti­mate our lia­bil­i­ties” to big hold­ers.

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.

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’s still far below the heady years of $100-a-bar­rel crude.

Sau­di Arabia’s sit­u­a­tion has become so acute the king­dom is now sell­ing a piece of its crown jewel—state oil com­pa­ny Sau­di Aram­co.

What’s more, the com­mit­ment to the decades-old pol­i­cy of “inter­de­pen­dence” between the U.S. and Sau­di Ara­bia, which arose from Simon’s 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’s land­mark nuclear deal last year. The U.S. shale boom has also made Amer­i­ca far less reliant on Sau­di oil.

“Buy­ing bonds and all that was a strat­e­gy to recy­cle petrodol­lars back into the U.S.,” said David Ott­away, a Mid­dle East fel­low at the Woodrow Wil­son Inter­na­tion­al Cen­ter in Wash­ing­ton. But polit­i­cal­ly, “it’s always been an ambigu­ous, con­strained rela­tion­ship.”

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’s 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.

“Everyone—in the U.S., France, Britain, Japan—was try­ing to get their fin­gers in the Saud­is’ pock­ets,” said Gor­don S. Brown, an eco­nom­ic offi­cer with the State Depart­ment at the U.S. embassy in Riyadh from 1976 to 1978.

For the Saud­is, pol­i­tics played a big role in their insis­tence that all Trea­sury invest­ments remain anony­mous.

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’s biggest fear was the per­cep­tion Sau­di oil mon­ey would, “direct­ly or indi­rect­ly,” end up in the hands of its biggest ene­my in the form of addi­tion­al U.S. assis­tance.

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 “add-ons.” Those sales, which were exclud­ed from the offi­cial auc­tion totals, hid all traces of Sau­di Arabia’s pres­ence in the U.S. gov­ern­ment debt mar­ket.

“When I arrived at the embassy, I was told by peo­ple there that this is Treasury’s busi­ness,” Brown said. “It was all han­dled very pri­vate­ly.”

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 by Colum­bia University’s David Spiro.

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’s hold­ings, the Trea­sury grouped them with 14 oth­er nations, such as Kuwait, the Unit­ed Arab Emi­rates and Nige­ria, under the gener­ic head­ing “oil exporters”—a prac­tice that con­tin­ued for 41 years.

The sys­tem came with its share of headaches. After the Treasury’s 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.

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.

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’s biggest cred­i­tors increased.

...

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 “was a pos­i­tive for Amer­i­ca.”

“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’s spend­ing.

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’s Trea­sury pur­chas­es stay “strict­ly secret,” accord­ing to a diplo­mat­ic cable obtained by Bloomberg from the Nation­al Archives data­base.”
Uh oh, the secret is out. So if you hap­pen to have spent the last fewdecades in a coma, now you know.