How the Bankers Did It

By Alexander Taylor

From three continents, the $12 billion deal that freed the hostages

A 5:15 a.m. last Tuesday, as the first rays of morning were beginning to light up midtown Manhattan, 25 tired, unshaven bankers in rumpled business suits stumbled wearily out of the Citicorp Center onto 53rd Street. "Whew," said one as he rubbed his eyes and ran his hands over the stubble on his face. "That's the most nerve-racking period I have ever spent." In cooperation with some 300 banks round the world, the moneymen had just completed the largest and most complex financial transaction in history. They had helped achieve an agreement that would lead to the freeing of the 52 American hostages in Iran.

Another predawn episode 14 months earlier had started the high-financial drama that concluded last week. On Nov. 14,1979, ten days after the Americans were taken prisoner, then Treasury Secretary G. William Miller was awakened in his Washington home at 5 a.m. by a call from a State Department duty officer, informing him that then Iranian Finance Minister Abolhassan Banisadr was threatening to withdraw all of his country's deposits from U.S. banks and place them in financial institutions in other countries. The Iranians were hoping that this move would drive down the value of the dollar.

Miller immediately notified President Carter, and the President ordered the U.S. Treasury to place a freeze on all Iranian assets held by the Federal Government or by U.S. banks and companies either at home or abroad. These assets ranged from 1.6 million oz. of gold stored in the vaults of the Federal Reserve Bank in New York City to a Boeing 747 that had not been de ivered to the Iranian government. The total amount of Iranian funds blocked by the U.S. came to an estimated $12 billion.

The Iranian funds immediately became the centerpiece of a financial thriller that might have been written by Paul Erdman, author of The Crash of 79. On the day after the American action, Bank Markazi, the central bank of Iran, instructed Chase Manhattan, the leading bank in a $500 million loan to the government of the Shah, to draw on Iranian assets at U.S. banks in London for payment of an interest installment of $4 million. Because the assets were frozen and payments could not be made on them, the loan became technically in default. Chase hastily polled the eleven other members of the lending syndicate and found the majority in favor of declaring Iran in default.

Chase's action set off a chain of legal moves by other banks to protect their outstanding loans by suing to attach Iranian property. Morgan Guaranty, for instance, obtained a lien on Iran's 25% interest in two of West Germany's best-known companies: Friedrich Krupp, a diversified steel and engineering combine; and Deutsche Babcock, a manufacturer of industrial equipment. Meanwhile, Bank Markazi sued in London courts to unfreeze $3.3 billion in Iranian assets held in five London branches of U.S. banks.

Such actions infuriated many conservative international bankers. They had reluctantly gone along with the freezing of assets, even though there was little precedent for it in international law, but were afraid that the rush of lawsuits would upset the gentlemanly rules that govern the Western financial community. Some bankers muttered that the Carter Administration was doing permanent damage to the global banking system.

American businesses that had lost property in Iran because of the revolution soon began claiming a share of the frozen assets. Other firms wanted part of the blocked money as payment for goods shipped or services sold for which they had never been paid. The companies filed a blizzard of 300 lawsuits, attaching some $6 billion of the Iranian assets. Claimants ranged from giant Xerox, which wanted $85 million for its expropriated business, to small consulting firms like the Stanwick Corp. of Arlington, Va., which claimed it was owed $7 million for technical services like welding training for the Iranian armed forces.

While diplomatic negotiations to free the hostages were stalemated during much of 1980, U.S. bankers maintained contact with the Iranian government through international law firms. Attorneys from Shearman & Sterling, lawyers for New York's Citibank, regularly held meetings with representatives of Stephenson Harwood, counsel for Bank Markazi. Keeping communications channels open between the two sides helped ease the way for the later settlement.

After a statement by the Ayatullah Ruhollah Khomeini in September set the unfreezing of the assets as a condition for releasing the hostages, financial negotiations began to heat up. Roger Brown, a lawyer with the Stephenson firm, began direct talks with the twelve American banks* that held Iran's frozen assets.

Starting two weeks ago, Brown quickened the pace still more, seemingly because he had received word that the Tehran government wanted to settle the matter before the beginning of the Reagan Administration. Brown flew to New York on Jan. 9, and in phone calls from his room at the Waldorf-Astoria Hotel, he asked each bank for its final tabulations of debts and credits with the Iranians.

At the same time in London, serious talks were starting. London was an obvious center for part of the negotiations because only its banking community and New York's had the skill and experience to conduct such a huge financial exchange. During the second week of January, Citibank's British lawyers, Coward Chance, invited legal counsel from the other eleven banks to its offices on Aldermanbury Square for a preliminary discussion of recent developments. Then, on Jan. 15, U.S. Negotiator Warren Christopher ordered his jet to stop in London on the way from Washington to Algiers. There it picked up two Bank of England officials, Deputy Governor Christopher ("Kit") McMahon and Chief Cashier David Somerset. They were to remain with Christopher during the toughest part of the negotiations in Algiers, arranging many of the details of the transfer mechanism.

Simultaneously in New York, the representatives of the twelve U.S. banks met together for the first time at the Shearman & Sterling law offices in the Citicorp building. At that meeting the bankers made a first attempt to agree on a common negotiating position.

The following day, Jan. 16, the New York group was summoned to Washington by Treasury Secretary Miller to listen to a new Iranian proposal. Thomas Lebrecque, vice chairman of Chase Manhattan, Alexander Vagliano, head of Morgan Guaranty's international finance operations, and 19 other bankers and attorneys took their places at 11:00 a.m. in a seventh-floor State Department conference room with Miller and Secretary of State Edmund Muskie. The new offer looked interesting. Bank Markazi suggested that when the Iranian funds were unfrozen, it would repay with interest outstanding loans that had been negotiated with about 100 international banks during the Shah's regime. In addition, Iran agreed to set up an escrow account to pay off other loans. An escrow account is a bank deposit that is controlled by a third party until certain terms are fulfilled. For example, banks often establish escrow accounts into which homeowners with mortgages deposit money that is used to pay property taxes. As Citicorp Chairman Walter Wriston told TIME Correspondent Frederick Ungeheuer afterward, "The principle of the deal was: Give back our people, and we will give you back your money."

Difficult negotiations, though, were still ahead. One sizable problem was a disagreement over the interest due the Iranians on the accounts the banks had been holding for 14 months. Iran was demanding $800 million, but the U.S. banks figured they owed only $670 million.

After lunch in an eighth-floor dining room, where most of the bankers shunned available liquor and chose hearty salads to eat, the participants returned to the conference room to recalculate the interest owed the Iranians. Bank of America, which held the largest amount of Iranian funds, was arguing the hardest. Their work was somewhat slowed because few of the bankers had brought calculators, and some ended up doing their math longhand. Eventually, the bankers agreed to pay almost 17% annual interest. They were generally pleased when they concluded work at 10:30 p.m.

On Saturday morning at 10 a.m., the bankers reconvened in the Secretary's conference room on the third floor of the Treasury Building. For the next nine hours they negotiated over the method for transferring the assets to Iran, while consuming gallons of coffee along with chicken salad and roast beef sandwiches from the Capitol Hill Deli. Meanwhile, telephone and telex lines were kept open round the world. Explained one banker: "All this had to be communicated periodically by telex to the Iranians to make sure that it was O.K. We conveyed each document as we concluded it." Government officials participated very little in the discussions. "There was no exchange between the Government and us," said one moneyman. "They took what we gave them."

When the meeting broke up Saturday night, it was decided to reconvene in New York on Sunday morning to await instructions from the Federal Reserve Bank in New York. The State Department offered to fly the bankers there on a Government plane, but bank lawyers complained that it might create conflicts of interest for the negotiators to receive special treatment. Therefore, many participants took the Eastern Air Lines shuttle up to New York.

Sunday morning the bankers met again in Shearman & Sterling's Citicorp offices, and activities took on a frenzied pace. Secretaries and stenographers bustled about, typewriters stood at the ready and waitresses served food prepared by a nearby delicatessen. The lawyers put the final touches on a technical eleven-page addendum to the funds-transfer agreement. This was designed to spell out how the twelve banks would pay more than $5.5 billion to the New York Federal Reserve for transmission to the Iranians. The completed documents were sent to Iran at noon, and the bankers left after agreeing to a "30 Minute Rule." They would only stay in hotels or apartments that were within 30 minutes of the Citicorp Center. The bankers confidently awaited the final word from Iran and for the Federal Reserve to start moving the money.

Meanwhile, parallel negotiations in London were also going well. The Iranians sent Ali Manavi-Rad, the senior vice governor of the Markazi, to London on Saturday night, seemingly to wrap up the details. At the ash wood-paneled offices of Coward Chance, lawyers, bankers and telex operators worked sending messages to New York and Tehran. They paused only for an elaborate roast turkey dinner accompanied by a vintage Bordeaux wine.

That optimism in New York and London, though, was dashed Monday morning U.S. time. The Iranian central bank had not telexed its payment order to the U.S. banks, and Iran's chief negotiator, Behzad Nabavi, was calling that final eleven-page document a new and unacceptable set of demands. A compromise was quickly drafted, with the help of Roger Brown, to mollify the last Iranian demand. The financiers, though, believed that they had really been caught in diplomatic squabbling. Said one banker: "Personally, I think the Iranians just wanted to hold up the agreement until the Inauguration."

After the latest telex was sent to Tehran, the bankers at Shearman & Sterling settled down Monday night for another vigil. One of them skipped out for a quick squash game at the nearby Racquet & Tennis Club; another went to a dinner but had to ask his hostess for an electric shaver before he joined the other guests. Finally, at about 3 a.m. Tuesday in New York, the long-awaited call arrived from the Federal Reserve Bank. The Iranians had accepted the deal, and the Bank of England had set up the required escrow accounts in the name of the Central Bank of Algeria to hold the frozen assets. the bankers flashed word back to their headquarters or telephoned the Federal Reserve directly with instructions. No money was physically transferred. Rather, telex and telephone messages instructed the Federal Reserve to take money out of one account and put it in another. In San Francisco, Lewis W. Teel, senior vice president of the Bank of America, who had been at his desk for 22 hours, pulled a piece of paper from his wallet that he had been carrying for four days. It contained the code that would trigger the release of $2.8 billion from Bank of America overseas branches into the Federal Reserve accounts. The task was completed in about five minutes. In another case, the transfer did not go as smoothly. The First National Bank of Chicago's telex garbled the message, and the amount to be transferred came out as $0,000,000,000.00. In a second attempt, though, the correct amount was sent: $76,036,366.25.

After receiving notification from the twelve American banks, the Federal Reserve transferred the money to an account with the Bank of England. Then it was deposited in the escrow accounts for the Algerian Central Bank. The total amounts unfrozen:

> The U.S. Government sent $2.4 billion, which included Iranian gold held by the U.S. and securities or cash that Iran had deposited with the Treasury or the Federal Reserve.

> The U.S. banks sent $5.5 billion from deposits in their overseas branches. That included $800 million for interest earned on the frozen funds since November 1979.

> Another $4 billion will be transferred over the next six to nine months into an account with the Bank of England. This money is made up of the Iranian bank deposits and other privately held assets in the U.S.

When the escrow account for the Central Bank of Algeria reached $7.9 billion, the Iranians were to begin procedures to release the hostages. That occurred Tuesday morning.

Most of the money, though, immediately went into other accounts. Some $3.7 billion was given back to the American banks to pay off the old loans. An additional $1.4 billion went into an escrow account to liquidate other loans from individual banks, and includes $130 million that will be used to resolve the dispute over interest payments between Iran and the banks. The $4 billion claims account is intended to settle some of the 300 legal cases pending against Iran. Finally, and only after the hostages had flown out of Iranian air space, the Central Bank of Algeria transferred $2.8 billion directly to Iran. That was the total amount that the Iranians immediately got out of the deal; in six months or so, they may get at least a billion in funds left over from the claims account.

The huge financial transaction, which caused hardly a ripple on the world's money markets, demonstrated the ability of bankers and lawyers to use their amazing network of modern communications. After 14 months of mostly fruitless negotiations, the deal was concluded in less than ten minutes. --By Alexander Taylor.

Reported by William Blaylock/Washington and Bruce van Voorst/Brussels

*Bank of America, Bankers Trust, Chase Manhattan, Chemical Bank, Citibank, Continental Illinois Bank, European American Bank, First National Bank of Chicago, Irving Trust, Manufacturers Hanover Trust, Marine Midland Bank and Morgan Guaranty Trust Co.

With reporting by William Blaylock/, BRUCE VAN VOORST

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