In 1974, a legendary bond trader from Salomon Brothers brokered a covert do-or-die deal that would reshape U.S. – Saudi relations for generations, and not become public knowledge until a report from Bloomberg in 2016.

It was July 1974 when newly appointed U.S. Treasury Secretary William Simon and his deputy, Gerry Parsky, embarked on a trip that was touted as a diplomacy tour across Europe and the Middle East. The real purpose of this trip was kept in strict confidence within President Richard Nixon’s inner circle.

OPEC Oil Embargo

It had been a tense year due to the oil crisis: an embargo by OPEC’s Arab nations — retribution for U.S. military aid to the Israelis during the recent Yom Kippur War — quadrupled oil prices. Inflation soared, the stock market crashed, and the U.S. economy was in a tailspin.

The oil embargo marked a pivotal shift in world affairs as it recognized for the first time the geopolitical power of oil and the dependence of first-world nations on middle-eastern oil.

Nixon Floats the Dollar

Happening concurrently with the embargo was a decline in European and U.S. domestic oil production and the decision by Nixon to “float” the dollar. Floating the dollar meant the value of the U.S. dollar was no longer fixed to gold but could fluctuate based on international markets.

Previously every U.S. dollar was backed by gold. Initially, the system worked well because the U.S. owned over half the world’s gold. However, in the late 1960s and early 1970s, foreign countries began to question the system and demand redemption of their dollars for gold, which threatened to be disastrous to the U.S. financial system. To stop the run on American gold, Nixon froze the dollar and ultimately took it off the gold standard and made the dollar the floating currency that it still is today.

Pressure to Strike a Deal with Saudi Arabia

At a four-day layover in the coastal city of Jeddah, Saudi Arabia, Simon’s goal was to neutralize crude oil as an economic weapon and find a way to persuade the hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth.

According to Parsky, Nixon made clear there was no coming back empty-handed. America’s financial state was in peril, not to mention the Soviet Union could seize the opportunity with the Arab world if the U.S. failed to.

Previously running the vaunted Treasuries desk at Salomon Brothers, Simon understood the appeal of U.S. government debt and how to sell the Saudis on the idea that America was the safest place to invest their petrodollars.

His expertise helped the administration concoct 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.

The US Strikes a Secret Deal With Saudi Arabia

The plan was that 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.

After months of negotiations during discreet meetings, there remained one crucial stipulation: 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.

It had only been months after the Yom Kippur War, and there was still plenty of animosity among Arabs towards the U.S. for its support of Israel.

How Much US-Debt Does Saudi Arabia Hold?

Indeed, the deal stayed secret for four decades until 2016. 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 in 2016 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.

There would still be unanswered questions though. The official figure vastly understated Saudi Arabia’s investments in U.S. government debt, which may be double or more, a former Treasury official speculated.

Some analysts theorized that 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.

US Debt Becomes Saudi Arabia’s Secret Weapon

Concerns also rose at how Saudi Arabia could use this debt as a political weapon: in April 2016, Saudi Arabia warned it would start selling as much as $750 billion in Treasuries and other assets if Congress passed a bill allowing the kingdom to be held liable in U.S. courts for the September 11 terrorist attacks, according to the New York Times.

This threat arose amidst 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 in May 2016, went to the House of Representatives.

Both Saudi Arabia’s Finance Ministry and Monetary Agency have declined to comment on the potential selling of Treasuries in response.

Additionally, Saudi Arabia was in the throes of a brutal fiscal crisis in 2016 — with the biggest budget deficit in a quarter-century, due to costly wars to defeat the Islamic State and proxy campaigns against Iran.

Consequently, the decades-long “interdependence” between the U.S. and Saudi Arabia, from Simon’s debt deal, showed signs of dissidence.

The U.S. has taken tentative steps toward reaffirming stability with Iran, including former President Barack Obama’s landmark nuclear deal in 2015. The U.S. shale boom also made America far less reliant on Saudi oil.

Gerry Parsky, now chairman of Aurora Capital Group, a private equity firm in Los Angeles, said the secret arrangement with the Saudis should have been dismantled years ago and was surprised the Treasury kept it in place for so long.

Still bearing no regret, Parsky affirmed to Bloomberg that the deal “was a positive for America.”