Foreign Relations of the United States, 1969–1976, Volume XXVII, Iran; Iraq, 1973–1976

102. Memorandum From the President’s Assistant for Economic Affairs (Seidman) to President Ford¹

Washington, February 11, 1975.

SUBJECT

• Proposed Iranian Government Investment in Pan American Airlines

As you know, initial negotiations have been completed with respect to an Iranian Government investment of $300 million in Pan American Airlines.² Because the controversial issue of OPEC government investment is involved, both Pan Am and Iran are seeking a favorable signal from the Administration before proceeding further with the transaction.

Any agreement reached by the parties would ultimately be subject to CAB approval of matters relating to potential Iranian control of Pan Am. A favorable Administration decision would, therefore, not necessarily ensure successful completion of the transaction. A negative signal would, however, almost certainly stop the proposed investment.

Decision Required. The main decision required is whether the Administration should approve in principle the proposed Iranian investment in Pan Am.

Terms of Transaction. After completion of the transaction as now proposed, Iran would hold approximately $245 million (20–30%) of Pan Am’s debt, own 55% of the stock of Intercontinental Hotels Corporation (an offshore hotel chain wholly owned by Pan Am), have warrants to purchase up to 13% of Pan Am’s equity and have one member on Pan Am’s 17 member Board of Directors (see attached Annex I for further details of transaction).³

Basic Issues—Several broader issues must be considered in order to reach a decision on the Iranian/Pan Am request. They are:

—Our policy with respect to OPEC government investment in the U.S.

—Our policy with respect to recycling and the impact of denial on the future flow of OPEC funds to the US.

—Foreign policy implications—especially Iranian/U.S. relations.

—Foreign government influence in key U.S. firms

—Injection of an undesirable foreign policy element into the CAB and Presidential decision making process in cases involving Pan Am.

—Effect on Pan Am’s long run economic viability.

Discussion of Key Issue: OPEC Government Investment in U.S.—One of the principal objectives of our recycling policy is to encourage OPEC nations to make long term constructive investments in the consuming nations. Such investments contribute to our current balance of payments, help alleviate the current capital shortage, and give the OPEC countries a stake in our economy which should provide some incentive for them to refrain from actions which would have a negative effect on our economy and their investments. An interagency review of foreign investment in the U.S. is underway and, while not complete, it is possible to say that all but the most extreme views would permit some foreign government investment in US firms—including firms like Pan Am.

Our existing laws and regulations are such that there is minimum danger that a foreign investor could use his investment here in a way that would cause serious harm to our economy or national security. However, a major reservation has been raised concerning the political and economic influence that a foreign government might obtain through substantial investments. Although the substance of these concerns has never been clearly defined, those that hold this view maintain that a foreign government could make subtle use of such influence to harm our national or economic security interests but in a manner that would put it beyond the reach of existing law.

There is an added difficulty in the present case in that Pan Am is regulated by the CAB and, in some cases, the President. The Department of Transportation is concerned that Iranian investment in Pan Am would inject additional foreign policy considerations into the deliberations of the CAB and the President in making decisions involving Pan Am or other international carriers. On the other hand, other agencies look upon CAB and Presidential regulations as an added safeguard to ensure that the Iranians would not use their investment in a way contrary to our national interest.

Defense Department Requirements. Any agreement reached by Pan Am and Iran must contain provisions which assure conformity with Defense Department regulations dealing with classified defense contracts and the Civil Reserve Air Fleet (CRAF). Otherwise, the Defense Department would object to the transaction.

Pan Am officials are optimistic that they can work out appropriate arrangements, but the precise methods of satisfying DOD concerns require further discussions with Iran and DOD. Therefore, Administration approval in principle at this time must be given subject to satisfaction of Defense Department regulations. (See Tab A)⁴

Advantages of a Favorable Decision

1. A favorable decision would indicate to other potential OPEC investors that the U.S. is willing to accept constructive long term OPEC government investment.

2. The investment would set a useful precedent for the type of OPEC investment we would welcome (i.e. mainly debt with a relatively small equity interest in a firm in a highly regulated industry).

3. Denial would be interpreted by OPEC nations as an indication that we intended to limit their investment in the U.S. and could have a major negative effect on such investment here.

4. Because of its generally favorable features, the transaction provides a good test case to sample Congressional and public reaction to substantial OPEC investment in U.S. companies.

5. The investment would avert another Pan Am cash crisis in late 1975 and might provide the type of medium term financial relief necessary to enable Pan Am to consummate a merger or route restructuring needed to create a viable airline.

Disadvantages of a Favorable Decision

1. The investment might take pressure off Pan Am to take the drastic actions required to return to long run profitability (e.g. merger or route restructuring).

2. Iranian influence in Pan Am would inject a new, and what some consider an undesirable, element into CAB and Presidential decision making in cases involving Pan Am and other international airlines.

3. Whether or not the relationship actually affects Presidential decisions, it will be perceived as having, or as capable of having, an influence on such decisions, which may give further impetus to the current effort to limit the President’s statutory authority over international route and rate decisions.

4. Further Pan Am financial problems could lead to another request for an Iranian bailout which, if approved, would increase Iranian influence in Pan Am and thereby set precedents for larger shareholdings in US companies by foreign investors.

5. Would advance Iran Air’s case for adding routes to the U.S., which would further dilute the North Atlantic market for U.S. carriers and could include additional Concorde operations which would impact the first class market.

Agency Recommendations

(1) Treasury, State, Commerce, OMB, CIEP, NSC and the Domestic Council all favor approval of the investment (on condition that the final agreement between Pan Am and Iran contain provisions which satisfy Defense Department requirements). The main reasons for their recommendations are the positive effect it would have on (i) our prospects for attracting more OPEC government investment and influencing its movement into constructive, long term ventures in the US and (ii) the short term financial condition of Pan Am.

(2) The only dissenting agency is Transportation which believes the investment could add an undesirable foreign policy element to CAB and Presidential decision making, or would be perceived as influencing Presidential authority over international routes and rates. Transportation is also concerned that Pan Am would not proceed as vigorously as it should with a merger or restructuring.

(3) Defense takes no position for or against but points out that any final agreement must contain provisions which assure conformity with its regulations dealing with classified defense work and the Civil Reserve Fleet.

(4) The Federal Energy Administration believes that the Administration should neither approve nor disapprove the transaction. Rather, FEA recommends that we offer no objection at this time, provided that the concerns of the CAB and the Department of Defense are met. In the meantime, the issue of foreign government investment in the U.S. per se should be explored—as is currently being done by the interagency review group.⁵

(5) Arthur Burns, speaking for the Federal Reserve, indicates he has doubts, mainly on grounds of national prestige, about the proposed investment. These doubts would, he notes, be greatly reduced if Iran would agree to limiting the warrants to non-voting common stock.

Recommendations of Senior White House Staff

(1) Mr. Hartmann believes (i) a more comprehensive check of Congressional and Labor reaction is desirable before any decision is made, (ii) DOD should be required to state its position and (iii) DOD concerns with respect to the Civil Reserve Air Fleet and classified contracts should be fully resolved before any Administration approval is announced.

(2) Mr. Rumsfeld’s office had no comment.

(3) Mr. Marsh favors approval of the Iranian Investment.

(4) Mr. Areeda believes the Transportation Department concerns are “worth weighing” but on balance he does not believe they are strong enough to determine the result.

Initial Congressional and Labor Reaction—The subject of OPEC investment in the U.S. is already an important issue in Congress as several bills to restrict or limit foreign investment have been introduced. Any decision on the Iranian case will undoubtedly evoke Congressional comment.

Pan Am representatives have consulted a number of Senators and report that so far they have encountered no adverse reaction. An independent check by the staff of CIEP with Senators Jackson, Javits, Scott, Williams, Percy, Stevenson, Church, Stevens, Pearson also uncovered no objection to the transaction. Pan Am has also had a number of consultations on the House side and reports no adverse reaction so far.

According to Pan Am, initial contacts with the Teamsters and the AFL–CIO indicates that labor will not have major objections to the transaction.

Approve Iranian Investment in Pan Am⁶

Disapprove Iranian Investment in Pan Am

Will discuss

[Omitted here is material on the release of a statement of approval of the investment.]

1. Source: Ford Library, White House Central Files, Subject File, CO 68: Iran, Box 24, 11/1/74–2/28/75. No classification marking. Sent for action. Printed from an uninitialed copy.
2. Financially weakened by oil price increases, Pan American Airlines was attempting to avoid bankruptcy by accepting a $300 million investment from Iran in exchange for placing an Iranian director on its Board.
3. Not attached.
4. Not attached.
5. The last sentence was added by hand, presumably by Ford.
6. Ford initialed approval of this option. A joint U.S.-Iranian statement on the investment was released on February 16. (The New York Times, February 17, 1975) In a February 21 telephone conversation, Kissinger assured Washington Post columnist Joseph Kraft that the Department of State had moderately favored the Pan Am deal but had not pushed it. Kissinger continued: “There is no ‘be nice’ policy. I am opposed to having a political and economic confrontation with Iran because I do not believe it will get oil prices down or because what it would take to get them down—the amount by which they would get down that way wouldn’t be worth the political and economic cause. I’m strongly in favor of creating the objective conditions that will get them down and we are well underway to doing that.” (Department of State, Electronic Reading Room, Transcripts of Kissinger Telephone Conversations)