It’s easier to make a $750 billion threat than carry it out.
The Senate on Tuesday unanimously passed a bill that would allow families of 9/11 victims to sue Saudi Arabia for its alleged connection to the attacks, pushing the kingdom one step closer to having to follow through on its pledge to sell hundreds of billions of dollars of United States assets that could be frozen by the courts. Carrying out that divestment pledge will be a long, difficult, complicated and likely costly process.
“The idea that they could just flip a switch and sell them all, it just doesn’t compute,” George Pearkes of Bespoke Investment Group, an independent research firm, told HuffPost. “It’s just too much. No one’s going to be able to take that risk off your book,” Pearkes said, using the industry term for a portfolio.
"You’re going to lose money doing it because everyone knows you’re going to do it, and ... it immediately has an impact on your currency and balance of payments,” he added, noting that the Saudi currency is pegged to the U.S. dollar and the kingdom continually receives dollars for its oil exports.
The exact value of the Saudis' U.S. assets is unclear. The Saudi foreign minister told members of Congress that the kingdom's U.S. assets are worth $750 billion. But the number is likely lower, Edwin Truman of the Peterson Institute for International Economics told The Huffington Post. He puts the number between $360 and $450 billion.
The White House reiterated Tuesday that President Barack Obama is “strongly opposed” to the bill and hinted he would veto it if it passed the House, believing it puts American citizens and the U.S. government at legal risk, The Huffington Post's Jennifer Bendery reported.
The White House is aware of the Saudis' threat to sell U.S. assets, but even in the most liquid market in the world -- U.S. Treasuries -- they would have trouble simply dumping their American holdings. The kingdom holds $117 billion in U.S. Treasuries in onshore accounts and likely more in European accounts, according to the Treasury Department, which on Monday released the number for the first time, in response to a Freedom of Information Act request by Bloomberg.
The Treasuries market is huge at about $500 billion worth of trades a day, but Pearkes pointed out that “so much of that volume is essentially transitory or intermediary-based. It’s people pushing risk through the system and in small chunks at a time. ... The thing you have to remember is that the total risk exchanged between end users is a lot smaller than the total volume.”
Trying to find someone who could do one big trade for $117 billion in Treasuries “is just nuts,” Pearkes said.
Given enough time, however, a determined seller can unload hundreds of billions of dollars of Treasuries, Bradley Setser, former deputy assistant secretary for international economic analysis at the Treasury Department and now a senior fellow at the Council on Foreign Relations, told HuffPost. He pointed to China, which has sold about $200 billion in U.S. government bonds to support its currency and stimulate its flagging economy over the past year.
Of course, once you’ve sold something, there’s the question of what to do with the cash, which is a difficult question to answer when the sums are in the hundreds of billions of dollars.
It’s possible that the Saudis could strike a deal with banks to deposit the cash. (The kingdom currently has $188 billion on deposit in foreign banks, according to the International Monetary Fund.) But because a deposit is a liability on a bank’s balance sheet, that merely pushes the question of what to buy with the cash onto someone else. A bank is likely to charge a fee to take on that headache.
Another option for the Saudi government, Setser said, would be to move its U.S Treasuries and other American assets to a fund manager outside the reach of U.S. courts, creating a sort of index fund. Or they could set up a series of swaps contracts to replicate their current holdings, which would allow the Saudis to sell their U.S. assets while retaining the profits and losses they would get if they still owned them.
There’s also the problem we mentioned earlier: The kingdom’s currency is pegged to the U.S. dollar. “It is impossible to get completely out of dollars and to maintain a dollar peg," Setser said. "That’s fairly straightforward.”
In other words, the Saudis may sell some assets and move others where the U.S. legal system can’t touch them, but wholesale divestment just isn’t possible.
Representatives at the Saudi embassy in Washington did not return a request for comment.