In November 1979, the U.S. Embassy in Iran was seized, and 52 Americans were held hostage. Their capture, and the Carter administrations failure to win their release, became a major issue in the 1980 presidential campaign.
Carter had frozen billions in Iranian assets in U.S. banks, money that was being claimed by American firms and individuals who had lost property in the Islamic revolution. American and Iranian officials were negotiating the amount of funds to be released in return for freeing the hostages. The Iranians also wanted Carter to release arms that had been ordered and paid for by the deposed Shah.
Reagan campaign officials allegedly met with Iranian representatives several times during the 1980 campaign, promising arms and money if Iran delayed release of the hostages until after the November election. This scandal would became known as the October Surprise.
Reagan won the election, but Carter officials continued to negotiate with the Iranians. Finally, around the turn of the year, an accord was reached under which the United States would release $4 billion but no arms. However, the Iranians did not release the hostages immediately.
A few days before Reagans inauguration, Ernest Backes recalls, Cedel got an urgent joint instruction from the U.S. Federal Reserve Bank and the Bank of England to transfer $7 million in bearer bonds—$5 million from an account of Chase Manhattan Bank and $2 million from an account of Citibank—both in offshore secrecy havens. The money was to go to the National Bank of Algeria, and from there to an Iranian bank in Teheran. Backes was informed that the $7 million was a small fraction of sums being sent from around the world and concentrated in the Algerian bank. He was told the transfers were linked to the fate of the hostages.
The Fed and the Bank of England were not members of Cedel, and by its rules had no right to order the transfers. Backes two superiors were absent. He informed the president of the Cedel administrative council, Edmond Israel, then acted to execute the order. (Israel, now honorary chairman, did not respond to phone and e-mail messages.)
On January 20, 1981, about 15 minutes after Reagan took the oath of office, the hostages were finally freed. Reagan and then Vice President George Bush have always denied the payoff happened.