Asia Time Online - Daily News <http://www.atimes.com/atimes/Global_Economy/KD03Dj02.html>http://www.atimes.com/atimes/Global_Economy/KD03Dj02.html Apr 3, 2009 Geithner's dirty little secret By F. W. Engdahl
US Treasury Secretary Tim Geithner, in unveiling his long-awaited
plan to put the US banking system back in order, has refused to tell
the dirty little secret of the present financial crisis. By refusing
to do so, he is trying to save de facto bankrupt US banks that
threaten to bring the entire global system down in a new more
devastating phase of wealth destruction.
The Geithner proposal, his so-called Public-Private Partnership
Investment Program, or PPPIP, is not designed to restore a healthy
lending system that would funnel credit to business and consumers.
Rather it is yet another intricate scheme to pour even more hundreds
of billions of dollars directly to the leading banks and Wall Street
firms responsible for the current mess in world credit markets,
without demanding they change their business model.
Yet, one might say, won't this eventually help the problem by getting
the banks back to health?
Not the way the Barack Obama administration is proceeding. In
defending his plan on US TV recently, Geithner, a protege of Henry
Kissinger and before his present posting president of the New York
Federal Reserve Bank, argued that his intent was "not to sustain weak
banks at the expense of strong". Yet this is precisely what the PPPIP
does. The weak banks are the five largest banks in the system.
The "dirty little secret" that Geithner is going to great degrees to
obscure from the public is very simple. There are only at most
perhaps five US banks that are the source of the toxic poison causing
such dislocation in the world financial system. What Geithner is
desperately trying to protect is that reality. The heart of the
present problem, and the reason ordinary loan losses are not the
problem as in prior bank crises, is a variety of exotic financial
derivatives, most especially credit default swaps.
In the Bill Clinton administration of 2000, the Treasury secretary
was Larry Summers, who had just been promoted from number two under
former Goldman Sachs banker Robert Rubin to be number one when Rubin
left Washington to take up the post of Citigroup vice chairman. As I
describe in detail in my new book, Power of Money: The Rise and Fall
of the American Century, to be released this summer, Summers
convinced president Clinton to sign several Republican bills into law
that opened the floodgates for banks to abuse their powers. The fact
that the Wall Street big banks spent some US$5 billion in lobbying
for these changes after 1998 was likely not lost on Clinton.
One significant law was the repeal of the 1933 Depression-era
Glass-Steagall Act, which prohibited mergers of commercial banks,
insurance companies and brokerage firms such as Merrill Lynch or
Goldman Sachs. A second law backed by Treasury secretary Summers in
2000 was an obscure but deadly important Commodity Futures
Modernization Act of 2000. That law prevented the responsible US
government regulatory agency, Commodity Futures Trading Corporation
(CFTC), from having any oversight over the trading of financial
derivatives. The new CFMA law stipulated that so-called
over-the-counter (OTC) derivatives like credit default swaps, such as
those involved in the AIG insurance disaster, (and which investor
Warren Buffett once called "weapons of mass financial destruction"),
be free from government regulation.
At the time Summers was busy opening the floodgates of financial
abuse for the Wall Street Money Trust, his assistant was none other
than Tim Geithner, the man who today is US Treasury Secretary, while
Geithner's old boss, the self-same Summers, is President Obama's
chief economic adviser as head of the White House Economic Council.
To have Geithner and Summers responsible for cleaning up the
financial mess is tantamount to putting the proverbial fox in to
guard the henhouse.
What Geithner does not want the public to understand, his "dirty
little secret", is that the repeal of Glass-Steagall and the passage
of the Commodity Futures Modernization Act in 2000 allowed the
creation of a tiny handful of banks that would virtually monopolize
key parts of the global "off-balance sheet" or OTC derivatives
issuance.
Today, five US banks, according to data in the just-released Federal
Office of Comptroller of the Currency's Quarterly Report on Bank
Trading and Derivatives Activity, hold 96% of all US bank derivatives
positions in terms of nominal values, and an eye-popping 81% of the
total net credit risk exposure in event of default.
The top three are, in declining order of importance: JPMorgan Chase,
which holds a staggering $88 trillion in derivatives; Bank of America
with $38 trillion, and Citibank with $32 trillion. Number four in the
derivatives sweepstakes is Goldman Sachs, with a mere $30 trillion in
derivatives; number five, the merged Wells Fargo-Wachovia Bank, drops
dramatically in size to $5 trillion. Number six, Britain's HSBC Bank
USA, has $3.7 trillion.
After that the size of US bank exposure to these explosive
off-balance-sheet unregulated derivative obligations falls off
dramatically. Continuing to pour taxpayer money into these five banks
without changing their operating system, is tantamount to treating an
alcoholic with unlimited free booze.
The government bailout of AIG, at more than $180 billion so far, has
primarily gone to pay off AIG's credit default swap obligations to
counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase and
Bank of America, the banks who believe they are "too big to fail". In
effect, these institutions today believe they are so large that they
can dictate the policy of the federal government. Some have called it
a bankers' coup d'etat. It definitely is not healthy.
Geithner and Wall Street are desperately trying to hide this dirty
little secret because it would focus voter attention on real
solutions. The federal government has long had laws in place to deal
with insolvent banks. The Federal Deposit Insurance Corporation
(FDIC) places the bank into receivership, its assets and liabilities
are sorted out by independent audit. The irresponsible management is
purged, stockholders lose and the purged bank is eventually split
into smaller units and when healthy, sold to the public. The power of
the five mega banks to blackmail the entire nation would thereby be
cut down to size. Ooohh. Uh Huh?
This is what Wall Street and Geithner are frantically trying to
prevent. The problem is concentrated in these five large banks. The
financial cancer must be isolated and contained by a federal agency
in order for the host, the real economy, to return to healthy
function.
This is what must be put into bankruptcy receivership, or
nationalization. Every hour the Obama administration delays that, and
refuses to demand a full independent government audit of the true
solvency or insolvency of these five or so banks, costs to the US and
to the world economy will inevitably snowball as derivatives losses
explode. That is pre-programmed, as a worsening economic recession
mean corporate bankruptcies are rising, home mortgage defaults are
exploding, unemployment is shooting up.
This is a situation that is deliberately being allowed to run out of
(responsible government) control by Treasury Secretary Geithner,
Summers and ultimately the president, whether or not he has taken the
time to grasp what is at stake.
Once the five problem banks have been put into isolation by the FDIC
and the Treasury, the administration must introduce legislation to
immediately repeal the Larry Summers bank deregulation including
restoration of Glass-Steagall and the repeal of the Commodity Futures
Modernization Act of 2000 that allowed the present criminal abuse of
the banking trust.
Then serious financial reform can begin to be discussed, starting
with steps to "federalize" the Federal Reserve and take the power of
money out of the hands of private bankers such as JP Morgan Chase,
Citibank or Goldman Sachs.
F William Engdahl is author of A Century of War: Anglo-American Oil
Politics and the New World Order; and Seeds of Destruction: The
Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). His
newest book, Full Spectrum Dominance: Totalitarian Democracy in the
New World Order (Third Millennium Press) is due out at end of April.
He may be reached through his website, www.engdahl.oilgeopolitics.net.
(Copyright 2009 F William Engdahl).
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