- US Treasury Secretary Tim Geithner has unveiled his long-awaited
plan to put the US banking system back in order. In doing so, he 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 Plan, his so-called Public-Private Partnership
Investment Program or PPPIP, as we have noted previously is designed not
to restore a healthy lending system which would funnel credit to business
and consumers. Rather it is yet another intricate scheme to pour even more
hundreds of billions 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 Obama Administration is proceeding. In
defending his plan on US TV recently, Geithner, a protégé
of Henry Kissinger who previously was CEO 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' which Geithner is going to
great degrees to obscure from the public is very simple. There are only
at most perhaps five US banks which are the source of the toxic poison
that is 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 as in prior bank crises are
not the problem, is a variety of exotic financial derivatives, most especially
so-called Credit Default Swaps.
- In 2000 the Clinton Administration then-Treasury Secretary
was a man named Larry Summers. Summers had just been promoted from No.
2 under Wall Street Goldman Sachs banker Robert Rubin to be No. 1 when
Rubin left Washington to take up the post of Vice Chairman of Citigroup.
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 Bill Clinton to sign several Republican bills into law which
opened the floodgates for banks to abuse their powers. The fact that the
Wall Street big banks spent some $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 that prohibited mergers of commercial banks, insurance
companies and brokerage firms like 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, (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. Today,
Geithner's old boss, Larry 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.
- The 'Dirty Little Secret'
- 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 Over-The-Counter derivatives
- 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 five are, in declining order of importance: JPMorgan
Chase which holds a staggering $88 trillion in derivatives (¤66
trillion!). Morgan Chase is followed by Bank of America with $38 trillion
in derivatives, 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.
Just to underscore the magnitude, trillion is written 1,000,000,000,000.
Continuing to pour taxpayer money into these five banks without changing
their operating system, is tantamount to treating an alcoholic with unlimited
- The Government bailouts of AIG to over $180 billion to
date has primarily gone to pay off AIG's Credit Default Swap obligations
to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank
of America, the banks who believe they are 'too big to fail.' In effect,
these five 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.
- This is Geithner's and Wall Street's Dirty Little Secret
that they desperately try to hide because it would focus voter attention
on real solutions. The Federal Government has long had laws in place to
deal with insolvent banks. The 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 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 full independent government audit of the true solvency
or insolvency of these five or so banks, inevitably costs to the US and
to the world economy will snowball as derivatives losses explode. That
is pre-programmed as 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 restore
Glass-Steagall and repeal 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.