Geithner's dirty little secret
By F William 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.
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.
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