GEITHNER’S DIRTY LITTLE SECRET
By F. William Engdahl, 30 March 2009
http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Geithner_Secret/geithner_secret.html
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
(In German: Obamas Rettungsplan für die Banken: keine Lösung,
sondern legaler Diebstahl), 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 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’ 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 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 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 free
booze.
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.
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