Financial Tsunami: The End of the World as We Knew It
The unexpected rejection by the US Congress of the Bush Administration financial rescue plan, TARP on September 29 has
opened up the spectre for the first time of a 1931-style domino wave of worldwide bank failures. That is already
underway across the US banking spectrum with the failure, nationalization or forced liquidation in the past two weeks of
Fannie Mae and Freddie Mac, of the giant Washington Mutual mortgage lender, of the nation’s fourth largest deposit bank,
Wachovia. That was on top of a wave of smaller bank failures that began with IndyMac in the spring. For some it is
appealing and more simple to grasp the magnitude of these titanic events in the US-centered financial world by assuming
it is all part of a pre-planned grand conspiracy by the Money Masters, what in the 1920s in the USA was termed the Money
Trust, to control the entire financial world.
As the details of the present crisis reveal, there are huge ideological fault lines making for chaos and a potential
meltdown of the Laissez Faire financial system. That present system, which was built on the back of Wall Street
financial and banking deregulation since 1987 when Alan Greenspan, a devout follower and close friend of radical
individualist Ayn Rand, became Wall Street’s man at the Federal Reserve for almost 19 years, is over now with the
failure of the Henry Paulson $700 billion bailout scheme. Governments worldwide now face no alternative but to begin the
painful process of putting the financial genie back in the bottle and re-regulating an out-of-control financial system.
The failure of the UK Government and the US Government to address that fundamental issue is behind the present crisis of
confidence.
A brief look at history
The Great Depression in Germany in 1931 began with a seemingly minor event—the collapse of a bank in Vienna,
Creditanstalt, that May. For readers interested in more on the remarkable parallels between that crisis and that of
today, I recommend the treatment in my earlier volume, A Century of War: Anglo-American Oil Politics and the New World Order.
That Vienna bank collapse in turn was triggered by a political decision in Paris to sabotage an emerging German-Austrian
economic cooperation agreement by pulling down the weakest link of the post-Versailles system, the Vienna Creditanstalt.
In the process, Paris triggered a series of tragic events that led to the failure of the German banking system over a
period of several weeks. The post-1919 Versailles System, much like the post-1999 US Securitization System, was built on
a house of cards with no foundation. When one card was removed, the entire international financial edifice crumbled.
Then, in 1931, there was an inept Brüning government in Germany, which believed severe austerity was the only solution,
merely feeding unemployment lines to pay the Young Plan German reparations to the new Bank for International Settlements
in Basle.
Then, in 1931 George Harrison, a Germano-phobe, was the inexperienced Governor of the powerful New York Federal Reserve.
Harrison was a member of the anglophile Skull & Bones, the elite Yale University secret society which also included George H.W. Bush and George W. Bush as initiates.
Harrison, who went on to coordinate the secret Manhattan Project on the development of the Atomic bomb under fellow
Skull & Bones member, War Secretary Henry Stimson, believed the crisis had started not from abroad but with German bankers
trying to make a profit at the expense of others.
Within weeks of rumor and jitters, the New York Bankers Trust, ironically today a part of Deutsche Bank, announced it
would be forced to cut the credit line to Deutsche Bank and by July 1931 began to pull its deposits from all big Berlin
banks. Harrison insisted the Reichsbank dramatically raise interest rates to stabilize things, only turning bad into
worse as a credit crisis across the German economy ensued.
The Bank of England Governor, Montagu Norman, while somewhat more supportive of Luther argued that his friend Hjalmar
Schacht was better suited to manage the crisis. On July 13, 1931, a major German bank, Darmstädter-und Nationalbank
(Danat) failed. That triggered a general a depositors’ run on all German banks. The Brüning government merged the Danat
with a weakly capitalized Dresdner Bank, and made large state guarantees in an effort to calm matters. It didn’t.
New York Fed governor, Harrison, who was personally convinced it was a ‘German’ problem, barked orders to Reichsbank
chief Hans Luther on how to manage the crisis according to archival accounts. A foreign drain on Reichsbank gold
reserves ensued.
The rest is history, the tragic history of the greatest most destructive war of the 20th Century, with all the suffering
that ensued. At that time in history, the American banking elite saw itself, despite a stock market crash and Great
Depression in America, as standing at the dawn of a new American Century.
The decline of the American Century
Today, in 2008, some 77 years later, a German Finance Minister stands before the Bundestag announcing the end of that
American Century. Today the German government encourages a fusion of Dresdner with Commerzbank. Today Deutsche Bank,
which some years ago acquired Bankers Trust in New York in a merger wave, appears to be in a stronger position than its
American counterparts as Wall Street investment banks, some more than 150 years old as the venerable Lehman Bros.,
simply vanish in a matter of days. The American financial Superpower crumbles before our eyes.
In March 2008 there were five giant Wall Street investment banks, banks which underwrote Mortgage-Backed Securities
(MBS), corporate bonds, corporate stock issues. They were not deposit banks like Citibank or Bank of America; they were
known as investment banks—Morgan Stanley, Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Stearns.
The business of taking deposits and lending by banks had been split during the Great Depression from the business of
underwriting and selling stocks and bonds—investment banking—by an act of Congress, the Glass-Steagall Act of 1933. The
law was passed amid the collapse of the banking system in the United States following the bursting of the Wall Street
stock market bubble in October 1929.
That Glass-Steagall act was a prudent attempt by Congress to end the uncontrolled speculative excesses of the Roaring
Twenties by New York finance. It established the Federal Deposit Insurance Corporation to guarantee personal bank
deposits to a fixed sum that restored consumer confidence and ended the panic runs on bank deposits.
In November 1999, after millions spent lobbying Congress, the New York banks and Wall Street investment banks and
insurance companies won a staggering victory. The US Congress voted to repeal that 1933 Glass-Steagall Act. President
Bill Clinton proudly signed the repeal act with Sandford Weill, the chairman of Citigroup.
The man whose name is on that repeal bill was Texas Senator Phil Gramm, a devout advocate of ideological free market
finance, finance free from any Government fetters. The major US banks had been seeking the repeal of Glass-Steagall
since the 1980s. In 1987 the Congressional Research Service prepared a report which argued the case for preserving
Glass-Steagall. The new Federal Reserve chairman, Alan Greenspan, just fresh from JP. Morgan bank on Wall Street, in one
of his first speeches to Congress in 1987 argued for repeal of Glass-Steagall.
The repeal allowed commercial banks such as Citigroup, then the largest US bank, to underwrite and trade new financial
instruments such as Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDOs) and establish so-called
structured investment vehicles, or SIVs, that bought those securities. Repeal of Glass-Steagall after 1999, in short,
enabled the Securitization revolution so openly praised by Greenspan as the "revolution in finance." That revolution is
today devouring its young.
That securitization process is at the heart of the present Financial Tsunami that is destroying the American credit
structure. Citigroup played a major part in the repeal of Glass–Steagall in 1999. Citicorp had merged with Travelers
Insurance company the year before, using a loophole in Glass-Steagall that allowed for temporary exemption. Alan
Greenspan gave his personal blessing to the Citibank merger.
Phil Gramm, the original sponsor of the Glass-Steagall repeal bill that bears his name, went on to become the chief
economic adviser to John McCain. Gramm also went on to become Vice Chairman of a sizeable Swiss bank, UBS Investment
Bank, in the USA, a bank which has had no small share of troubles in the current Tsunami crisis.
Gramm as Senator in 2000 was one of five co-sponsors of the Commodity Futures Modernization Act of 2000. A provision of
the bill was referred to as the ‘Enron loophole’ because the it was later applied to Enron to allow them unregulated
speculation in energy futures, a key factor in the Enron scandal and collapse. The Commodity Futures Modernization Act,
as I described in my earlier piece in May, Perhaps 60% of Today’s Oil Price is Pure Speculation, allowed investment bank Goldman Sachs (coincidentally the former bank of Treasury Secretary Paulson), to make a literal
killing in manipulating oil futures prices up to $147 a barrel this summer.
Paulson’s impressive interest conflicts
The actions of Treasury Secretary Paulson since the first outbreak of the Financial Tsunami in August of 2007 have been
directed with one apparent guiding aim—to save the obscene gains of his Wall Street and banking cronies. In the process
he has taken steps which suggest more than a mild possible conflict of interest. Paulson, who had been chairman of
Goldman Sachs from the time of the 1999 Glass-Steagall repeal to his appointment in 2006 as Treasury head, had been one
of the most involved Wall Street players in the new securitization revolution of Greenspan. Naming him to head the
Government agency now responsible for cleaning up the mess left by Wall Street greed and stupidity was tantamount to
putting the wolf in charge of guarding the hen house as some see it.
Paulson showed where his interests lay. He is by law is the chairman of something called the President's Working Group
on Financial Markets, the Government’s financial crisis management group that also includes Fed Chairman Bernanke, the
Securities & Exchange Commission head, and the head of the Commodity Futures Exchange Commission (CFTC). That is the reason Paulson,
the ex-Wall Street Goldman Sachs banker, is always the person announcing new emergency decisions since last August.
Two weeks ago, for example, Paulson announced the Government would make an unprecedented $85 billion nationalization
rescue of an insurance group, AIG. True AIG is the world’s largest insurer and has a huge global involvement in
financial markets.
AIG’s former Chairman, Hank Greenberg—a close friend of Henry Kissinger, a former Director of the New York Fed, former
Vice Chairman of the elite New York Council on Foreign Relations and of David Rockefeller’s select Trilateral
Commission, Trustee Emeritus of Rockefeller University—was for more than forty years Chairman of AIG. His AIG career
ended in March 2005 when AIG's board forced Greenberg to resign from his post as Chairman and CEO under the shadow of
criticism and legal action for cooking the books, in a prosecution brought by Eliot Spitzer, then Attorney General of
New York State.
In mid September, in between other dramatic failures including Lehman Bros., and the bailout of Fannie Mae and Freddie
Mac, Paulson announced that the US Treasury, as agent for the United States Government, was to bailout the troubled AIG
with a staggering $85 billion. The announcement came a day after Paulson announced the Government would let the 150-year
old investment bank, Lehman Brothers, fail without Government aid. Why AIG and not Lehman?
What has since emerged are details of a meeting at the New York Federal Reserve bank chaired by Paulson, to discuss the
risk of letting AIG fail. There was only one active Wall Street banker present at the meeting—Lloyd Blankfein, chairman
of Paulson’s old firm, Goldman Sachs.
Blankfein later claimed he was present at the fateful meeting not to protect his firm’s interests but to ‘safeguard the
entire financial system.’ His claim was put in doubt when it later emerged that Blankfein’s Goldman Sachs was AIG’s
largest trading partner and stood to lose $20 billion in a bankruptcy of AIG. Were Goldman Sachs to go down with AIG,
Secretary Paulson would have reportedly lost $700 million in Goldman Sachs stock options he had, an interesting fact.
That is a tiny glimpse into the man who crafted the largest bailout in US or world financial history some days ago, the
failed TARP—Troubled Asset Relief Program—a proposed $700 billion financial stabilization scheme which, in Paulson’s
original version would have allowed him or his Treasury successor to use $700 billion, with no oversight or
accountability, to buy bad or worthless assets from financial institutions he deems worthy of help.
As respected economist, Nouriel Roubini pointed out, in almost every case of recent banking crises in which emergency
action was needed to save the financial system, the most economical (to taxpayers) method was to have the Government, as
in Sweden or Finland in the early 1990’s, nationalize the troubled banks, take over their management and assets, and
inject public capital to recapitalize the banks to allow them to continue doing business, lending to normal clients. In
the Swedish case, the Government held the assets, mostly real estate, for several years until the economy again improved
at which point they could sell them onto the market and the banks could gradially buy the state ownership shares back
into private hands. In the Swedish case the end cost to taxpayers was estimated to have been almost nil. The state never
did as Paulson proposed, to buy the toxic waste of the banks, leaving them to get off free from their follies of
securitization and speculation abuses.
Paulson’s plan, the one essentially rejected on September 29 by the House of Representatives, would have done nothing to
recapitalize the troubled banks. That recapitalization could cost an added hundreds of billions on top of the $700
billion toxic waste disposal.
Serious conservative banker friends I know who went through the Scandinavian crisis of the 1990’s are scratching their
head trying to imagine how crass the Paulson TARP scheme was. That crass and politically obvious bailout of Wall Street
by the taxpayers, what some refer to as ‘Bankers’ Socialism—socialize the costs of failure onto the public, and
privatize the profits to the bankers—is a major factor behind the defeat of the TARP compromise version.
But there is an added element. John McCain decided to boost his flagging Presidential campaign by trying to profile
himself as a ‘political Maverick’ one who opposes the powerful Washington vested interests. He flew into Washington days
before the TARP was to be approved by a panicked Congress and conspired with a handful of influential Republican Senate
friends, including Banking Committee ranking member, Senator Shelby, to oppose the Paulson TARP. What emerged, with
McCain’s backing, was a political power play that may well have brought the United States financial system to its knees,
and McCain’s Presidential hopes with it.
Power and greed are the only visible juice driving the decision-makers in Washington today. Acting in the long-range US
national interest seems to have gotten lost in the scramble. As I wrote last November in my Financial Tsunami five part
series on the background to today’s crisis, all this could be foreseen. It is what happens when elected Governments
abandon their public trust or responsibility to a cabal of private financial interests. It will be interesting to see if
anyone in Washington realizes that lesson. Whatever next comes out of Washington, however, one thing is clear, as
reflected in what German Finance Minister Peer Steinbrück told the Bundestag. This is the end of the world as we knew
it. The American financial Superpower is gone. The only important question will be what and how will the alternative be.
*************
F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press
Ltd.) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). He may be contacted through his website, www.engdahl.oilgeopolitics.net.
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