by F. William Engdahl
September 30, 2008
F. William Engdahl is author of
A Century of War: Anglo-American Oil Politics and the New World
Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of
Genetic Manipulation (www.globalresearch.ca). He may be contacted
through his website,
The US Congress’ passage of a slightly modified form of the Bush
Administration’s financial bailout plan on the week of October 3 has opened
up the specter for the first time of a 1931-style domino wave of worldwide
That process is already underway across the US
banking sector with the failure, nationalization or forced liquidation in
the past weeks of Fannie Mae and Freddie Mac, of the giant
Washington Mutual mortgage lender, and the rapid collapse 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.
The new act has been described as the financial equivalent of the US
Patriot Act, the law that gave
Bush Administration powers in violation of Constitutional
safeguards under the climate of the September 11, 2001 attacks.
The treasury will have almost unlimited discretionary powers to price and
buy distressed mortgage securities, or any other type of securities -
including even car loans and student loans - which it considers important.
Treasury can buy from any institution of its choice, through a process of
its own design, which is as yet unknown and at a pace which the treasury
deems appropriate. Moreover, the Paulson Treasury will ‘outsource’ most of
the management of the $700 billion purchases to the very financial
institutions responsible for creating the crisis.
The treasury is reportedly planning to use up to 10 private asset managers
to manage the assets purchased under the plan. Big players like PIMCO, Black
Rock and Legg Mason are reported likely to be chosen for what will be some
of the world's biggest asset management accounts. Heavy private sector
involvement from the same community of investment bankers who are perceived
to be the villains in this crisis, will make political management of the
plan all the more difficult.
Former US Treasury Secretary Paul O’Neill in an interview has called
the Paulson plan ‘crazy.’ O’Neill points out as this author and many other
economists have, that the new plan does nothing to assure an end to the
banking crisis. It merely rewards many of Paulson’s friends on Wall Street
at US taxpayer expense.
Were the moral backbone of the Democratic
Congress at all strong, there would be calls for
indictment of Paulson and others in the Bush
Administration for criminal misconduct in the most brazen
financial swindle in the scandal-ridden American finance history.
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
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
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,
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
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
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
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
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:
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.
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 J.P. 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 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.
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.
Under Paulson, according to City of London financial sources familiar with
it, Goldman Sachs drove the securitization revolution with an endless
rollout of new products.
As one London banker put it in an off-record
remark to this author,
"Paulson’s really the guilty one in this
securitization mess but no one brings it up because of the extraordinary
influence Goldmans seems to have, a bit like the Knights Templar order
Naming Goldman chairman Henry Paulson 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
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
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.
That is a tiny glimpse into the man who crafted the largest bailout in US or
world financial history some days ago.
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 gradually 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 bankers 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 is. That 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.
Under Paulson’s scheme, which seems likely to
get very little alteration by Congress in coming days, the Treasury
Secretary, initially Paulson, would have sole discretion, with minimal
oversight, to use a $700 billion check book, courtesy of taxpayer
generosity, to buy various Asset Backed Securities held not only by Federal
Reserve regulated banks like JP Morgan Chase or Citicorp, or Goldman Sachs,
but also by hedge funds, by insurance companies and whomever he decides
needs a boost.
‘The Paulson plan is unworkable,’ noted Stephen Lewis, chief economist with
the London-based Monument Securities.
‘No one has an idea how to set a price on
these toxic securities held by the banks, and in the present market a
lot of them likely would be marked to zero.’
Lewis like many others who have examined the
example of the temporary Swedish bank nationalization, called Securum,
during their real estate collapse in the early 1990’s, stresses that
ultimately only a similar solution would be able to resolve the crisis with
a minimum of taxpayer cost.
‘The US authorities know very well the
Swedish model, but it seems in the US nationalization is a dirty word.’
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
He flew into Washington days before the
Paulson Plan 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 plan. 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
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.