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
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
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
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
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.
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