TThe unexpected US Congress� rejection 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
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, 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 Br�ning 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 Germanophobe, 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, Darmst�dter-und Nationalbank (Danat)
failed. That triggered a general a depositors� run on all German banks. The
Br�ning 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, 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
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 -- 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 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 Percent 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
Paulson�s impressive interest conflicts
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 of old.� 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.
showed where his interests lay. He is by law 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 sirector 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 40 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. 
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 bail out 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?
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.
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.
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 1990s, 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. 
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.
bankers I know who went through the Scandinavian crisis of the 1990s are
scratching their heads 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 checkbook, 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.
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 1990s, 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.�
is an added element. John McCain decided to boost his flagging presidential
campaign by trying to portray 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.
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.
next comes out of Washington,
however, one thing is clear, as reflected in what German Finance Minister Peer
Steinbr�ck 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.
Press, Two charges against AIG�s
Spitzer aide says four left concerning
deception are �heart of the case,� September 6, 2006, in msnbc.msn.com/id/14704060.
2. Gretchen Morgenson, Behind
Insurer�s Crisis, Blind Eye to Web of Risk, The New York Times, September
3. Nouriel Roubini, Is
the Purchasing of $700 billion of Toxic Waste the Best Way to Recapitalize the
Financial System?, September
28, 2008, in www.rgemonitor.com
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.