Dear colleagues!
Helga and I are making our presentations, the attempts at intimidation, which we heard from Mr. Zhirinovsky, notwithstanding. Although it should be said, that as an individual, I did follow his advice in a certain sense, insofar as when I was elected to the first State Duma, I voluntarily refused to take my seat—but that was for other reasons.
And maybe it really would be better for women to sit in the kitchen, if it were not for the fact that our people so often have to see so many idiots among the men
coming across their television screens, and if today's brilliant presentation by Vladimir Volfovich had not been just as incoherent as always. But, it's too bad he's not here and I have to talk behind his back.
In a short presentation today, I shall try to sketch the development of the research done by our group, which is a group of independent experts studying the world financial crisis, but in a more global context than merely financial.
Our Three-Level Forecast
In the Autumn of 1997, we were requested by a major industrial finance group in Moscow, to draw up such an analysis. We delivered our product to the client at the end of March 1998. In the framework of our analysis, we made a three-level forecast.
Our first forecast was optimistic, and envisaged a devaluation of the ruble, as we calculated, within a factor within the range of one-and-a-half to two, by the Fall of 1998. Our middle version suggested a three- to fourfold devaluation, and our most pessimistic forecast suggested devaluation by a factor of five to seven.
It should be noted that our clients, who were quite well-qualified people—otherwise they wouldn't have ordered such a study in the first place—were skeptical about even our most optimistic prognosis. By June [1998], however, when I had occasion to speak at an open practical-scientific conference, organized by the Ministry of Internal Affairs at the Institute for Combating Organized Crime, I limited myself to outlining only the pessimistic version, i.e., a devaluation of the ruble by a factor of five to seven that Autumn.
To say that the audience was shocked, would be to put it mildly. During the first half of the day, I was sitting at the dais, but after my speech, they were scared to invite me back up to the dais, although the rest of the colleagues, who had been sitting next to me, were still there. I was denounced in the mass media.
Why did I need to discuss only the pessimistic version?
In May, the cabinet had been broken, and Mr. Kiriyenko was named Prime Minister. For us, as analysts, this means that history was picking up the pace, and that events would be unfolding in the relatively graver ways we had identified, and possibly somewhat sooner, than our concept of a "black Autumn." And, so it happened. True, it was close to September—but still in August.
The figure of Kiriyenko was worked up quite splendidly, by the forces, who were playing out this scenario. This person was rather widely dubbed on TV, "The kinder-surprise." We called him a talking head, or a talking parrot. This is a totally peremptory person, absolutely sure of himself, who knows absolutely everything about everything. Almost like Vladimir Volfovich, one might say. Although Vladimir Volfovich is still smarter than Kiriyenko, it seems to me—a bit deeper.
In the framework of that June [1998] conference, I hesitated to name the person, on whose behalf the game was being played. Literally ten days after my speech to our policemen, I was invited to appear on REN TV, where I again laid out the pessimistic "black Autumn" scenario, and said that we would have a new Prime Minister by the end of Summer. And when all the relevant events had taken place, and REN TV invited me again, they said:
You seemed to have guessed that the default was going to happen, but the Prime Minister hasn't changed. And I said, "It's not yet evening."
Two days later, Kiriyenko was out.
Thus, one of the hypotheses about why this game was being played, and which figures were acting in the open, was that the beneficiary was Yevgeni Primakov.
The only unexpected element, when this person really did emerge as the candidate for the premiership, was that Grigori Yavlinsky was the first to bring him up. I have known Grigori for a very long time, since our work together in Nikolai Ivanovich Ryzhkov's working groups at Sosny. He is a very cowardly person, who absolutely lacks his own point of view. He is the original "floating exchange rate"—but a political one, rather than for currency. Furthermore, and I say this as a person who has been living her political life somewhat in parallel with Grigori Yavlinsky—having sat with him, Gaidar, and Volodya Orlov at the conference table in Sosny—it is the case, that with Grisha Yavlinsky there always comes bloodshed.
There was the blood of the Pugo couple, and then some other incidents. Therefore, this was a very frightening prospect. I shall not go into details, but the fact that ultimately Putin came to power, I consider to be positive.
Let me say a little bit, about why our forecast was so accurate, down to the part of the month, even to the day, with the ruble falling already in the first days of August 1998—threefold, and then 4.3-fold. This was very close to the lower boundary of our pessimistic forecast.
Many colleagues here know me, and that I have studied the "shadow" economy of the Soviet Union and then Russia, in parallel with studying the ordinary, normal economy. So, when I was dragged by the ears into politics, as well, while studying our domestic "shadow" economy and expanding that to the study of the transnational "shadow" economy, I unavoidably landed in the realm of analysis that is sometimes called conspiracy theory. This is an analytical technique, a methodology, which makes it possible to fine-tune research and quantitative evaluations, both with respect to time, and with respect to certain other kinds of parameters.
I shall not go in detail into the basis for our forecast, which I shall now present to you. Just take my word for it, as some colleagues in the Ministry of Internal Affairs audience did back then.
My forecast is that major events will unfold, once again, in August. In a strange way, it seems to me that the date may even be known. It will be on Aug. 19. I have provisionally called this scenario, "Tidal Wave XXI," where XXI denotes the new century, in Roman numerals.
The Main Blow Will Hit the United States
The main blow will be inflicted on the United States of America. My colleague [Andrei] Kobyakov said here, that his analysis shows that the eye of the cyclone will be in America. I would only add, that it will emerge there, but this will be done on purpose.
Many of the preceding speakers mentioned financial figures, on the magnitude of financial assets, which had reached around $400 trillion in 2000, as against $30 trillion world GDP, and on capital flows. But it is consistently treated as unnecessary to analyze who is transferring that money. Who is the non-resident, with respect to the American economy? Where do these investments come from? If here we bring in our supplementary analysis and methodology, the picture becomes fairly clear, and can be observed, including with respect to the persons involved.
Thus, I make this determination. It will be the United States this time, and it will be a crisis developing at a different rate than the one in 1997-98. At that time, the action was drawn out. Here, it will be more of a precision strike. It will be like the explosion of the Universe. And it will spread throughout all continents.
Many governments will be swept away. The monetary and financial system of the world will change.
In Russia, beyond a doubt, the free exchange of currency will be shut down. And the approximately $100 billion, now circulating in cash inside our country, will suddenly cause an enormous shock to Russian citizens. (It should be mentioned that the quantity of foreign currency, functioning in economic exchange to transact deals, is 1.5 times the ruble money supply, servicing economic activity.) It will be impossible to change money. Those who have a lot of money (and I told this to our policemen not long ago, at a follow-up conference held in May 2001) will use their greenbacks to wallpaper the bathroom, where they'll be able to admire the portrait of a past President of the U.S.A.
There will be a change of leadership in the U.S.A., and early elections in Russia. By this Fall, there will be a new Parliament, a different government, but the President will remain the same. Insofar as I nevertheless fear to say too much—and I could say very much—thank you for your attention. God grant that my forecast turn out to be wrong.
May God grant that!
Expert: Russia Knew in Advance, Encouraged Citizens to Cash Out Dollars
Dr. Alexandr Nemets
Monday, Sept. 17, 2001
from NewsMax Website
Dr. Nemets is a consultant to the American Foreign Policy Council (AFPC). An expert in Chinese-Russian strategic-military alliance development, he has spent the last several years researching Chinese and Russian economic and military issues. Dr. Nemets worked from 1986-92 at the Presidium of Russian Academy of Sciences.
He immigrated to the United States in December 1994.
Russian press accounts and other activities by the Russian government this summer indicate that the Russian government knew in advance that something would happen to America, including a "financial attack" against the U.S. During the past three months, Russian media and officials have encouraged citizens to cash out U.S. dollars pending an economic collapse there after an "attack."
Currently, the dominant view of the media is that the terrorist actions in New York City and Washington were just a "bolt of thunder from the sky." Could it be? Yes, a well-organized group accomplished these dastardly acts. But just how well organized was it?
Obviously, President Bush and Vice President Cheney are targeting the powers behind these terrorist groups, the states that give them safe harbor and backing. Sponsors of state terrorism include Iran, Iraq, Libya, Cuba, North Korea, Sudan and Syria. Did you know that all of these countries have very close ties with Russia and her military/intelligence agencies?
Could it be that the Russians actually expected this in advance and even counted on it, discussing the possible consequences?
My suspicions were raised this July and August as I scanned and sifted through all of Russia's major newspapers. Considering Russia's close ties to these terrorist countries, Russian activities need close scrutiny.
Pravda Wrote of Financial 'Attack' on U.S.
Consider the July 12, 2001, Page One report in Pravda – still considered the establishment voice of Russia's old guard communists who control the military and intelligence agencies.
The Pravda article was entitled "Will the Dollar and America Fall Down on August 19? That's the Opinion of Dr. Tatyana Koryagina, Who Very [accurately] predicted the August Default in 1998."
This article struck me for several reasons. Major newspapers so closely aligned with the government do not attempt to create panic or fear in the public – unless the government wants this information to be publicly aired. Also, a major newspaper would be reluctant to print a major prediction for which it could be held accountable.
This Pravda article was published about the same time as another strange event that took place in early July in the Russian State Duma. The Duma held a conference entitled "On the measures to provide the development of Russian economy in the environment of destabilization of the world financial system."
The chairman of the Duma Commission on Economic Politics, Dr. Sergei Glazyev, headed the hearings. Some prominent foreigners, including Lyndon Larouche from the U.S. and Malaysian Ambassador in Russia Yacha Baba, were among the participants. Tatyana Koryagina made a statement at the end of hearings – as a Russian expert in the shadow economy, shadow politics and conspirology.
She is a senior research fellow in the Institute of Macroeconomic Researches subordinated to the Russian Ministry of Economic Development (Minekonom). The main theme of the Duma hearings was the rapidly approaching economic crash of the United States. The hearings focused on preparing recommendations for President Putin as to what Russia should to do to soften the consequences of this
coming catastrophe. Pravda also detailed its own interview with Dr. Koryagina.
Here is an excerpt:
Pravda: All the participants at the hearings stated that America is a huge financial pyramid which will crash soon. Still, it is hard to understand how this could happen in the first and richest country of the world – without a war, without missile or bomb strikes?
Koryagina: Besides bombs and missiles, there are other kinds of weaponry, much more destructive ones. ...
Pravda: Well, economic theory. But how it is possible for you to give an exact date [for the U.S. crash] – August 19?
Koryagina: The U.S. is engaged in a mortal economic game. The known history of civilization is merely the visible part of the iceberg. There is a shadow economy, shadow politics and also a shadow history, known to conspirologists. There are [unseen] forces acting in the world, unstoppable for [most powerful] countries and even continents.
Pravda: Just these forces intend to smash America on August 19?
Koryagina: There are international "super-state" and "super-government" groups. In accordance with tradition, the mystical and religious components play extremely important roles in human history. One must take into account the shadow economy, shadow politics and the religious component, while predicting the development of the present financial situation.
Pravda: Still, I don't understand what could be done to this giant country [the U.S.], whose budget is calculated in the trillions of dollars.
Koryagina: It is possible to do anything to the U.S. ... whose total debt has reached $26 trillion. Generally, the Western economy is at the boiling point now. Shadow financial actives of $300 trillion are hanging over the planet. At any moment, they could fall on any stock exchange and cause panic and crash. The recent crisis in Southeast Asia, which touched Russia, was a rehearsal.
Pravda: What is the sense of smashing just America?
Koryagina: The U.S. has been chosen as the object of financial attack because the financial center of the planet is located there. The effect will be maximal. The strike waves of economic crisis will spread over the planet instantly and will remind us of the blast of a huge nuclear bomb.
Pravda: Did Russia's crisis of 1998 have this religious-mystical component?
Koryagina: ... The Russian crisis of 1998 was preconditioned by internal factors. Yeltsin's policy enlarged its consequences. Now we have President Putin, and this is a good choice.
Pravda: What do we have to do now?
Koryagina: Recommendations, compiled by the Duma Commission of Economic Politics after the recent Duma hearings, offer instruction on what should be done to escape the consequences of a world crisis inspired by a financial catastrophe in the U.S. This document will be sent – or has already been sent – to President Putin.
Pravda: What should Russian citizens do?
Koryagina: They should start changing their dollars for rubles. President Putin and the Russian Central Bank are already taking the necessary healthy measures. There are high chances that after 19 August the ruble will become a very good currency.
Pravda: Why 19 August, say, and not the 21st?
Koryagina: Some fluctuation in this date is possible. Serious forces are acting against THOSE WHO ARE NOW PREPARING THE ATTACK ON THE UNITED STATES [emphasis added]. August, with very high probability, will bring the financial catastrophe to the U.S. ... The last 10 days of August have especial importance from a religious-sensible point of view.
[End of excerpt]
It is important to note that this story was not an isolated one, or a cute, human interest story as one may find occasionally on the cover of
the Wall Street Journal. It was a serious news report, and story, discussed widely in Russia, including on national TV programs. The thrust of the story was that Russian officials were strongly encouraging Russian citizens to cash out the U.S. dollar.
It is also important to understand that Dr. Koryagina is one of the leading economists in a Russian social group which, from the very beginning, has fiercely opposed "radical economic reform" in Russia. She is a firm supporter of President Putin.
She and her network actively support Putin, especially his foreign policy aimed at the diminishing America's global role. In particular, they support Putin's policy of engagement of Iran, Iraq and other nations of concern. Dr. Koryagina herself should be considered as an insightful, well-connected and well-informed person. Dr. Koryagina says much about the invisible and unstoppable "international mystical-religious forces" preparing an attack on the U.S.
It looks like she knows the real nature of these forces and tries to disguise them in a "conspiratorial fog." She is sure that such an attack or strike of some kind – sudden and effective – will soon take place, and will cause panic and an ensuing crash of the U.S. financial system and the world financial system, already unstable. However, Dr. Koryagina evidently does not know the exact mechanism of the attack.
Duma Warned Citizens to Cash Out Dollars
The hearings in the Duma, which has become a rubber stump for President Putin, have been inspired, without doubt, by the Kremlin, "taking the necessary healthy measures" in advance of a U.S. crash and world crisis.
The Kremlin clearly is thinking how it should operate in the "new world" after the expected U.S. crash. It is my belief that the Kremlin provided Dr. Koryagina with a very small part of its information on the forthcoming attack against the U.S.
Another article on this same theme was published by Pravda on July 17, 2001. It was an interview with Chairman of the Duma Commission on Economic Politics Dr. Sergei Glazyev, one of the most prominent Russian economists.
The article was entitled "The Dollar and the U.S. Could Fall at Any Moment."
Dr. Glazyev, in his answers, did not mention the forces preparing an attack on the U.S. and its financial system. He merely discussed the forms and scales of the forthcoming financial catastrophe in the U.S. and its consequences for Russia – mostly beneficial ones if the necessary measures are taken in advance.
In particular, like Dr. Koryagina, Dr. Glazyev advised the Russian public to change dollars for rubles and predicted that "the ruble will become the reserve currency for Eurasia, particularly in trade with China and India."
Third Article, More Media
Pravda published a third article on this theme on 31 July-1 August 2001. This article, called "The Dollar and the U.S. Will Fall," was in the form of an interview with the Malaysian ambassador in Russia. Other Moscow newspapers published articles of this kind also.
As a result, New York's Russian-language TV channel in early August was forced to state that "the Moscow rumors are ungrounded." Within a few days the public forgot all about this story. The tone of Moscow economists predicting the crash of the U.S. financial-economic system is confident and somewhat delightful: "Finally, it is going to happen!"
They are not only discussing the future, they are evidently trying to issue a self-fulfilling prophecy, transforming this future into the present. This is because the prospects described in the above articles are extremely attractive for the Russian elite for the following reasons:
1.
It will become possible to pay off Russia's huge foreign debts with devalued dollars; it would be really easy enough if oil prices jumped to $100 per barrel or more.
2.
Russia would become really equal among a weakened G-8 group of nations.
3.
Investment conditions in Russia would become really attractive in comparison to the bleak global background. Russia could become the goal of huge foreign investment.
4.
If the U.S. military might is undermined (and it might be, if the financial system collapses), Russia will regain its control over the former Soviet republics, spread it to the Balkans and reacquire its former super-empire status.
Such a prize, such a temptation for the criminal Russian "elite"! One small push, and such great booty! While reading these articles, it is almost possible to visualize how they are licking their lips with excitement.
So, those in Moscow had very serious reasons not to share information with the U.S. about the
coming attack on the latter – if they indeed had such information.
Very likely they did, and the maximum amount of information was concentrated in the Kremlin. According to numerous statements published by prominent U.S. economists after the tragedy, the time and places of the attacks were chosen – more precisely, pretty well calculated – as if the terrorists or those backing them had tried to do their best to undermine the U.S. financial system and political system and to cause a financial-economic crisis in the U.S.
There is some evidence that another targeted aircraft, a TWA plane at JFK airport, did not take off and perhaps another crash was thwarted. Was it intended for the New York Stock Exchange?
"It wasn't a healthy economy to begin with, and this could be just enough to push us into a mild recession and render a blow to consumer confidence," one of these economists told the UPI.
He continued:
"There has been a complete disruption of passenger flights. Besides the airline industry, tourism, retail and the shipping sectors will feel the negative effects of Tuesday's attack. Tougher security measures now in place at the nation's airports will increase shipping and travel expenses that will be passed along to the consumer."
And the consumer confidence index, low already, declined additionally.
However, those in Moscow very probably waited for much greater effects. Remarkably, immediately after the events in New York and Washington – at approximately 6 p.m. Moscow time – the dollar exchange rate in Moscow street exchanges fell from 29 rubles to 15-20 rubles – as if the Moscow financial experts had awaited the strikes or expected greater panic and collapse.
It is important to note that such a great fluctuation in the exchange rate happened in no other world capital. The next day, the dollar in Moscow gradually returned to its previous exchange rate.
A network of terrorist groups – mostly in the U.S. and Middle East – merely provided the fingers to implement the terrorist strikes. After all, Arab terrorist groups are supported by rogue nations – Libya, Syria, Iran, Iraq and Sudan. These countries are "hands."
U.S. Needs to Look at Source
Now, if the U.S. and NATO forces carry out retaliatory strikes on Afghanistan, the "hands" will be punished.
*
And where is the body, the heart of the beast?
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And who provides the advanced military technology – including that needed for "special actions" – to these nations of concern?
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Who supports them in the U.N.? *
Who demonstrates daily the desire to diminish or undermine America's global influence?
Moscow and Beijing.
And Moscow, probably, is even more evil and impudent. Let us consider the Moscow rulers. Yes, of course, Putin immediately sent condolences to President Bush and the American people. It should be taken into account here that in September 1999 Putin conveniently used the apartment explosions in Moscow and Volgodonsk (KGB-organized actions, in the opinion of most of the Russian media and in the opinion of the author) to gain supreme power in Russia.
Now the Kremlin is making statements about a "joint struggle against world terrorism," about "the ties between the actions in New York and the actions in Moscow in September 1999."
Indeed, these are probably closely tied to one another, and the same forces are behind the actions in New York and Moscow. But what is the real name of these forces?
The investigation should go to the bottom of the barrel and provide the proper answer. 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 bank failures.
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 the 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 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, Stoljece Rata.
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
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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% 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.
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.
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.
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 vested interests.
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 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.
