From the October 2008 Idaho Observer:
Paulson Panics as UK, Germany find their own solutions
Paulson Panics as UK, Germany find their own solutions
America’s de facto Finance Czar U.S. Treasury Secretary Henry Paulson has reached for the panic button and made a dramatic 180-degree reversal of his financial bailout plan passed only days before. On September 23 in testimony before the U.S. Congress, Paulson, former CEO of the politically influential Wall Street investment firm Goldman Sachs declared his adamant opposition to the idea of the U.S. government taking equity stakes in troubled major banks in order to provide them capital and stabilize the frozen interbank trading market. On October 13, that opposition to "nationalization" collapsed. What happened to cause that sudden reverse is what interests us here. It shows the utter lack of coherency in the U.S. financial elites over how to deal with home-grown securitization of their risk fiasco.
By F. William Engdahl
The Paulson plan was widely criticized among more sober U.S. bankers and economists, including Treasury Secretary Paulson’s predecessor Paul O’Neill who simply called the concept of using a $700 billion taxpayer bailout fund to buy "toxic debt" from banks, as "crazy." All critics agreed the Paulson approach was by far the most costly option and comes with no guarantees that it will solve the underlying problem: Inadequate bank capitalization following hundreds of billions of dollars in sub-prime and other security losses. Yet Secretary Paulson adamantly refused to alter his plan, even after Congress rejected it in the first vote. He allowed non-related Democratic "pork" items to be tacked onto his original Troubled Asset Relief Plan (TARP), a plan that gave the Treasury Secretary virtual dictatorial powers over the U.S. finance and, by extension, the U.S. economy. It was referred to widely as "the financial equivalent of the U.S. Patriot Act."
Then, on October 8, 2008, the unexpected took place: Gordon Brown, former British finance minister and now prime minister, facing a literal meltdown of the British banking system, on advice of senior staff of the Bank of England, swallowed his own opposition to bank nationalization and adopted an emergency nationalization scheme. He announced that the UK Treasury had made € 64 billion available to buy bank preferred shares in eight UK banks designated by the government as strategic. The nationalization was to be partial but effective and included a €260 billion "special liquidity scheme" of Treasury cash to inject into the frozen inter-bank market, consisting of UK Treasury bills in exchange for the banks’ less liquid assets as collateral.
The relevance of 1931
The move was a replay of the dramatic decision by the British Government in 1931. At that time, Britain and members of the British Commonwealth "broke the rules of the game" and unilaterally abandoned the international Gold Standard. In September, 1931, after months of debate, the UK abandoned monetary orthodoxy and unilaterally left the gold standard it had rejoined in 1925.
Germany had preceded the UK in abandoning the gold standard by some weeks—and under far different circumstances—in August, 1931. Germany, under emergency rule without parliament under Chancellor Brüning, faced a crisis in the wake of the French decision to punish the German-Austrian economic entente. France had precipitated a banking crisis in Austria’s largest bank, the Vienna Credit-Anstalt.
The role of J.P. Morgan Bank in New York, the leading private creditor of the German banking system since the end of hyperinflation in 1923 and the Morgan controlled New York Federal Reserve under Governor George L. Harrison, was instrumental in precipitating the German banking crisis of 1931.
As a condition for its stabilization loan to the Reichsbank, Harrison demanded the Reichsbank cease lending to German commercial banks. Under maximum duress, it did. The banks collapsed.
So long as it remained on the Gold Standard, a requirement of JP Morgan and the New York Federal Reserve, Germany had to prevent capital outflows and impose higher taxes and budget austerity to persuade international creditors of its credit worthiness. As the German recession deepened, the government cut the social programs instituted after the war. It was the outbreak of the banking crisis in the summer of 1931 that made the German depression so severe. The collapse of the banks in central Europe had a major social, psychological and political impact. The rest became tragic history.
The United States, guided by Harrison and backed up by the monetary orthodoxy of President Herbert Hoover, held bitterly to the gold standard until March, 1933, when newly inaugurated President Roosevelt left the gold standard. By then, the United States economy was deep in depression.
Paulson’s "volte face"
The Paulson plan underwent a radical shift once leading EU nations began responding to the deepening U.S. banking quagmire.
UK.This time around it was again England that led the break with the rules of a U.S. financial game by swiftly nationalizing its top eight banks, starting with the Royal Bank of Scotland (RBS) on Wednesday, October 8, 2008.
Germany. By the following Friday it was clear that Germany was also moving toward a national resolution of its banking problems—problems that originated in the U.S. with its spread of asset-backed securities (ABS) and credit default swaps (CDS).
(The ABS and CDS "markets" are a relatively new and exotic area of creative finance which had, in just a few years, grown to some $68 trillion in a totally unregulated area of bank-to-bank commerce relations).
France. The French Sarkosy Plan, a €300 billion to €400 billion "common bailout fund" modeled loosely on the original Paulson Plan, was dead. German taxpayers would not pay for the excesses of French or Italian banks.
The British, German and French responses to the largely U.S.-created global financial crisis is leading a sea change in attitude all across the EU—away from a U.S.-led desire for global financial unity. The much vaunted "Project for a New American Century" was suddenly faced with the possibility of catastrophe.
The "S" word. That was the point of Paulson’s radical shift to what, in the parlance of U.S. radical "free marketers," was a bolt towards the dreaded "S" word: "Socialization" of the banking system. According to my best European banking sources, had Paulson not taken radical new action at that point, as one City of London veteran banker expressed it, "the U.S. banks were in danger of extinction."
On Monday, October, 13, 2008, Paulson convened an emergency meeting at the U.S. Treasury with the heads of the nine largest U.S. banks. According to reports from participants, Paulson handed each person a one-page document to sign that they would agree to sell their stock shares in part to the U.S. government in return for an emergency injection of $250 billion. Paulson told them they must all sign before leaving the room. Three hours and reportedly many acrimonious arguments later, all nine had signed onto the largest government U.S. banking system intervention since the Great Depression.
According to insider accounts from bankers I spoke with here and in New York, it was precisely the decision by the UK, backed by a similar (if not yet so detailed plan from the German authorities) that forced Paulson’s "volte face."
Treasury fox now
running Fed henhouse
After the fact, in a confirmation of how weak the new Federal Reserve Chairman Ben Bernanke is in face of the domineering personality of Paulson, Bernanke mumbled to the press that he had been in favor of the government buying equity shares to recapitalize the banks "all along."
Why he refused to state that publicly, before the Paulson Plan won the day, is unclear, but it suggests the man Bush chose to succeed Alan Greenspan was chosen for his "lability" not his "ability" or strength of character.
Lehman Bros. "bankruptcy"
The Lehman Bros. bankruptcy on September 15, 2008, was the banking "shock heard round the world." Lehman Bros. Bank was commonly believed to be one of the largest and strongest banks in the world. It’s unexpected bankruptcy precipitated a global crisis in banking confidence that has resulted in the present situation.
Whether Paulson and friends calculated the Lehman Bros. collapse to provide justification for a U.S.-crafted solution to the the resultant global banking crisis remains unclear. What is clear is that one of the chosen "winners" in the present U.S. banking reorganization, JP Morgan Chase, played a nasty role in the final push against Lehman Bros. the Friday prior to Lehman’s Monday declaration of insolvency. JP Morgan Chase had "mysteriously" withheld a $19 billion transfer that Friday which would have averted the collapse of Lehman Bros. It was an eerie echo of the nasty role played in 1931 by the House of Morgan in relation, then, to the German and European banking crisis.
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 (See ad page 14). He may be reached through his website, www.engdahl.oilgeopolitics.net.