Forum Post: Greg Palast: Potential Fed Chair Summers at Heart of Global Economic Crisis
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Greg Palast: Potential Fed Chair Summers at Heart of Global Economic Crisis
Tuesday, 03 September 2013 09:52 By Jaisal Noor, The Real News Network | Report
JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore.
Investigative journalist Greg Palast has obtained a secret memo authored by then deputy Treasury secretary Larry Summers and his protégé Timothy Geithner detailing their plans to roll back financial regulation. In the piece, titled "The Confidential Memo at the Heart of the Global Financial Crisis" for Vice, Palast writes:
"The Memo confirmed every conspiracy freak's fantasy: that in the late 1990s, the top U.S. Treasury officials secretly conspired with a small cabal of banker big-shots to rip apart financial regulation across the planet. When you see 26.3 percent unemployment in Spain, desperation and hunger in Greece, riots in Indonesia and Detroit in bankruptcy, go back to this End Game memo, the genesis of the blood and tears."
Now joining us to discuss this article is Greg Palast. He's a BBC investigative reporter and author ofVultures' Picnic. Palast turned his skills to journalism after two decades as a top investigator of corporate fraud. Palast directed the U.S. government's largest racketeering case in history, winning a $4.3 billion jury award. He also conducted the investigation of fraud charges in the Exxon Valdez grounding.
Thank you so much for joining us, Greg.
GREG PALAST, BBC INVESTIGATIVE REPORTER: Glad to be with you, as always.
Noor: So, Greg, can you describe this memo you obtained and the context in which it was circulated, as well as its contents and its significance today?
Palast: It's really significant today, because the memo is written to Larry Summers, who was at the time the deputy Treasury secretary, and he was about to become Treasury secretary under Robert Rubin. It came to him from Timmy Geithner. Timmy would become Obama's secretary of the Treasury.
This is really important right now because Larry Summers is President Obama's top choice to become head of a Federal Reserve Board. This would make him the most powerful economic decision-maker in America, more powerful than the president even, and it'll last for years. He would take Ben Bernanke's place. It's quite shocking to have Summers' name come up as head of the Fed, and especially--and therefore especially now that I have this memo in hand.
And what this memo is--they call it the "end game memo". Geithner calls it the "end game". And what's the game being played? The memo asks Summers to get back to the five biggest, most powerful bankers in the United States to act on and determine what our policy should be for world governance of the banking system. Basically, there were secret calls going between Larry Summers and the head of Bank of America, the head of Goldman Sachs, the head of Citibank and Merrill, the five big boys, to find out what should happen to the world financial policing order. And the answer was: smash it. Summers was holding secret meetings with the big bankers to come up with a scheme to eliminate financial regulation across the planet. It's quite an extraordinary process. This is one memo within the whole framework of this strange and what seems to be illegal gatherings. I can tell you that it's not against the law for the secretary of the Treasury to meet with big bankers. What you can't do is do it in secret and run secret negotiating positions past those bankers, who have a direct financial interest in the outcome. Their financial interest was to eliminate all policing of their activities, which they did.
The memo in particular, what Summers was engineering--remember, Summers, Rubin, Geithner were the key players in eliminating financial regulation of the banking industry. They eliminated the distinction between gambling houses in the investment banks and our piggy bank banks, the commercial banks. And as you know, that led to financial implosion in the United States and worldwide. How did it end up bringing down the world financial system just 'cause we had a problem with the United States? The answer goes back to this memo. It was an idea in which they said, look, we can't deregulate into the United States alone; we have to deregulate across the planet. Otherwise, money will shift out of the United States into safer money harbors. So the way to change end that would be to eliminate banking regulations in every nation of the world, 156 nations in one shot.
And it was quite brilliant, the scheme, which was--and it succeeded, that is, in an awful way. We have a world financial collapse, but their plan to succeeded, the end game succeeded, which is to require any nation that wants to do trade with the United States in goods to accept our bads. If you want to sell us--if Ecuador wants to sell America bananas--and this is a real example--if Ecuador wants to sell us bananas, they have to accept in return derivatives, subprime mortgages. They have to accept synthetic collateralized debt obligations. So they're being paid for their real assets with toxic assets.
And every nation but one signed on. A hundred and fifty-five nations agreed to a kind of form of blackmail, which is that you want to sell cars to the U.S., you want to sell, you know, orange juice to the U.S., you're going to have to go along with deregulating your banking system, accepting our derivatives junk, our junk bonds and our junk derivatives, and opening up your sectors to Goldman Sachs and JPMorgan, so that Morgan, Citibank, and others are allowed to operate internationally. The effects, of course, have been disastrous. And what's important about this document, again, is not just that it tells you how the world fell to its knees and the inside process and the kind of icky revelation that, you know, as a lot of people suspected, that the bankers and the Treasury Department actually secretly put this whole business together. What's particularly relevant this week is that Larry Summers, the center of this scheme of this end game, is Obama's prime choice to be head of the Federal Reserve Board. So I thought that this was the time to get the document out.
Noor: And so you can confirmed the authenticity of the memo with Pascal Lamy, the secretary-general of the World Trade Organization. What was his reaction? Can you share his reaction to the memo? And did he disclose anything to you that wasn't previously known or published?
Palast: Well, I actually spoke to--I traveled all over the world to confirm this. I went to Geneva, Switzerland, and I--you know, 'cause of my position as--I'm pretty well known internationally as a reporter, so I was able to speak with the director-general of the World Trade Organization himself, Pascal Lamy. He's French. He said, oh, the WTO--'cause all this was done through the auspices of trade--the WTO is not some cabal of evil bankers meeting in a room secretly filled with cigar smoke, etc. And then I showed him the memos. So that was--yes, there was no cigar smoke, but there were secret meetings of bankers.
And his reaction was, listen, if the United States--in his wonderful French accent--if the United States doesn't have a real democracy, then you're going to have to file a complaint with the human rights court down the street in Geneva. That's none of his business. It's not his job to make America a democracy if we're being run by bankers, which is pretty awful way of putting it.
I then went and I also spoke with a member of the cabinet at the time. Remember, these are cabinet members, Rubin and Geithner and Summers. Another member of Clinton's cabinet when this was occurring was Joe Stiglitz, who later won the Nobel Prize in economics. He was head of the Council of economic advisers. And Stiglitz has never given me, by the way, inside documents, but he does tend to confirm the documents I show him, just to make sure I know what I'm talking about. And he said something shocking to me. He said that when he was in cabinet meetings, Summers would turn to Rubin and say--and they're in the White House in front of the president. The president would ask them some for policy recommendations, and Summers would say to Rubin, well, what would Goldman think of this? In other words, what would Goldman Sachs think? And he did it several times, until Stiglitz finally said, don't you think it's inappropriate to be asking what Goldman Sachs would think of our policies? Isn't it--it's what happens to the American people, not what happens to Goldman Sachs. And they looked at him like he was a complete naive schmuck. You know? And so he was eventually disinvited from Clinton's cabinet, and Summers was promoted to full secretary of the Treasury.
Now, one of the problems here: it's more than bad that there are secret discussions between our policy chiefs and the banks determining what the policy should be. It had a terrible effect on the world economy. It decriminalized behavior by these banks. It used to be a crime for these bags to be shifting money across borders. It used to be a crime for them to sell products that weren't products, like financial derivatives. The problem is that once these activities were decriminalized--we call it deregulating. It's really decriminalizing previously criminal activity. Once we decriminalized the banking system, we ended up with situations, for example, where Goldman Sachs cut a secret deal for currency default swaps with the government of Greece. When that was uncovered, the Greek economy imploded. So these things have serious consequences. By the way, even when we look at the destruction of Detroit, China signed the agreement, agreed, okay, we'll open up our banking sector to derivatives and your toxic junk, but we want your auto parts industry in return. So we basically handed over the auto-parts industry to China. That was their deal. Two million manufacturing jobs shifted to China from the U.S., and auto-parts was a big part of it, which led to the--. One of the reasons why the city of Detroit went bankrupt despite the auto bailout is that auto parts did leave for China. So, you see, there's direct repercussions of this type of secret connivance between our officials and banks. It's a very dangerous business. And for Summers to have been in the middle of organizing this and coordinating this and not revealing this--they're allowed to have these meetings, but they can't do it in secret--it raises questions about whether this guy should be the central banker of the United States.
Noor: And Greg Palast, we'll certainly follow this story and see if it does have an impact on whether Summers gets that position or not.
Palast: Well, yeah, I think it will, because I do know that they're very nervous about his confirmation hearings, and I think that there are some--I do know that there are going to be some senators who are going to be more than happy to stick this memo to his forehead, and especially after they read parts two and three coming up at GregPalast.com. There's going to be--I'm not done with Mr. Summers. I've been keeping files on this guy for about a decade and a half, because wherever there's an economic fire, he always seems to be the guy holding the matchbook.
Noor: Well, Greg Palast, thank you so much for joining us, and we look forward to having you on again to discuss your future reporting.
Palast: Thank you.
Noor: Thank you for joining us on The Real News Network.
This piece was reprinted by Truthout with permission or license.
How Intelligence Was Twisted to Support an Attack on Syria
Tuesday, 03 September 2013 09:05 By Gareth Porter, Truthout | News
http://truth-out.org/news/item/18559-how-intelligence-was-twisted-to-support-an-attack-on-syria
Failing Up to the Fed: A Reporters' Guide to the Paper Trail Surrounding Larry Summers
Wednesday, 04 September 2013 09:26 By Mary Bottari, PRWatch | Report
http://truth-out.org/news/item/18586-failing-up-to-the-fed-a-reporters-guide-to-the-paper-trail-surrounding-larry-summers
The Washington Post's Ezra Klein reports that Larry Summers is the "overwhelming favorite" of the Obama team for the job as Federal Reserve chairman. To convince the American public that one of the chief architects of the 2008 financial crisis should be the chief regulator of the U.S. financial system, supporters of Summers have their work cut out for them. Cue the rewrite.
The New York Times reports that some of Mr. Summers's supporters "argue that better oversight of derivatives would not have prevented or significantly diminished" the 2008 financial crisis. One former Treasury official told the Times that Summers secretly wanted derivatives regulated, but couldn't win the support of Greenspan or Senate Republicans so dropped the idea.
For journalists who are being told what a brilliant man and insightful regulator Larry Summers was behind the scenes, here are a few items from his public record you might want to review.
The final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States puts over-the-counter (OTC) derivatives "at the center of the storm," and specifically cites the Commodities Futures Modernization Act as a major contributing factor. "The enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter derivatives was a key turning point in the march towards the financial crisis." Read the report here.
In the spring of 1998, Deputy Treasury Secretary Larry Summers called Brooksley Born, the head of the Commodity Futures Trading Commission (CFTC), and yelled: "I have 13 bankers in my office who tell me you're going to cause the worst financial crisis since the end of World War II" if she moved forward with plans to bring transparency and reporting requirements to the OTC market. OTC derivatives were already causing huge loses around the globe. In 1994 Orange County California lost $1.5 billion speculating on OTC derivatives. Watch the Frontline investigation "The Warning" here. Summers attacked Born publicly, testifying in Congress in July 1998: "As you know, Mr. Chairman, the CFTC's recent concept release has been a matter of serious concern, not merely to Treasury but to all those with an interest in the OTC derivatives market. In our view, the Release has cast the shadow of regulatory uncertainty over an otherwise thriving market -- raising risks for the stability and competitiveness of American derivative trading. We believe it is quite important that the doubts be eliminated." "The parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies." Read Summers testimony here.
One of Summers primary arguments was that any new regulation could invalidate the burgeoning swaps market, yet Born made it clear in her release and in her testimony that new rules would be prospective. Previously the CFTC had generated prospective rules. "The release does not in any way alter the current status of any instrument or transaction under the Commodity Exchange Act. Any proposed regulatory modifications resulting from the concept release would be subject to rulemaking procedures, including public comment, and any changes that imposed new regulatory obligations or restrictions would be applied prospectively only." Read the concept release here.
Even though the 1998 Long-Term Capital Management derivatives disaster shook regulators and demonstrated that derivatives deals could pose systemic risk to the entire economy, bank regulators and Congress ignored Born who cited "an immediate and pressing need to address possible regulatory protections in the OTC derivatives market." Instead they placed a six month moratorium on any CFTC regulation and Born resigned in early 1999. Read Born's speech on LTCM here.
Summers became Treasury Secretary in July 1999, receiving a congratulatory letter from Ken Lay, the President of Enron Corporation, addressed "Dear Larry." In his response to "Ken" on May 25, 1999, Summers included a handwritten PS: "I'll keep my eye on power deregulation and energy-market infrastructure issues." Read the letters here.
Summers helped negotiate the World Trade Organization's Financial Services agreement that opened global markets to derivatives and other financial products and made it harder for signatory nations to regulate banking in the public interest. In the WTO agreement, which was negotiated behind closed doors, the United States effectively pledged to get rid of the 1933 Glass-Steagall law, which was seen as a barrier to market entry by many foreign banks that were structured differently. In 1997, Tim Geither urged Larry Summers to personally call the heads of America's top five banks to seal the deal. See the Geithner memo to Summers here.
Summers pushed for the repeal of the Glass-Steagall, which was created after the Great Depression to wall off traditional commercial banking activity from the Wall Street casino. The repeal allowed commercial banks to merge with investment banks, securities firms and insurance companies, creating "too big to fail" behemoths and unleashing an era of reckless speculation. On November 5, 1999 Summers hailed the passage of the repeal: "Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st Century. This historic legislation will better enable American companies to compete in the new economy." Read the statement here.
On November 9, 1999, Summers and other regulators issued a report that would serve as the Congressional blueprint for the Commodities Futures Modernization Act drafted the following year. The "President's Working Group on Financial Markets" concluded that "under many circumstances, the trading of financial derivatives by eligible swap participants should be excluded from the CEA [Commodities Exchange Act]. To do otherwise would perpetuate legal uncertainty or impose unnecessary regulatory burdens and constraints upon the development of these markets in the United States." Read the Working Group Report here.
Summers personally reassured Ken Lay on November 22, 1999 that Enron's derivatives trades would not be regulated, directing him to pages 34-35 in the Working Group report that reads "in light of their small market share and the apparent effectiveness of private counterparty discipline in constraining the risk-taking of such derivatives dealers, the Working Group is not recommending legislative action with respect to such derivatives dealers at this time." Read the letter here.
Summers wrote to Congress on December 15, 2000 to "strongly support" the Commodities Futures Modernization Act. The bill that went even further than the legal changes called for in the President's Working Group Report, exempting derivatives from regulation by any federal bank regulator not just the CFTC. Summers also allowed the "Enron Loophole" to be included in bill (over the objections of the CFTC), which exempted energy trading on electronic commodity markets from regulation and helped Enron to gouge billions of dollars from West Coast consumers. Read the letter in the Congressional Record here.
As energy prices skyrocketed in California, Summers opposed Governor Gray Davis' plan to intervene with price controls, claiming: "This is classic supply and demand. The only way to fix this is ultimately by allowing retail prices to go wherever they have to go." Enron filed for bankruptcy in 2001, putting 20,000 employees out of work and Ken Lay was convicted of 10 counts of securities fraud, wire fraud and other offenses. Read Kurt Eichenwald's 2005 book on the collapse of Enron, "Conspiracy of Fools."
Summers departed the Treasury in 2001 and went off to be the President of Harvard, where he ignored repeated warnings by expert staff and lost Harvard some $2 billion of its endowment funds, including $1 billion on toxic interest rate swaps. Read about it in the Boston Globe and Bloomberg News.
Back at the White House in 2009 as head of the National Economic Council, Summers was a chief architect of the generous bank bailout, the weak stimulus and the limited structural reforms in Dodd-Frank. Summers opposed numerous efforts to strengthen the bill, most tellingly, the President's effort to include the "Volcker Rule." Volcker's aim was to put an end some of the riskiest practices by curtailing proprietary trading at U.S. banks and limiting their investments in private equity firms and hedge funds, but the rule was slow walked and weakened by Summers. Read Richard Wolffe's book "Revival: The Struggle for Survival Inside the Obama White House."
Summers was overheard in November of 2008 chastising Arthur Levitt (former head of the SEC under Clinton) for saying that Brooksley Born was right "I read somewhere you were saying that maybe Brooksley Born was right. ... But you know she was really wrong." Levitt confirmed the account, available here.
In the years that followed the 2008 meltdown, Clinton, Greenspan, Levitt even Rubin admitted they made mistakes or expressed some regret for these actions. Summers abided by his own advice to Geithner, as Geithner prepped for his confirmation session as Treasury Secretary, "don't anyone admit we did anything wrong." Read Ron Suskind's "Confidence Men."
In 2012, Summers was grilled by a British reporter and defended his record on derivatives, saying "at the time Bill Clinton was president, there essentially were no credit default swaps. So the issue that became a serious problem really wasn't an issue that was on the horizon... If you want to assign responsibility, If you take a market that essentially didn't exist in the 1990s, that grew for eight years from 2001 to 2008, and then brought on a major collapse, if you were looking to hold people responsible, you would look to... officials of the Bush Administration." Credit default swaps were invented by JP Morgan Chase to offset the risk of the Exxon Valdez disaster in 1994 and plenty of people were worried about them, including presidential adviser Joseph Stiglitz. Watch the Summers interview.
In the shadows, between 2000-2008, the OTC derivatives market grew from $95.2 trillion to $672.6 trillion, notational value. When the dark market deals started to go sour, the impact was felt around the world. The man who was featured on the cover of Time Magazine as part of the "Committee to Save the World" with Robert Rubin and Alan Greenspan in 1999, instead helped bring it to its knees.
This piece was reprinted by Truthout with permission or license.
Also:
http://truth-out.org/opinion/item/18527-summers-time-the-record-that-should-keep-him-off-the-fed