Larry Summers' smoking gun: How he, Rubin & Geithner deregulated banks -- GLOBALLY

[BrainGlutton]

Greg Palast breaks the story.

In 1997, Larry Summers – now a leading candidate for Chairman of the Federal Reserve – was serving as Deputy Secretary of the Treasury, under Secretary Robert Rubin, who was pushing very hard to deregulate banks.

11/24/97, Summers received a very . . . interesting memo from Timothy Geithner, who was Undersecretary of the Treasury for International Affairs.

It begins with Larry Summers’ flunky, Timothy Geithner, reminding his boss to call the Bank bigshots to order their lobbyist armies to march:

“As we enter the end-game of the WTO financial services negotiations, I believe it would be a good idea for you to touch base with the CEOs…”

To avoid Summers having to call his office to get the phone numbers (which, under US law, would have to appear on public logs), Geithner listed the private lines of what were then the five most powerful CEOs on the planet. And here they are:

Goldman Sachs: John Corzine (xxx) xxx-xxxx

Merrill Lynch: David Kamanski (xxx) xxx-xxxx

Bank of America: David Coulter (xxx) xxx-xxxx

Citibank: John Reed (xxx) xxx-xxxx

Chase Manhattan: Walter Shipley (xxx) xxx-xxxx

Lamy was right: They don’t smoke cigars. Go ahead and dial them. I did, and sure enough, got a cheery personal hello from Reed – cheery until I revealed I wasn’t Larry Summers. (Note: The other numbers were swiftly disconnected. And Corzine can’t be reached while he faces criminal charges.)

Summers’, Geithner’s and Rubin’s agenda was to repeal the Glass-Steagall Act, dismantling the barrier between commercial banks and investment banks; and to allow banks to engage in “derivatives trading.” (We know how that worked out.) Summers blocked any attempt to control derivatives.

But what was the use of turning US banks into derivatives casinos if money would flee to nations with safer banking laws?

The answer conceived by the Big Bank Five: eliminate controls on banks in every nation on the planet – in one single move. It was as brilliant as it was insanely dangerous.

How could they pull off this mad caper? The bankers’ and Summers’ game was to use the Financial Services Agreement (or FSA), an abstruse and benign addendum to the international trade agreements policed by the World Trade Organisation.

Until the bankers began their play, the WTO agreements dealt simply with trade in goods – that is, my cars for your bananas. The new rules devised by Summers and the banks would force all nations to accept trade in “bads” – toxic assets like financial derivatives.

Until the bankers’ re-draft of the FSA, each nation controlled and chartered the banks within their own borders. The new rules of the game would force every nation to open their markets to Citibank, JP Morgan and their derivatives “products”.

And all 156 nations in the WTO would have to smash down their own Glass-Steagall divisions between commercial savings banks and the investment banks that gamble with derivatives.

The job of turning the FSA into the bankers’ battering ram was given to Geithner, who was named Ambassador to the World Trade Organisation.

Eventually every country yielded, too, with the sole exception of Brazil.

The new FSA pulled the lid off the Pandora’s box of worldwide derivatives trade. Among the notorious transactions legalised: Goldman Sachs (where Treasury Secretary Rubin had been co-chairman) worked a secret euro-derivatives swap with Greece which, ultimately, destroyed that nation. Ecuador, its own banking sector de-regulated and demolished, exploded into riots. Argentina had to sell off its oil companies (to the Spanish) and water systems (to Enron) while its teachers hunted for food in garbage cans. Then, Bankers Gone Wild in the Eurozone dove head-first into derivatives pools without knowing how to swim – and the continent is now being sold off in tiny, cheap pieces to Germany.

No, Mr. President, Larry Summers should not be Chairman of the Federal Reserve, nor of anything but a prison-inmates’ committee. Go with Janet Yellen.

[BrainGlutton]

Meanwhile, Senators Bernie Sanders and Elizabeth Warren propose Four Questions for Fed Chair Candidates.

Question 1: Do you believe that the Fed’s top priority should be to fulfill its full employment mandate?

<snip>

Question 2: If you were to be confirmed as chair of the Fed, would you work to break up “too-big-to-fail” financial institutions so that they could no longer pose a catastrophic risk to the economy?

<snip>

Question 3: Do you believe that the deregulation of Wall Street, including the repeal of the Glass-Steagall Act and exempting derivatives from regulation, significantly contributed to the worst financial crisis since the Great Depression?

<snip>

Question 4: What would you do to divert the $2 trillion in excess reserves that financial institutions have parked at the Fed into more productive purposes, such as helping small- and medium-sized businesses create jobs?

[BrainGlutton]

William Greider writes:

There are many reasons to oppose Summers as Fed chair, but the strongest objection is that Obama would be rewarding the same guys who got things disastrously wrong for the country—the Clinton-Rubin policy makers who danced to Wall Street’s tune of financial deregulation and collaborated with the Greenspan Fed and Wall Street to gut prudential regulation like the Glass-Steagall Act. Those actions set the stage for the crisis that devastated middle-class home owners and working people generally.

Summers was an over-confident cheerleader posing as superior intellect. People called him “the smartest man in the room,” and Summers definitely believed it. As Treasury secretary during Bill Clinton’s second term, Summers personally did the knife work that cut up Brooksley Born, the brave regulator earnestly trying to impose meaningful limits on the explosive derivatives market. He still owes Born—and the country—an apology.

<snip>

When Summers came back to Washington in 2009 as Obama’s chief economic adviser, he pushed aside rival views and once again underestimated the nature of the crisis or how to deal with it. When other Democrats called for much stronger stimulus measures, Summers was a voice for doing less, and he accepted disappointing results as the best that government could do. Obama, alas, adhered to that advice.

[RickJay]

Wait, only Brazil avoided the crisis?

Which Canadian banks failed?

[BrainGlutton]

@RickJay

Wait, only Brazil avoided the crisis?

No, only Brazil balked at deregulating derivatives-trading. Of course, a global financial crisis affects every country no matter how or why it started.

[puddleglum]

I think Yellen should be Fed chair because I am a dove and think she is too. However, there is alot of misinformation in the OP.
The financial crisis was not caused by the repeal of certain parts of Glass Steagal. Bears Stearns, Lehman Brothers, Goldman Sachs and Merril Lynch were all investment banks and did not venture into commercial banks. Glass-Steagal did not apply to them. AIG was an insurance company and Glass-Steagal did not apply to it. The commercial banks which did have problems Washington Mutual, Wachovia, and Bank of America were caused not by going into investment banking but by writing too many bad mortgages or by acquiring a mortgage company.
Keeping Glass-Steagal would not have prevented the financial crisis. Even Fauxcohontas realizes this.

When I called Ms. Warren and pressed her about whether she thought the financial crisis or JPMorgan’s losses could have been avoided if Glass-Steagall were in place, she conceded: “The answer is probably ‘No’ to both.”

[BrainGlutton]

@puddleglum

I think Yellen should be Fed chair because I am a dove and think she is too.

What does hawk v. dove have to do with anything? We are not talking about the secretariat of State or Defense.

[Simplicio]

@BrainGlutton

What does hawk v. dove have to do with anything? We are not talking about the secretariat of State or Defense.

Monetary hawks vs monetary doves. The latter tend to believe in more aggressive monetary policy to fight unemployment.

[Honesty]

@BrainGlutton

Meanwhile, Senators Bernie Sanders and Elizabeth Warren propose Four Questions for Fed Chair Candidates.

These are excellent questions. I’m on pins and needles waiting on the nominee’s answer.

[puddleglum]

@BrainGlutton

What does hawk v. dove have to do with anything? We are not talking about the secretariat of State or Defense.

Inflation hawk vs dove. Hawks want to fight inflation and doves don’t.

[deltasigma]

Let’s also not forget how Larry cost the Harvard endowment $1.8B - at least as far as he was aware.

[aNewLeaf]

Let me play Devil’s Advocate for a second.
This guy changed the entire world banking industry for his own goals.

Don’t we want that guy working for us?
Do we want him working for someone else instead?

[BrainGlutton]

@aNewLeaf

Let me play Devil’s Advocate for a second.
This guy changed the entire world banking industry for his own goals.

Don’t we want that guy working for us?

Only in the laundry room of a federal prison.

[ITR_champion]

I agree that we obviously shouldn’t vote for Democrats, given that the last two Democratic Presidents both felt that this guy was trustworthy.

Somehow I’m betting that certain members of the SDMB will react differently, though.

[aNewLeaf]

@BrainGlutton

Only in the laundry room of a federal prison.

I missed the crime he committed as I scanned through the story- could somebody give me tl;dr on the charges?

[Simplicio]

@ITR_champion

I agree that we obviously shouldn’t vote for Democrats, given that the last two Democratic Presidents both felt that this guy was trustworthy.

Somehow I’m betting that certain members of the SDMB will react differently, though.

In what sense is he untrustworthy? He was openly in favour of appealing Glass-Segal, and then he worked to make it happen. I’d say that’s sort of the opposite of untrustworthy (indeed, part of the guys bad rep. comes from his habit of being a little too open about what he’s thinking).

The OP is silly. The memo doesn’t show anything except that the people in the Clinton WH were pushing in private for the policies they were also pushing in public.

[BrainGlutton]

@aNewLeaf

I missed the crime he committed as I scanned through the story- could somebody give me tl;dr on the charges?

It’s more in the nature of “There oughta be a law!”

From Palast’s article:

The Memo confirmed every conspiracy freak’s fantasy: that in the late 1990s, the top US 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.

<snip>

Of course, it was not just threats that sold the FSA, but temptation as well. After all, every evil starts with one bite of an apple offered by a snake. The apple: the gleaming piles of lucre hidden in the FSA for local elites. The snake was named Larry.

Does all this evil and pain flow from a single memo? Of course not: the evil was The Game itself, as played by the banker clique. The memo only revealed their game-plan for checkmate.

And the memo reveals a lot about Summers and Obama.

While billions of sorry souls are still hurting from worldwide banker-made disaster, Rubin and Summers didn’t do too badly. Rubin’s deregulation of banks had permitted the creation of a financial monstrosity called “Citigroup”. Within weeks of leaving office, Rubin was named director, then Chairman of Citigroup – which went bankrupt while managing to pay Rubin a total of $126 million.

Then Rubin took on another post: as key campaign benefactor to a young State Senator, Barack Obama. Only days after his election as President, Obama, at Rubin’s insistence, gave Summers the odd post of US “Economics Tsar” and made Geithner his Tsarina (that is, Secretary of Treasury). In 2010, Summers gave up his royalist robes to return to “consulting” for Citibank and other creatures of bank deregulation whose payments have raised Summers’ net worth by $31 million since the “end-game” memo.

That Obama would, at Robert Rubin’s demand, now choose Summers to run the Federal Reserve Board means that, unfortunately, we are far from the end of the game.

[brickbacon]

Why is Jon Corzine’s name misspelled in the memo? Is that a typo?

[Simplicio]

@BrainGlutton

It’s more in the nature of “There oughta be a law!”

From Palast’s article:

That article is rudiculous. Something isn’t a “conspiracy” if its done openly. The people in that memo openly supported the legislation they were supposedly “conspiring” to pass.

Seriously, just try reading the memo independently of all the breathless conspiracy-theory talk around it. What in that memo do you feel is new information that was previously kept secret from the public? What in there do you think there should be a law against?

[BrainGlutton]

@Simplicio

That article is rudiculous. Something isn’t a “conspiracy” if its done openly. The people in that memo openly supported the legislation they were supposedly “conspiring” to pass.

Seriously, just try reading the memo independently of all the breathless conspiracy-theory talk around it. What in that memo do you feel is new information that was previously kept secret from the public? What in there do you think there should be a law against?

To avoid Summers having to call his office to get the phone numbers (which, under US law, would have to appear on public logs), Geithner listed the private lines of what were then the five most powerful CEOs on the planet.

Clearly they felt they had something to hide.