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Forum Post: Geithner’s Ploy: Saving U.S. Banks at Taxpayer Expense, Once Again

Posted 2 years ago on Jan. 8, 2012, 5:39 p.m. EST by jk1234 (257)
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SUNDAY, JANUARY 8, 2012

Geithner’s Ploy: Saving U.S. Banks at Taxpayer Expense, Once Again By Michael Hudson

U.S. and foreign stock markets continue to zigzag wildly in response to expectations about whether the euro can survive, in the face of populations suffering under neoliberal austerity policies being imposed on Ireland, Greece, Spain, Italy, etc. Here’s the story that I’m being told by Europeans regarding the recent turmoil in Greece and other European debtor and budget-deficit economies. (The details are not out, as the negotiations have been handled in utter secrecy. So what follows is a reconstruction.)

In autumn 2012, it became apparent that Greece could not roll over its public debt. The EU concluded that debts had to be written down by 50 percent. The alternative was outright default on all debt. So basically, the solution for Greece reflected what had happened to Latin American debt in the 1980s, when governments replaced existing debts and bank loans with Brady bonds, named for Reagan Treasury Secretary Nicolas F. Brady. These bonds had a lower principal, but at least their payment was deemed secure. And indeed, their payments were made.              This write-down seemed radical, but European banks already had hedged their bets and taken out default insurance. U.S. banks were the counterparties to much of this insurance.

In December (?) 2011, a quarter century after Mr. Brady, Mr. Obama’s Secretary Geithner went to Europe met with EU leaders to demand that Greece make the write-downs voluntary on the part of banks and creditors. He explained that U.S. banks had bet that Greece would not default – and their net worth position was so shaky that if they had to pay on their bad gambles, they would go broke.              As German bankers have described the situation to me, Mr. Geithner said he would kill the European banks and economies if they did not agree to take it on the chin and suffer the losses themselves – so that U.S. banks would not have to pay off on the collateralized default swaps (CDOs) and other gambles for which they had collected billions of dollars.

Europeans were enraged. But Mr. Geithner made a deal. OK, he finally agreed: The White House would indeed permit Greece to default. But America needed time.              He agreed to open a credit line from the Federal Reserve Bank to the European Central Bank (ECB). The Fed would provide the money to lend to banks during the interim when European government finances faltered. The banks would be given time to unwind their default guarantees. In the end, the ECB would be the creditor. It – and presumably the Fed – would bear the losses, “at taxpayer expense.” The U.S. banks (and probably the European ones too) can avoid taking a loss that would wipe out their net worth.              What really are the details? What we do know is that U.S. banks are pulling bank their credit lines to European banks and other borrowers as the old ones expire. The ECB is stepping in to fill the gap. This is called ‘providing liquidity,’ but it seems more to be a case of providing solvency for a basically insolvent situation. A debt that can’t be paid, won’t be, after all.              Geithner’s idea is that what worked before will work again. When the Federal Reserve or Treasury picks up a bank loss, they simply print government debt or open a Federal Reserve bank deposit for the banks. The public doesn’t view this as being as blatant as simply handing out money. The government says it is “saving the financial system,” without spelling out the cost at “taxpayer expense” (not that of the banks!).              It’s a giveaway. Mitch Green on Sunday, January 08, 2012

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3 Comments


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[-] 1 points by Wallgreed (-26) 2 years ago

The Obama Admin at work again, destroying the US

[-] 1 points by jomojo (562) 2 years ago

Gold, silver certificates, bank wires. The Euro, saved by the Dollar?

[-] 1 points by Rico (3027) 2 years ago

Interesting. A nice story full of suspense and intrigue, but it failed my fact-check efforts, so I can't put any weight behind it (in my mind anyway).

The article apparently originates at http://neweconomicperspectives.blogspot.com/2012/01/geithners-ploy-saving-us-banks-at.html#more where the author, Michael Hudson, blogs from time to time. Interestingly, the article wasn't posted by Mr Hudson, but by another author, Mitch Green who appears to be an OWS minded fellow. This particular article is not to be found on the author's own rather substantial web-site at http://michael-hudson.com/?s=geithner . Weird, but perhaps OK.

The author, Michael Hudson, passes the credential check with flying colors. See http://en.wikipedia.org/wiki/Michael_Hudson_(economist) for his bio and links to some other works that appear worth exploring.

What I can't reconcile is the fact that the article itself is wholly unattributed. Furthermore, the Bloomberg article at http://www.bloomberg.com/news/2011-11-16/banks-in-u-s-facing-serious-risk-on-contagion-from-europe-fitch-says.html suggests US banks aren't as exposed as the article suggests....

  • The “exposures” of U.S. lenders to major European banks and the stressed nations of Greece, Ireland, Italy, Portugal and Spain, known as the GIIPS, are smaller than those to some of the continent’s larger countries, Fitch said. The six biggest U.S. banks -- JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. and Morgan Stanley (MS) -- had $50 billion in risk tied to the GIIPS on Sept. 30, Fitch said. So-called cross-border outstandings to France for all except Wells Fargo were $188 billion, including $114 billion to French banks. Risk to Britain and its banks was $225 billion and $51 billion, respectively.

We appear to have about $50 billion at risk in the smaller nations, and the problem "only" grows to $188 billion if the larger nations were to fall. If that happens, we have a lot more to worry about than whether our banks get paid.

Most folks don't realize that the TARP funds were never fully spent, and we still have quite a bit unspent and available from the $475 billion authorization (that's right, we never spent the $700 billion, and the authorization was later reduced to $475 billion).

The most recent report from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) at http://www.sigtarp.gov/reports/congress/2011/October2011_Quarterly_Report_to_Congress.pdf indicates we still have $50 billion of unspent TARP funds in Table 2.1 on page 30.

The threat of European exposure doesn't seem as large as suggested by the tone of Mr Hudson's blog entry quoted in the original post. Furthermore, I'm of the opinion that Mr Geithner should be out representing the interests of American banks lest we have to bail them out again !

My overall assessment is that the author is credible, but that he quotes no sources and uses language that is more sensational than called for. We don't have as much exposure as suggested by his tone, and we have sufficient TARP funds remaining to cover the problem if need be. We certainly don't want to have to bail out our banks again, and it is only right that Geithner is out trying to prevent us having to do so.

Note, by the way, that the Secretary of the Treasury can't direct the Fed to do anything. He can suggest, he can cajole, but the Fed doesn't report to any political official. It was interference in the Fed by the politicians back in the great depression that caused the collapse, and we passed the Banking Act of 1935 to remove direct political control of the Fed (and money supply). Instead, we set them up similar to the Supreme Court with the president nominating board members for 14 year terms subject to approval by Congress. This was a depression-era lesson-learned instituted around the same time as Glass-Steagall, and I am dismayed by people that support anything but keeping these lessons-learned in place.