Geithner's Dirty Little Secret

by JASON | 3:33 PM in |

US Treasury Secretary Tim Geithner, in unveiling his long-awaited plan to put the US banking system back in order, has refused to tell the dirty little secret of the present financial crisis. By refusing to do so, he is trying to save de facto bankrupt US banks that threaten to bring the entire global system down in a new more devastating phase of wealth destruction.

The Geithner proposal, his so-called Public-Private Partnership Investment Program, or PPPIP, is not designed to restore a healthy lending system that would funnel credit to business and consumers. Rather it is yet another intricate scheme to pour even more hundreds of billions of dollars directly to the leading banks and Wall Street firms responsible for the current mess in world credit markets, without demanding they change their business model.

Yet, one might say, won't this eventually help the problem by getting the banks back to health?

Not the way the Barack Obama administration is proceeding. In defending his plan on US TV recently, Geithner, a protege of Henry Kissinger and before his present posting president of the New York Federal Reserve Bank, argued that his intent was "not to sustain weak banks at the expense of strong". Yet this is precisely what the PPPIP does. The weak banks are the five largest banks in the system.

The "dirty little secret" that Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks that are the source of the toxic poison causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality.

What Geithner does not want the public to understand, his "dirty little secret", is that the repeal of Glass-Steagall and the passage of the Commodity Futures
Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global "off-balance sheet" or OTC derivatives issuance.

Today, five US banks, according to data in the just-released Federal Office of Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.

The top three are, in declining order of importance: JPMorgan Chase, which holds a staggering $88 trillion in derivatives; Bank of America with $38 trillion, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs, with a mere $30 trillion in derivatives; number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain's HSBC Bank USA, has $3.7 trillion.

After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.
http://www.atimes.com/atimes/Global_Economy/KD03Dj02.html

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