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Friday, October 17, 2008

How the Banksters are Making a Killing Off the Bailout -- Pam Martens

Portion below; whole thing here: http://www.counterpunch.org/martens10172008.html

What most Americans do not understand, because mainstream media rarely explains it, is the incestuous relationship between the U.S. Treasury and this small band of financial marauders who busted the entire financial system with insane levels of leveraged derivative bets.

The bulk of the $125 billion will be dispersed among Uncle Sam’s own brokers, or in street parlance, Primary Dealers. Primary dealers are those financial firms anointed by the Federal Reserve to participate in the Fed’s open market activities and are required to participate to a significant degree in buying up Treasury securities at every Treasury auction. In other words, without these firms, the U.S. Government would have no means of financing its own funding needs.

Treasury, therefore, has an obvious conflict of interest in keeping these firms alive, even when they are the walking dead. Here’s how much of the $125 Billion the Fed’s Primary Dealers will collect: Citigroup, $25 Billion; JPMorgan Chase & Co., $25 Billion; Bank of America and its soon to be acquired brokerage, Merrill Lynch, $25 Billion; Goldman Sachs, $10 Billion; Morgan Stanley, $10 Billion. In other words, of the first $125 billion outlay from the emergency bailout fund, 76% is going to shore up Uncle Sam’s brokers and $300,000 is going to retain one of Wall Street’s favorite law firms.

In 1988 there were 46 primary dealers. That number had shrunk to 30 by 1999. In June 2008 there were 20, in no small part as a result of the mergers facilitated by Simpson, Thacher & Bartlett. In rapid succession since July, three more have disappeared from bad bets: Countrywide Securities (shotgun marriage with Bank of America); Lehman Brothers, bankrupt; Bear, Stearns (shotgun marriage with J.P. Morgan Securities). That currently leaves 17 and that number will drop to 16 when Merrill Lynch is folded into Bank of America. (The rest of the 16 primary dealers that are not getting part of the $125 billion are foreign banks.)

In addition to the repeal of the depression era, investor protection legislation known as the Glass Steagall Act, the removal of credit default swaps from regulation by the Commodity Futures Modernization Act of 2000, various U.S. Supreme Court decisions upholding Wall Street’s ability to run its own private justice system shrouded in darkness, there was one more key regulatory change that greased the tracks of this train wreck. On January 22, 1992 the Federal Reserve announced that its New York region would “discontinue the ‘dealer surveillance’ now exercised over Primary Dealers through the monitoring of specific Federal Reserve standards and through regular on-site inspection visits by Federal Reserve dealer surveillance staff.”

In other words, as bank consolidation left the country with fewer and fewer Primary Dealers and more and more “too big to fail candidates,” instead of beefing up surveillance, the Federal Reserve amazingly dropped inspections. Who was at the helm of the Federal Reserve when this nutty decision was made: the same man who lobbied for the repeal of the Glass Steagall Act that ushered in the merger of depositor banks with casino investment banks and brokerages; the same man who lobbied for the passage of the Commodity Futures Modernization Act of 2000 to allow for unregulated derivatives markets. The man, of course, is Alan Greenspan who served a breathtaking 19 years as Chairman of the Federal Reserve. That, by the way, is the approximate number I would assign to how many years it will take to repair the collapse of confidence engendered by his crony wealth transfer system created under the guise of free market capitalism.


Pam Martens worked on Wall Street for 21 years; she has no security position, long or shot, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com

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