October 9-11, 2009 -- GUEST EDITORIAL: The Invisible Currency of Fascism
publication date: Oct 9, 2009
The Invisible Currency of Fascism
by Len Bracken
"The extensive wars wherewith Louis XIV was burdened during his reign, while draining the State's treasury and exhausting the substance of the people, nonetheless contained the secret that led to the prosperity of a swarm of those bloodsuckers who are always on the watch for public calamities, which, instead of appeasing, they promote or invent so as, precisely, to be able to profit from them the more advantageously. The end of this so very sublime reign was perhaps one of the periods in the history of the French Empire when one saw the emergence of the greatest number for these mysterious fortunes whose origins are as obscure as the lust and debauchery that accompany them." - Marquis de Sade, 120 Days of Sodom
With the announcement in the autumn of 2008 of government plans for equity ownership in banks came obituaries on the death of capitalism and claims, invariably expressed as insults, that the United States has become a socialist regime. Karl Marx is cited with reference to the fifth proposal in the Communist Manifesto calling for a state monopoly on banks and credit. Looking past the mock funerals, however, one sees fasces-fasces being the Latin root of fascism-deeply etched into the granite and marble banks and government buildings, not the peeling remnants of posters bearing the hammer and cycle.
This is the conclusion of someone who lived in the Soviet Union for several years, where there was no equivalent to the extravagant wealth and consumption of the western financial elite-the private jets, villas and art collections, or the mistresses dripping with world-class jewelry and other luxuries that scarcely existed behind the Iron Curtain. The Communist Party's First Class didn't own gold-plated helicopters, much less sports teams or palatial homes and hideaways, as was the case with Allen Stanford, who pleaded ignorance as to how his allegedly fraudulent Caribbean financial operation was run and refused to comment on the accuracy of reports that he worked for the CIA. He would never be reduced, as was the case with Mikhail Gorbachev, to appearing in advertisements for Louis Vuitton and Pizza Hut to earn money for his foundation.
If Marquis de Sade were alive today, he would heap scorn on the notion that party functionaries and financial bureaucrats at their run-down resorts in the Black and Baltic seas would be compared to the oligarchs exemplified by the snake-loving skinhead Henry Paulson. After moving from Goldman Sachs, where he earned the nickname of The Hammer, to the Treasury Department, Paulson would execute the demise of his former rival, Lehman Brothers, force Bank of America to complete its acquisition of Merrill Lynch despite better judgment from the bank's chief executive officer, and orchestrate the greatest theft in world history with the Troubled Assets Relief Program (TARP) to bail out the financial sector-most notably his former firm-resorting even to the threat of martial law with recalcitrant legislators who were backed by an unprecedented constituent outcry.
While recognizing the necessary split entailed with giving fixed meaning to an ongoing crisis and the pitfalls of historical prognostication, recent and current snapshots allow for a fairly clear view of the horizon to be pieced together. The empire emanating from Red Square didn't unravel because of its financial sector's ability to purloin state funds, as eventually could be the case with the empire ostensibly centered in Washington but commandeered from New York and London. The Soviet Union, by the most reliable accounts, imploded in large part because of its Afghan war. While the United States and its allies now have their crippling campaign in that unforgiving country, the weakest links to the empire controlled by Wall Street and The Square Mile are formed by a quadrillion dollars in derivatives and a hundred trillion dollars of securitized debt. It is in these debt instruments that one finds the contemporary equivalent of Sade's allusion to the obscure origins of the mysterious fortunes enjoyed by the bankster elite.
Before going further, I should make it clear that this is not an apology for the Soviet Union; the Marxist authors closest to me hold that the Bolsheviks were the first fascists. Although I understand their point about the totalitarian nature of the Soviet regime, I disagree. While fascists make populist, even revolutionary propaganda, on questions of class, they differ from socialists and are more inclined to work with and for the financial elite. In the case of Mussolini, he rewarded the financiers and industrialists who brought him to power and rescued their firms when they failed during the Depression, privatizing profits and socializing losses.
The response of party bureaucrats in Beijing to the crisis has been telling in this regard; they have instituted policies more in the interest of small businesses and the average citizen than the politicians and central bankers in Washington, who have been intent on protecting the financial elite by socializing losses after years of private profit from outsized risk. The elite that owns the government hails mostly, but not entirely, from the six banks that hold nearly all U.S. bank derivative positions: the Golden Circle formed by JPMorgan Chase, Bank of America, Citi, Goldman Sachs, Wells Fargo and HSBC USA.
If the assertions of well-informed protesters are not enough to make this point, we have former International Monetary Fund rescue expert Simon Johnson contending that "the finance industry has effectively captured our government" and comparing the situation with emerging-market crises in this regard. Illinois Democratic Senator Dick Durban concurs, saying, "And the banks-hard to believe in a time when we're facing a banking crisis that many of the banks created-are still the most powerful lobby on Capitol Hill. And they frankly own the place."
Goldman Sachs and AIG
Goldman Sachs (GS) sets the most lurid example. Paulson was recruited by Bush's chief of staff, who was a former GS executive; and another former GS chief executive officer, Robert Rubin, had the top slot at Treasury under Clinton. The chief of staff of the present treasury secretary is a former GS lobbyist, who is being replaced at Goldman by a top staffer from the House Financial Services Committee. Currently, GS alumni have landed at the head of the New York Federal Reserve, the Commodity Futures Trading Commission, the presidency of the World Bank, the governorship of the Bank of Canada and chief of the influential Financial Stability Forum associated with the Bank of International Settlements.
Lawrence Summers-the Clinton administration official who championed the repeal of the Glass-Steagall Act, which separated commercial and investment banking activity, and the official who did the most to prevent regulation of credit default swaps with his support of the Commodity Futures Modernization Act of 2000-is now an Obama presidential economic adviser. In April 2008 he took time off from peddling collateralized debt obligations for hedge fund D.E. Shaw to receive $135,000 for a one-day speaking visit at Goldman.
Another former GS executive, in addition to Paulson, was involved with the government takeover of the government-sponsored enterprises Fannie Mae and Freddie Mac; and the TARP funds were managed, if that is the right word for what amounted to theft, by yet another GS man, despite the fact that the firm was a recipient of those funds.
When Paulson bailed out insurance giant American International Group (AIG), with whom GS and other money-center banks had written credit default swap contracts, invisibly traded pseudo-insurance on bond defaults, a former member of the GS board was chosen as the new chief executive. "During Paulson's reign at Goldman Sachs, his traders arranged risky bets with AIG's financial products unit in credit default swaps, and yet, it was Paulson, a few years later, acting as U.S. Treasury chief, who wound up protecting GS's $12.9 billion CDS trade with AIG from default," notes financial analyst and former commodities trader Gary Dorsch. "This colossal conflict of interest, plus $165 billion paid to Merrill Lynch traders, with U.S. taxpayer money, have all been quietly swept under the rug by the ruling elite."
At last count, the government has given $180 billion to AIG, which used its insurance policyholders' capital to make highly leveraged, over-the-counter trades against credit defaults with money center banks in the United States and abroad. One has to ask whether AIG and its counterparties didn't know better and, as a well-established U.S. intelligence operation for the Central Intelligence Agency, recognize in advance that it would be protected and its counterparties paid in full.
Investigative journalist Wayne Madsen and his Asian sources have written extensively on these intelligence connections, which include data collection on foreign nationals using former Tiananmen dissidents, and leasing aircraft to known fronts such as Evergreen International and World Airways. None of this should come as a surprise to Obama, whose first job out of college was as a researcher and writer for Business International Corporation, a firm with deep ties to the CIA that eventually merged with the Economist Intelligence Unit, which is said to work closely with Britain's MI-6.
Was the Crisis Engineered?
With the lesson of 9/11 in mind-what was purported to be an intelligence failure was in fact a brilliant success-one must ask whether the same is the case for the current financial crisis. So far the central bank and U.S. government have committed $12.8 trillion dollars to the financial rescue effort, a sum that nears last year's gross domestic product of $14.2 trillion. The bailout will likely surpass the GDP once Treasury Secretary Geithner's Public-Private Investment Program goes into full swing, providing hedge funds 14/1 leverage with taxpayer money and no downside risk to buying toxic assets. Would this vast sum have been spent, lent or otherwise extended to financial institutions in the absence of a crisis? No. Was the crisis engineered? Quite possibly.
We know that on May 5, 2006, the same day that Porter Goss resigned as the director of the CIA, President Bush gave his intelligence czar, John Negroponte, the authority to excuse publicly traded companies from their accounting and securities disclosure obligations. This was the first time this authority has been delegated to someone outside of the Oval Office, giving Negroponte "the function of President" under the law in question. It was also in early 2006 that Wall Street's major firms agreed to standardize credit default swaps on collateralized debt obligations, enabling speculators to pay relatively small fees for what would prove to be huge rewards when these bonds began defaulting.
Greed motivated the general sequence of financial maneuvers at the epicenter of the crisis. Banks and the shadow banking system, including hedge funds, would issue commercial paper-short-term loans often provided by money market funds. Instead of investing directly in real estate or other assets, firms would invest in securities based on pools of those assets, commonly mortgages, in the form of collateralized mortgage obligations or CMOs. The financial engineers on Wall Street, notably Goldman Sachs, created these structured products with their many tranches, including the notorious super-senior tranches that would supposedly never default, not just out of mortgages but virtually any form of debt-student loans, car loans, credit card debt-packaging them into collateralized loan obligations or collateralized debt obligations.
So the bank or other firm that borrows via commercial paper for six weeks at 4 percent can invest for twenty years and capture a yield of 7.5 percent, making a profit on the net positive interest rate margin. It may not seem like much, but in finance circles this yield spread is highly profitable as the sums involved are quite large. Moreover, the risk involved could be explained away. If a money market fund refused to roll over the commercial paper, the bank could borrow from other banks as the first bank would have hedged this risk by opening lines of credit when it issued the paper. It was thought that the structured products would not default as they drew on mortgages or other forms of credit that were either highly rated or geographically dispersed.
In the summer of 2007, borrowers began to default on the debt behind these structured products and the products became virtually worthless. Officials such as Paulson and Federal Reserve Chairman Ben Bernanke discovered that these products based on debt had been treated as assets and were themselves the collateral for more structured products-CDOs squared and cubed. They also discovered that vast sums of commercial paper were issued off firm's books in the form of Enron-style structured investment vehicles, hiding the extent of a given firm's liabilities and the risks it, in turn, posed to the system as a whole.
In the worldwide system of fiat-issued money, money is debt. The firms holding CDOs accounted for these debts as assets, and firms such as AIG that wrote credit default swap contracts on these CDOs created obligations for their counterparties to pay premiums every year, usually for five years, creating money out of thin air. These CDS contracts were written without holding reserves or collateral backing the underlining debt. "So what backed them?" asks blogger Hellasious on suddendebt. "Faith, pure and simple. That's as close as we have ever come to creating the absolute faith-based financial instrument."
As faith is vanishing for these under-collateralized wagers created with unlimited leverage, the CDS market is crumbling, exposing the insolvency of the CDS dealer banks and their counterparties. According to Chris Whalen of Institutional Risk Analytics, Paulson and Geithner are using tax dollars to conceal the insolvency of not just AIG but of Citi and JPMorgan Chase as well as others. "The real issue," Whalen states, is "the bankrupt intellectual basis for the CDS contracts themselves."
He estimates that at least $15 trillion and likely more in CDS payouts will be required from governments worldwide as default rates rise. The problem is that because these contracts are made over the counter, they are invisible and no one knows the true size of the outstanding issues. Award winning documentary filmmaker Gary Null, commenting on interviews he has conducted with Wall Street insiders, says the net CDS liabilities of U.S. financial institutions could reach $100 trillion.
Much of this market comprises naked swaps in which the buyer has no material interest in the underling asset, unlike covered swaps, which are beginning to see some regulation and institutional clearing. So far, the plan has been for the U.S. government to make good on these gambling bets at par, indirectly bailing out the banks in the Golden Circle via AIG.
According to Weiss Research, the CDS market represents only 7.8 percent of the notional value of derivatives held by U.S. banks, with the interest-rate sector comprising 82 percent. "Especially alarming," writes Dr. Weiss, "is the fourth quarter OCC data demonstrating that record bank losses are spreading to interest-rate derivatives." Weiss named eight large banks at the risk of failure, including three of the nation's four largest, adding that the rescue of failing institutions would entail "unacceptable damage" to the borrowing power of the United States.
"There is not any playbook," Paulson famously said in characterizing how the administration responded to the crisis, which is hard to believe when one considers how, once the TARP funds were obtained, Paulson switched their allocation from the proposed acquisition of toxic assets to directly purchasing bank shares. This assertion by the former secretary also lacks credibility on the grounds that the premises of the credit crunch were more mythical than real.
In October 2008, researchers at the Minnesota Fed found interbank lending to be healthy, lending to nonfinancial institutions was unaffected by the crisis, and commercial paper issued to nonfinancial institutions was unchanged. It was, however, the reluctance of money market funds to roll over asset-backed commercial paper following the default of CDOs held by two Bear Stearns hedge funds that severely deepened the crisis in 2007. The researchers requested that lawmakers show the data upon which the lawmakers made their rescue decisions.
What if the real problem were a fraudulently engineered housing and debt bubble in which the debt was packaged into asset-backed securities such as collateralized debt obligations and sold around the world? These securities were then either insured or shorted by legitimate hedges or punters, as speculators are called in England and Australia, using the credit default swaps issued by the likes of AIG, Ambac and MBIA that had no reserves to cover them in the event of a default. This pseudo-insurance allowed banks to meet their capital requirements and increase leverage to buy still more CDOs, which, absurdly, could be CDOs squared and cubed and synthetic CDOs, i.e., CDOs of CDSs.
The financial industry was printing its own money with these hedge instruments on a scale that far exceeded that of the nation's central bank and its Federal Reserve Notes. Bernanke was reportedly furious when he learned that AIG's financial products unit had created so much debt with its credit default swap contracts. But how safe and sound are the other, much larger derivative markets? The U.S. banking system's total notional derivative exposure (comprising interest rate, currency and CDS derivatives) is estimated to be $200 trillion.
The worldwide notional value of outstanding derivatives is now estimated to be $1.405 quadrillion, up 22 percent from the 2008 level. DK Matai of the Asymmetric Threats Contingency Alliance notes that a conservative 10 percent default or decline could result in $100 trillion of payouts. Financial institutions, nation states, even blocs such as the European Union will be unable to fund these obligations, often owed to speculators by bankers that grossly mispriced risk.
These same bankers are grumbling at restrictions put on their salaries and bonuses by government rescue covenants. "Never trust someone with a bonus system to handle risk," Nassim Nicholas Taleb, a New York University professor of risk management, told this reporter, adding, they cannot do it because of the "free option" on their performance whereby they benefit from profits but do not suffer from losses. "The system as it is, is broken," he said, signaling out former Fed Chairman Alan Greenspan for blame. The system is "surviving on novocaine," he said of the rescue, but it "needs a root canal."
Whereas it was once only obscure graffiti artists who would call for the public to "drain bankers' blood in the Potomac," the anger has spread as the crisis exposes the excesses of the financial elite: the French-made luxury jets and use of corporate credit cards for $2,000 per hour prostitutes; the use of methamphetamine while processing mortgage applications at Washington Mutual and cocaine at Goldman's corporate finance department; and the $10,000 bottles of wine, chauffeurs and country club memberships. Goldman's CEO made $54 million in 2008, for example, and the firm's top five executives received a total of $242 million, with the cost of leased cars and drivers running as high as $233,000 per executive, according to figures compiled by Associated Press.
One Chicago-based bank that was given bailout funds created a scandal by sponsoring a professional golf event during the course of which it rented a private hangar at the Santa Monica Airport for dinner and threw a private party in the entire House of Blues with a performance by Sheryl Crow. Wells Fargo canceled a Vegas junket for its top employees "in light of the current environment" and Morgan Stanley cancelled company trips to Monte Carlo and the Bahamas.
When meeting with top bank executives, Obama reportedly told them to be careful in their public statements, adding, "My administration is the only thing between you and the pitchforks." With the president running interference for the financial elite, it will likely extend its empire by increasing taxpayer indebtedness until the derivative time blows up or history otherwise reasserts itself.
While it's very likely that workers and consumers will dig their own graves, as their skeletons are thrown into plastic caskets and buried without ceremony, or incinerated after being piled up for months at overwhelmed morgues, this is potentially a transformational period of time. The powers that be have acknowledged as much in a secret document that has circulated on Capitol Hill and several agencies. It cautions on the possibility for conflict with other nations should the U.S. default on its debt, or for revolution should taxes be raised to pay for the financial bailout.
Marquis de Sade was writing the work cited in the epigraph about private profit from public calamities when he yelled from Bastille drainpipe that prisoners were being killed, causing a riot. The storming of the prison twelve days later marked the beginning of the French Revolution.
Workers and consumers enslaved by the semi-autonomous system of production and consumption are learning how CEOs representing corporations engaged in financial speculation cashed out prior to the crisis to the tunes of tens if not hundreds of millions of dollars. Even the president has acknowledged that the anger is real. It remains to be seen whether the flames ignited by this financial crisis will leap out of control.
©2009 Len Bracken, author of three nonfiction books and three novels. He covered the Treasury Department and Federal Reserve as a daily beat reporter when the financial crisis erupted in the summer of 2007 into early 2008. His essays have appeared in publications as diverse as the Canadian Journal of Political and Social Theory and the London-based Principia Dialectica, and his works have been covered by the Associated Press, Washington Post and many small journals.
This essay was originally published in the summer 2009 issue of Paranoia