Legal Gambling Den

international | miscellaneous | opinion/analysis Friday January 09, 2009 17:19 by Maidhc Ó Cathail

Taxpayers Foot the Bill for Wall Street Gambling Debts

Wall Street's successful lobbying of Congress led to the current financial debacle. But the bankers have no need to worry. The government have come to their rescue with taxpayers' money, raising serious questions about whose interests the politicians really serve.

The events on Wall Street since September 2008 have taken many by surprise, not least the “experts” in the mainstream media. It was all too predictable, however, if people knew the nature of the financial system, whom it benefits, and how they shape the political process.

To understand the current financial crisis, we need to go back to 1999, and the crucial political decision that was taken then. After intensive lobbying by Wall Street, which lasted for years and cost millions of dollars, President Bill Clinton signed the Financial Services Modernization Act into law on November 12, 1999.

Basically, this legislation brought an end to the regulation of the financial sector that had been in place since President Franklin D. Roosevelt signed into law the Glass-Steagall Act in 1933, in response to the uncontrolled speculation on Wall Street which had resulted in the failure of over 5,000 banks since the Wall Street Crash of 1929.

Wall Street had been pushing for the deregulation of financial services since the 1980s. And when Alan Greenspan, a director with J.P. Morgan, was appointed Chairman of the Federal Reserve Bank (a central bank which is not federal but privately owned), he urged Congress to repeal Glass-Steagall.

Along with his cronies on Wall Street, Greenspan was delighted when the Clinton administration removed the little oversight that government had over them up to then, praising it as a “revolution in finance.” The repeal of Glass-Steagall, however, facilitated the securitization revolution which is responsible for the mess that finance is now in.

The Black Hole

Derivatives were central to this securitization revolution. The Fiontar Dictionary of Terminology defines a derivative as “a financial instrument that is valued according to the expected price movements of an underlying asset, which may be a commodity, a currency, or a security.” But, in short, a derivative is a bet on the stock market. And it’s this betting which has resulted in the failure of huge financial institutions like Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Brothers, as well as AIG, which insured the gambling on Wall Street.

But we ain't seen nothing yet. As Ellen Brown explains in her article “Bailout Bedlam” (Global Research, 2 October, 2008), “The imploding derivatives bubble is a giant black hole that could suck all the productive assets of the nation into banking coffers.” According to Brown, American banks have an exposure to derivatives of $180 trillion. This astronomical figure is the equivalent of three times the GDP of all the countries in the world, which is, as Brown calls it, “an impossible to fill black hole.”

Nevertheless, the U.S. government has tried to fill this black hole with taxpayers’ money. It seems, however, that only certain holes will be filled. The Treasury Secretary Henry Paulson announced in October 2008 that the U.S. Treasury would give $85 billion to rescue the largest insurance company in the world, AIG, a day after he refused to come to the aid of Lehman Brothers. But why the difference?

Paulson’s decision may have had something to do with the meeting that took place at the Federal Reserve Bank in New York around that time between him and Lloyd Blankfein, the chairman of Goldman Sachs. Although Blankfein claimed that he was not there on behalf of his own bank but to save the financial system as a whole, it so happens that AIG was Goldman Sach’s largest trading partner, and it would lose $20 billion if AIG went into bankruptcy.

Conflict of Interest

Moreover, Paulson had been chairman and CEO of Goldman Sachs before becoming Treasury Secretary, a job he got after Joshua Bolten, another former employee of Goldman Sachs, recommended him to George W. Bush. There was said to be a revolving door between Goldman Sachs and the Bush White House.

Some believe that Paulson continued to serve the interests of his old firm while he was working in government. “The actions of Treasury Secretary Paulson since the first outbreak of the Financial Tsunami in August of 2007 have been directed with one apparent guiding aim - to save the obscene gains of his Wall Street and banking cronies,” wrote William Engdahl (Global Research, 30 October, 2008).

It seems that the Treasury will get the money - $700 billion and counting - for Paulson’s “bailout” plan by borrowing it from the Federal Reserve, whose shareholders are all private banks. So, American taxpayers will pay interest to the banks to rescue the banks from their gambling debts! No wonder that William Engdahl described it as “the most brazen financial swindle in the scandal-ridden American finance history.”

The Great Depression of the 21st Century

To make matters worse, it seems likely that Paulson’s “swindle” will only exacerbate the economic situation. According to Michel Chossudovsky, Professor of Economics at the University of Ottawa and the editor of Global Research, “The proposed bank ‘bailout’ under the so-called Troubled Asset Relief Program (TARP) is not a ‘solution’ to the crisis but the ‘cause’ of further collapse.” 

In his article ““The Great Depression of the 21st Century,” Chossudovsky points out that “spiralling public debt” and “an unprecedented centralization of banking power” will be the main results of Paulson’s so-called plan. In addition, he says, the financiers will buy cheaply - with the money they got from the taxpayers - corporations whose stock values have fallen, often as a result of speculation by these same financiers.

If Chossudovsky is right, then it seems that for some on Wall Street gambling can be very profitable indeed. Especially if they control the government, they can’t lose.

Obama’s Paymasters

Will Barack Obama’s administration be any better? Hardly. The president-elect has chosen (or more likely, was told to choose) for his economic team people like Timothy Geithner and Lawrence Summers who are responsible for the mess that the financial system is in today. “Those who set the financial system ablaze in 1999, have been called back to turn out the fire,” as Chossudovsky put it.

Even more significantly, Goldman Sachs, J.P. Morgan Chase, and Citigroup were among the largest campaign contributors to Obama. Although Obama said during the election that “we cannot have a thriving Wall Street while Main Street suffers,” it seems that some on Wall Street are doing very well at the same time as ordinary people are suffering. The next president has a clear choice: to serve the likes of Goldman Sachs or to serve the American people. But he cannot serve both. Any bets on which which master Obama will choose?

This is a slightly modified version of an article that was originally published in the Irish-language magazine Beo (www.beo.ie). That article can be read here:
http://www.beo.ie/?page=ar_na_saolta_seo&content_id=788