Why Obama’s favourite Larry Summers got the boot
Lawrence H Summers, President Barack Obama’s favourite for the post of Federal Reserve chief, was forced to withdraw from the race on September 15 as his role as Treasury secretary to President Bill Clinton, in undoing the bank regulations that triggered the 2008 market collapse, triggered a revolt in the Democratic party.
At the heart of the crisis is a confidential ‘End Game’ memo which was exposed three weeks ago by a journalist and an author, Greg Palast. The Memo revealed that in the late 1990s, the US treasury secretary Robert Rubin and his deputy Larry Summers secretly conspired with a cabal of bankers led by Goldman Sachs to destroy financial regulation across the world. Summers argued that to free the US economy, commercial banks should be allowed to bet Government-guaranteed savings on new “derivatives products”, let banks sell high-risk sub-prime mortgage securities and cut their reserves against losses.
When Joseph Stiglitz, then chairman of the President’s Council of Economic Advisors, tried to warn against the dangers of such a move, he was sacked. He went on to win the Nobel Prize for Economics. Greg Palast flew to Geneva to meet Pascal Lamy, Secretary General of the World Trade Organisation (WTO), and confronted him with the memo. It began with Timothy Geithner reminding his boss Larry Summers to call the Bank big shots to unleash their lobbyist armies: “As we enter the end-game of the WTO financial services negotiations, I believe it would be a good idea for you to touch base with the CEOs…”
To protect Summers from calling his office for the phone numbers (which, under the US law would have to appear on public logs), Geithner listed the private numbers of the then five most powerful CEOs on the planet [Goldman Sachs: John Corzine (212)902-8281; Merrill Lynch: David Kamanski (212)449-6868; Bank of America: David Coulter (415)622-2255; Citibank: John Reed (212)559-2732; and Chase Manhattan: Walter Shipley (212) 270-1380]
In Pascal Lamy’s presence, Palast called John Reed to confirm the number, after which the other numbers were swiftly disconnected. Corzine is facing criminal charges. While it is perfectly legal for a treasury official to call a banker, this cannot be done secretly, and that too, to discuss policies that could make billions for the said banks. The ‘End Game’ began in 1997 with US treasury secretary Robert Rubin helping to de-regulate banks by repealing the Glass-Steagall Act that placed barriers between commercial banks and investment banks. The banks wanted the right to play a new high-risk game called ‘derivates trading’. As the then deputy treasury secretary, Summers (who soon replaced Rubin) checked all attempts to control derivatives.
To prevent the flight of American money to nations with safer banking laws, the Big Bank Five decided to eliminate controls on banks in every nation on the planet — in one single move. The plan, says Greg Palast, was to use the Financial Services Agreement (or FSA), an abstruse and benign addendum to international trade agreements policed by the WTO. Until the bankers began their game, the WTO agreements dealt simply with trade in goods (cars for bananas). But the new rules invented by Summers and the banks would force all nations to accept trade in ‘bads’ or toxic assets like financial derivatives.
Hitherto, each country controlled and chartered the banks within its borders. But with the bankers’ re-draft of the FSA, every nation would be forced to open its markets to Citibank, JP Morgan and their derivatives products. All 156 nations in the WTO would have to remove the divisions between commercial savings banks and the investment banks that gamble with derivatives. Geithner’s job was to accomplish this task; he was made the US ambassador to the World Trade Organisation.
Thereafter, every nation was bullied into signing. Only Brazil’s new President, Inacio Lula da Silva, refused, despite threats of a virtual embargo of Brazil’s products by European Union Trade Commissioner Peter Mandelson. But Lula did not waver and Brazil alone among Western nations survived the 2007-2009 bank crisis. China signed, but got its pound of flesh in the form of access and control of the US auto parts and other markets, which shifted two million US jobs to China. Under the new FSA, Goldman Sachs (where Treasury secretary Rubin had been co-chairman) worked a secret euro-derivatives swap with Greece which led to its destruction. Ecuador had its banking sector deregulated and demolished.
Argentina had to sell off its oil companies (to the Spanish) and water systems (to Enron). The Eurozone jumped headlong into derivatives pools; now the Continent is being sold in tiny, cheap pieces to Germany. The 26.3 per cent unemployment in Spain and bankruptcy in Detroit are the consequences of these decisions. As billions reel under the worldwide banker-made disaster, Rubin and Summers fared well. Rubin’s deregulation of banks permitted the creation of a financial monstrosity called Citigroup; soon after leaving office, Rubin became director and then the chairperson of Citigroup, which paid him $126 million even as it went bankrupt. Thereafter, Rubin became key campaign benefactor to a young State Senator, Barack Obama, who in turn became the President.
Rubin asked Obama to make Summers US ‘Economics Tsar’ (so he could run the Treasury without formal Congress confirmation); Geithner became Secretary of Treasury. In 2010, Summers returned to consulting for Citibank and other creatures of bank deregulation who enriched him by $31 million. Goldman and clients pocketed billions as a result of Obama’s abandonment of 3.9 million families whose homes were repossessed during his first term. As American homeowners sank, ‘Tsar’ Summers scuttled a plan to prevent foreclosures by forcing banks to write-off the overcharges in predatory sub-prime mortgages. This saved Citibank billions.
The disaster is by no means over for Americans. The not-for-profit credit unions that serve working people and the poor are under legal and political attack, while a new kind of banking operation has emerged to make loan-sharking legal. One outfit proposes a fee of 29 per cent for arranging loans, and does not want to be regulated by the Federal Reserve. A new addition to its Board of Directors: the ubiquitous Larry Summers. Now the plan to make Summers chief of the Federal Reserve Board has been grounded. The term of current chairperson Ben S Bernanke ends on January 31, 2014. As of now, vice chairman Janet Yellen who supports stricter regulation of the financial system, and former treasury secretary and former Fed president Timothy Geithner are the known frontrunners.
(Photo credit: AP)
Disclaimer: Opinions expressed in this article are the author's personal opinions. Information, facts or opinions shared by the Author do not reflect the views of Niti Central and Niti Central is not responsible or liable for the same. The Author is responsible for accuracy, completeness, suitability and validity of any information in this article.
Sandhya Jain is a political analyst and independent researcher. She is the author of ‘Adi Deo Arya Devata- A Panoramic View of Tribal-Hindu Cultural Interface’ (Rupa & Co., 2004) and ‘Evangelical Intrusions. Tripura: A Case Study’ (Rupa & Co., 2009).