Why Obama’s favourite Larry Summers got the boot

Why Obama's favourite Larry Summers got the boot

Why Obama's favourite Larry Summers got the bootLawrence 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)

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  • Ramtanu Maitra

    This must also be pointed out about Summers — a stooge for the big banks and insurance company. Any attempt to get him through the senate hearing at a time when the least percentage of America’s workforce is on payroll since 1978 would have been a mud pie on Obama’s face.
    Obama advisor Larry Summers couched his passive-aggressive defense of AIG’s thieves in the saccharine argot of jurisprudence. “We are a country of law — there are contracts (and) the government cannot just abrogate contracts,” he said.
    In Feb 2009, the same government that says it “cannot just abrogate” executives’ bonus contracts used its leverage to cancel unions’ wage contracts. As the Wall Street Journal reported, federal loans to G.M. and Chrysler were made contingent on those manufacturers shredding their existing labor pacts and “extract[ing] financial concessions from workers.” In other words, our government asks us to believe that it possesses total authority to adjust contracts at car companies it lends to, and yet has zero power to modify contracts at financial firms it owns. This, even though the latter set of covenants might be easily abolished.

  • Come Carpentier

    A very good summary of what has been going for several years in the global – and specifically the US -economy and finance. Public institutions in “free market” economies are in the service of the big private capital which dictates the terms of the social contract while pushing for its ultimate abolition. This leads to the abolition of the very notion of economic crimes against society since the sole object of the neoliberal system is to accumulate ever larger profits in the hands of the ruling banking/business elite.

  • Sayan Sen

    The same Larry Summers had infamously declared that “women lack brains to study science” when he was president of Harvard University (the international headquarters of left-liberal pink chaddiwalas & red jholawalas).Because of conservative opposition,he had to resign from Harvard.His comment exposed the sexist,racist Left-Lib elites.Larry is the typical left-lib who sheds crocodile tears for the poor and conspires with the super-rich against the working people.The Left-lib elite wants to destroy real capitalism (the only economic system that helps the poor to work hard and improve their conditions) and bring crony capitalism a.k.a socialism (that benefits the Left-Lib elite and keeps all others in poverty).However,there is still hope for Larry if he immigrates to India and join the greatest Left-Lib cub,the National Advisory Council. :D Here he will find lots of his soulmates,Left-Libs like Amartya Sen,Prannoy Roy and Montek Singh Ahluwalia.