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F Wiliam Engdahl, economist, author, and risk consultant speaks to Paul Jay about Geithner’s plan to rescue the financial institutions in the United States. Engdahl says the plan doesn’t address the concentration of financial power in the United States, that is based in five major financial institutions. He says his plan is like a “band-aid for a bad hemorrhage”

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network, coming to you from our studio in Washington, DC. This morning, Tim Geithner, who’s the Secretary of the Treasury for President Obama, made his rounds of the Sunday morning talk shows. Here’s how he defended his plan to bail out or save the American banking system.

GEORGE STEPHANOPOULOS, ABC: The investors, especially in the plans to buy up these toxic assets, are not taking all that much of a risk. They’re going to put up $6 and they’re going to get 93 percent from the government. We will share on the upside, yes, but they’re protected against huge losses.

TIM GEITHNER, US SECRETARY OF TREASURY: George, let’s just step back for a sec. The problem we’re facing on our financial system is that we — banks made a bunch of loans, backed real estate that are now facing losses. And those loans are clogging up the financial system.
They’re taking up room that could otherwise be used to provide new credits to a business or a family. Now we have two choices, we can let — leave that as it is, hope that banks earn their way out of this over time. That would be a mistake. That would leave us with a strong — with a deeper, longer recession. We’re not prepared to adopt that basic strategy.

STEPHANOPOULOS: But there is a third choice…

GEITHNER: There is another choice — let me say, there’s another choice that a lot of people suggest is the government itself comes in, buys these assets, sets the pricing of an asset, takes on all of the risk in that strategy. And that would leave the taxpayer taking on much more risk, much greater risk of loss over time. We don’t think that’s an appropriate approach. The approach we’re adopting, though, is to have private investors come in and put their capital risk alongside the government. That helps make sure we’re using their incentive to set the price for these assets, rather than having the government set the price and risk overpaying.

JAY: Now joining us from Frankfurt, Germany, to unpack Mr. Geithner’s comments is William Engdahl, who’s an economist, author, risk consultant for many financial institutions in Europe. His upcoming book is Power of Money: The Rise and Fall of the American Century, which will be available this summer. Thanks for joining us, William.


JAY: So we don’t want to sustain the weak and thus weaken the strong. So what do you make of Mr. Geithner’s plan?

ENGDAHL: Well, Geithner’s public-private partnership is really to give the private sector hedge funds and other investors a windfall of profits at the expense of the public taxpayer. And there are all sorts of tricks, if you read the fine print of the plan, to disguise what’s really going on. For example, the Federal Deposit Insurance Company is listed in the plan as the major conduit for lending to hedge funds to make these investments and buy these toxic assets off the books of the banks. Well, the FDIC is virtually bankrupt. They’ve bailed out so many large banks in the last 18 months, they don’t have the capital to do this. So what are they talking about? They’re talking about the US Treasury, which is the US government, as the nominal owner of the FDIC. And little tricks like these are simply—the reason Geithner had such a difficult time in finally coming up with this package was to hide that reality; he’s hiding the fact that he’s bailing out Wall Street. These are not American banks; these are essentially—and this is really the crux of the entire matter—there are five institutions in the United States of America, according to the latest released report of the Office of Comptroller of the Currency (the US government), five institutions, supposed banks—Goldman Sachs, Citigroup (Citibank), JPMorgan Chase, and Bank of America, and one other institution—and they hold 90 to 95 percent of the instruments that are at risk that are putting the entire global financial system at risk. The credit default swaps, the various other derivatives that are so explosive and adding to these losses like AIG. So when Geithner makes these verbal sophistic remarks about we don’t want to make the weak banks stronger and the strong banks weaker, he’s just playing games with the public, because—.

JAY: Well, in the interview with Stephanopoulos, he acknowledges that it’s a bailout. His fundamental argument, which he’s made here and he makes in other places, is that the alternative is worse, that American [inaudible] people should live with even high compensation for bank presidents and corporate leaders. They should live with the fact that Wall Street might make some profit out of this, because without this the system collapses, and that’s worse for everybody.

ENGDAHL: Well, there are two systems. There’s a normal banking system, where most banks in the United States are fairly soberly run and conservatively run. They may have some excesses in bad real estate loans and so forth, but for the most part they’re healthy banks. They are impaired from lending to normal commercial and industrial and consumers because of the overall jam-up in the banking system caused at the top of the pyramid. The top of the pyramid is where the problem lies. And what Geithner doesn’t see in this plan—well, he does see; he says, “We don’t go down that road”—is these five or six institutions should be put into immediate government receivership; the management should be eradicated, fired immediately; the toxic assets be booked by the government in these government-owned institutions, in receivership, booked down to zero in net worth. And perhaps in four or five years, when they’re sold off in a healthier climate, they’ll bring net positive returns from zero, but right now they have to be booked at zero in order to get out of this mess. We have to break the logjam of the credit system. What you’re doing with the Geithner plan is essentially what I call throwing fertilizer on a dead tree. These banks are brain-dead banks—Citigroup, Bank of America, etcetera. JPMorgan Chase looks better simply because they have the action on the creation of credit default swaps, and they’re doing quite lovely, thank you, by the terms of the previous bailouts of Paulson and company. So this is the heart of the problem; this is what has to be addressed.

JAY: Well, his argument is that by allowing this private-public partnership, it will use sort of the market wisdom, market mechanism, to give some value to these assets, and that without that, the government doesn’t know what they’re worth. And then the second thing, he says that he’s found the balance between too much benefit for the banks and too much benefit for the private investors.

ENGDAHL: Yeah, and we’re supposed to trust him.

JAY: That’s [inaudible]

ENGDAHL: I’m sorry, I don’t. I’ve examined Tim Geithner’s career when he was president at the New York Federal Reserve, and that’s not a basis for me to trust someone to manage this crisis. He caused a good part of this crisis. He was in on the decision with Paulson and company to let Lehman Brothers go belly-up back in September, and that took a contained crisis and made it into a global, systemic crisis, and mushroomed the losses into the trillions of dollars worldwide. And now it’s much, much more difficult to deal with this. This is Geithner’s track record. This man is incompetent to be Treasury secretary. He is representing the interests of the Wall Street money oligarchy.

JAY: Well, in his interview with Stephanopoulos, he talks about how he never worked directly for Wall Street; he was always on the public-interest/government side.

ENGDAHL: Oh, yes, yes, yes, yes. What is the New York Federal Reserve? It’s a private bank, and the shareholders of that private bank, the board of directors, are names like JPMorgan Chase. AIG used to be on the board. And it’s a privately owned institution. He is not a public servant in that sense. And before that he had other such experience. He was with the Treasury, of course. But there’s a blur between this particular public interest and the private sector of this money oligarchy. You know, we used to talk in the ’90s about the Russian financial oligarchy looting and plundering the country, and if you think about it, that’s pretty much what you’ve got in the United States today since Larry Summers—. In 1999 and in 2000, as Treasury secretary under the Clinton administration, he oversaw the repeal of Glass-Steagall, which freed up banks, insurance companies and investment banks, Wall Street banks like Goldman Sachs, to merge and combine and create these mammoth institutions—$2 trillion, $2.2 trillion of assets in Citibank, Bank of America; JPMorgan Chase is slightly less. And these mammoth institutions are so awesomely big that the Congress is terrified of doing anything to get on their wrong side.

JAY: Yeah. They’ve come up with this great phrase called “they’re too big to fail.”

ENGDAHL: Yeah, “they’re too big to fail.” My answer to that is they’re too big to save, and they should be put into receivership. The FDIC has standard rules for this when a bank is in trouble: put them into receivership; break it up into 20 or 30 smaller banks, instead of this goliath that’s called Citigroup; and then take the toxic assets off at the market, price it at zero, and if maybe in five years they begin to have some vaue, if some of these mortgages recover because the economy’s recovering and people get jobs again, then you can talk about selling those assets and paying back some of that taxpayer [inaudible]

JAY: Well, Geithner’s explanation of all this is all of that may be true, in terms of the working with Wall Street and not taking them on and so on and so on, but, he says, the only real test or objective here is: is liquidity going to come back into the system or not? Are small businesses and people going to get loans? So is it possible this plan will work, even if Wall Street makes a lot of money along the way?

ENGDAHL: No, I don’t see it, because, first of all, the debts—it’s a band-aid measure which he’s not really being open about. It’s a band-aid measure to staunch a hemorrhage of losses that these four or five big institutions are having. Those losses are going to exponentially increase over the next two, three years as the mortgage losses, the loan losses that those banks have made, explode into a deepening recession/depression. I call it a depression. It soon will be acknowledged to be that. And this thing is going to be worse than the 1930s, the way things are going, because they refuse—the Obama administration, Geithner, as well as the Bush administration, refuse to touch the inner sanctum of the holy of holies called Wall Street and the money oligarchy. And until you do that—you know, I don’t like to use terms like “money oligarchy” to refer to American banks, but that is literally—if you look up the dictionary definition of “oligarchy,” it’s money defining the political control. And that’s what we have developed into in the US banking system over the last 15 to 20 years. And that’s what has to be cleaned up. That’s what Geithner is not going to touch with a 10-foot pole because he knows that’s taboo.

JAY: Thanks very much for joining us, William.

ENGDAHL: Thank you.

JAY: And thank you for joining us on The Real News Network. And don’t forget our “donate” button, ’cause we don’t have any oligarchs supporting us, so we need you to click “donate.” Thank you very much for joining us on The Real News Network.


Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.

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F William Engdahl is an economist and author and the writer of the best selling book "A Century of War: Anglo-American Oil Politics and the New World Order." Mr Engdhahl has written on issues of energy, politics and economics for more than 30 years, beginning with the first oil shock in the early 1970s. Mr. Engdahl contributes regularly to a number of publications including Asia Times Online, Asia, Inc, Japan's Nihon Keizai Shimbun, Foresight magazine; Freitag and ZeitFragen newspapers in Germany and Switzerland respectively. His newest book is called "Gods of Money: Wall Street and the Death of the American Century". He is based in Germany.