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The Fed is a Cartel Operating against the public Interest 2nd in series

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(Article changed on March 17, 2014 at 11:39)

The game called bailout is not a whimsical figment of the imagination, it is real. Here are some of the big games of the past and their final scores.

In 1970, Penn Central railroad became bankrupt. The banks that lent money to it had taken over its board of directors and put it further into the hole, all the while extending bigger loans to cover the losses. Directors concealed reality from stockholders and made additional loans so the company could pay dividends to keep up a false front. Directors and their banks unloaded their stock at unrealistically high prices. When the truth became public, stock holders were left holding the empty bag. The bailout, involved government subsidies to other banks to grant additional loans. When Congress was told that the collapse of Penn Central would be devastating to the public interest, it responded by granting $125 million in loan guarantees so banks would not be at risk. The railroad failed anyway, but the banks were covered. Penn Central was nationalized into AMTRAK and continues to operate at a loss.

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In 1970, as Lockheed faced bankruptcy, Congress heard essentially the same story. Thousands would be unemployed, subcontractors would go out of business, and the public would suffer greatly. So Congress guaranteed $250 million in new loans, which put Lockheed 60% deeper into debt than before. Now that government was guaranteeing the loans, it made sure Lockheed became profitable by granting lucrative defense contracts at non competitive bids. The banks were paid back.

In 1978, Chrysler was on the verge of bankruptcy. Congress was told that the public would suffer if the company folded, and that it would be a blow to the American way if freedom-of-choice were reduced from three to two makes of automobiles. So Congress guaranteed up to $1.5 billion in new loans. The banks reduced part of their loans and exchanged another portion for preferred stock. The banks' previously uncollectable debt was converted into a taxpayer-backed, interest-bearing asset.

In 1972, the Commonwealth Bank of Detroit, with $1.5 billion in assets, became insolvent. It had borrowed heavily from Chase Manhattan to invest in high-risk and potentially high-profit ventures. Now that it was in trouble, so was Chase. The bankers went to Washington and told the FDIC the public must be protected from the great financial hardship that would follow if the Commonwealth folded. So the FDIC pumped in a $60 million loan plus federal guarantees of repayment. Chase took a minor write down but converted most of its potential loss into taxpayer-backed assets.

In 1979, the First Pennsylvania Bank of Philadelphia became insolvent. With assets in excess of $9 billion, it was six-times the size of Commonwealth. It, too, had been an aggressive player in the '70s. Now the bankers and the Federal Reserve told the FDIC that the public must be protected from the calamity of a bank failure of this size, that the national economy was at stake, perhaps even the entire world. So the FDIC gave a $325 million loan--interest-free for the first year, and at half the market rate thereafter. The Fed offered money to other banks at a subsidized rate for the purpose of re-lending to First Penn. With that enticement, they advanced $175 million in immediate loans plus a $1 billion line of credit.

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In 1982, Chicago's Continental Illinois became insolvent. It was the nation's seventh largest bank with $42 billion in assets. The previous year, its profits had soared as a result of loans to high-risk business ventures and foreign governments. Although it had been the darling of market analysts, it quickly unraveled when its cash flow turned negative. Fed Chairman Volcker told the FDIC it would be unthinkable to allow the world economy to be ruined by a bank failure of this magnitude. So, the FDIC assumed $4.5 billion in bad loans and took 80% ownership of the bank in the form of stock. In effect, the bank was nationalized, but no one called it that.

Bailouts up to this point pale by comparison to the trillions of dollars pumped into banks, insurance companies, automobile manufacturers, and banks of other countries beginning in 2008. It started with what was called the sub-prime meltdown, caused by a calculated policy of the nation's largest banks to entice low-income families into accepting mortgages in excess of what they could afford. The assumption was that the value of houses would rise forever, so people could pay off old loans by taking out larger new loans based on the increasing value of real estate. These doomed mortgages were packaged together, given fancy names, and sold to naive investors and investment funds. When the day of reckoning arrived, millions of mortgage holders lost their mythical equity (and their homes) while millions of investors lost their money.

The banks that created this bubble were on the brink of collapse but, carefully following the rules of the Game, they told Congress they were too big to fail, because, if they did, so would America itself. Congress dutifully approved virtually every request for taxpayer funding regardless of the amount. This legalized plunder was coordinated by two Secretaries of the Treasury, Henry Paulson and Timothy Geithner, who came from the banking fraternity and used their positions of public trust to protect and enrich the cartel.

All of the money was provided by the Federal Reserve acting as the "lender of last resort." That was one of the purposes for which it had been designed. We must not forget that the phrase "lender of last resort" means that the money is created out of nothing resulting in the confiscation of wealth through inflation.

NATIONALIZATION BECOMES A REALITY

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What the government funds, it controls; and what it controls, it owns. This point was made crystal clear when, on April 1, 2009, Treasury Secretary, Timothy Geithner (CFR), announced he was prepared to oust the CEO of any bank that received a bailout if he doesn't run the bank correctly. Geithner was not planning to fire anyone. The purpose of his statement was to convince the public that the government was being conscientious and responsible with the handling of so much money, but the significance of his statement is that the Secretary of the Treasury now holds the power to oust bank CEOs without concern for the wishes of their boards of directors.

1.   "Federal Reserve NY reports paper profit," BBC News (Net), July 30, 2010.

2.   "Grassley Slams GM, Administration Over Loans Repaid with Bailout Money," Fox News (Net), Apr 22, 2010.

3.   "Ousting bailed-out U.S. bank CEOs: Timothy Geithner," Reuters (Net), Apr. 1, 2009.

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