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MUST READ:Behind the Panic: Financial Warfare over Future of Global Bank Power

By: F. William Engdahl

What is clear from the behavior of European financial markets over the past two weeks is that the dramatic stories of financial meltdown and panic are deliberately being used by certain influential factions in and outside the EU to shape the future face of global banking in the wake of the US sub-prime and Asset-Backed Security (ABS) debacle. The most interesting development in recent days has been the unified and strong position of the German Chancellor, Finance Minister, Bundesbank and coalition Government, all opposing an American-style EU Superfund bank bailout.

Stock market falls of 7 to 10% a day make for dramatic news headlines and serve to foster a broad sense of unease bordering on panic among ordinary citizens. The events of the last two weeks among EU banks since the dramatic state rescues of Hypo Real Estate, Dexia and Fortis banks, and the announcement by UK Chancellor of the Exchequer, Alistair Darling of a radical shift in policy in dealing with troubled UK banks, have begun to reveal the outline of a distinctly different European response to what in effect is a crisis ‘Made in USA.’

As I suggested in my previous piece here, Spezi-Kapitalismus in den USA: Paulsons Panikmache sieht immer mehr nach Berechnung aus, there is serious ground to believe that US Goldman Sachs ex CEO Henry Paulson, as Treasury Secretary, is not stupid and is actually moving according to a well-thought-out long-term strategy. Events as they are now unfolding in the EU confirm that. As one senior European banker put it to me in private discussion, ‘There is an all-out war going on between the United States and the EU to define the future face of European banking.’

In this banker’s view, the ongoing attempt of Italian Prime Minister Silvio Berlusconi and France’s Nicholas Sarkosy to get an EU common ‘fund’, with perhaps upwards of $300 billion to rescue troubled banks, would de facto play directly into Paulson and the US establishment’s long-term strategy, by in effect weakening the banks and repaying US-originated Asset Backed Securities held by EU banks.

Using panic to centralize power

As I document in my forthcoming book, Power of Money: The Rise and Decline of the American Century, in every major US financial panic since at least the Panic of 1835, the titans of Wall Street—most especially until 1929 the House of JP Morgan—have deliberately triggered bank panics in order to consolidate their grip on US banking. The private banks used the panics to control Washington policy including the exact definition of the private ownership of the new Federal Reserve in 1913, and to consolidate their control over industry such as US Steel, Caterpillar, Westinghouse and the like. They are, in short, old hands at such financial warfare to increase their power. Now they must do something similar on a global scale to be able to continue to dominate global finance, the heart of the power of the American Century.

That process of using panics to centralize their private power created an extremely powerful, concentration of financial and economic power in a few private hands, the same hands which created the influential US foreign policy think-tank, the New York Council on Foreign Relations in 1919 to guide the ascent of the American Century, as Time founder Henry Luce called it in a pivotal 1941 essay.

It is becoming increasingly obvious that people like Henry Paulson, who by the way was one of the most aggressive practitioners of the ABS revolution on Wall Street before becoming Treasury Secretary, are operating on motives beyond their over-proportional sense of greed. They, as did Fed Chairman Greenspan, had a strategy. Knowing that at a certain juncture the pyramid of trillions of dollars of dubious sub-prime and other high risk home mortgage-based securities would come falling down, they apparently determined to spread the so-called ‘toxic waste’ ABS securities as globally as possible in order to seduce the big global banks of the world, most especially of the EU into their honey trap.

It worked…up to a point. That point came over the weekend of October 3, coincidentally the national unification holiday of Germany.

Germany breaks with US model

In closed door talks well into the evening of Sunday October 5, Alex Weber the hard-nosed head of the Bundesbank, BaFin head Jochen Sanio and representatives of the Berlin coalition Government of Chancellor Merkel came up with a rescue package for Hypo Real Estate of a nominal €50 billion. However, behind the dramatic headline number, as Weber pointed out in a September 29 letter to Finance Minister Peer Steinbrück that has been made public, not only did the private German banks have to come up with 60% of that figure, the state with 40%. But also, given the careful manner in which the Government in cooperation with the Bundesbank and BaFin, structured the rescue credit agreement, the maximum possible loss, in a worst case scenario, to the state would be limited to €5.7 billion, not €30 billion as many believed. It’s still real money but not the blank check for $700 billion that a US Congress under duress and a few days of falling stock market prices agreed to give Paulson.

The swift action by Finance Minister Steinbrück to fire the head of HRE, in stark contrast to Wall Street where the same criminal fraudsters remain at their desks reaping huge bonuses, indicates as well a different approach. But that does not cut to the heart of the issue. The situation of HRE arose as noted previously, from excesses in a wholly-owned daughter bank of HRE subsidiary DEPFA in Ireland, an EU country known for its liberal loose regulation and low tax regime.

A British policy shift

In the UK, after the costly and foolish bailout of Northern Rock earlier in the year, the Government of Prime Minister Gordon Brown has just announced a dramatic change in policy in the direction of Germany’s position. Britain’s banks will get an unprecedented 50 billion-pound (€64 billion) government lifeline and emergency loans from the Bank of England.

The government will buy preference shares from Royal Bank of Scotland Group Plc, Barclays Plc and at least six other banks, and provide about 250 billion pounds of loan guarantees to refinance debt, the Treasury said. The Bank of England will make at least 200 billion pounds available. The plan doesn’t specify how much each bank will get.

That means the UK Government will at least partially nationalize its most important international banks, rather than buy their bad loans as under the unworkable Paulson plan. Under such an approach, costs to UK taxpayers once the crisis abates and business returns to more normal conditions, the Government can sell the state shares back to a healthy bank at perhaps a nice profit to the Treasury. The Brown Government has apparently realized that the blanket guarantees it gave to Northern Rock and Bradford & Bingley merely opened the floodgates of government costs without changing the problem.

The new nationalization policy is a dramatic contrast to the Paulson ideological ‘free market’ approach of buying the worthless bonds held by the select banks Paulson chooses to save, rather than recapitalize those banks to allow them to continue to function.

The battle lines drawn

What has emerged are the outlines of two opposite approaches to the unfolding crisis. The Paulson plan, as we noted in our previous article, is part of a project to create three colossal global financial giants—Citigroup, JP MorganChase and, of course, Paulson’s own Goldman Sachs. Having successfully used fear and panic to wrestle a $700 billion bailout from the US taxpayers, now the big three will try to use their unprecedented muscle to ravage European banks in the years ahead.

By agreeing on a strategy of nationalizing what EU finance ministers deem are ‘EU banks too systemically strategic to fail,’ while guaranteeing bank deposits, the EU governments have opted for what will in the longer run allow European banking giants to withstand the anticipated financial attacks from the likes of Goldman or Citigroup.

The dramatic selloff of stocks across European bourses and across Asia is in reality a secondary and far less critical issue. According to market reports, the selloff is being driven by mainly US hedge funds desperate to raise cash as they realize the US economy is going into economic depression and that the Paulson Plan does nothing to address that.

A functioning solvent banking and interbank system is far the more strategic issue. The ABS debacle was ‘Made in New York.’ Nonetheless, its effects have to be isolated and viable EU banks defended in the public interest, not just the interest of Paulson’s banking pals as in the US. The coordinated interest rate cut by the ECB and other European central banks while grabbing headlines, in effect do little to address the real problem: banks fear to lend to each other until their solvency is assured.

By initiating state partial nationalizations across the EU, and rejecting the Berlusconi/Sarkozy bailout scheme, the governments of the EU, interestingly led by the German, are laying a far more sound foundation to emerge from the crisis. Stay tuned, it’s far from over. Asian banks, badly burned by Wall Street’s manipulated 1997-98 Asia Crisis, are very little exposed to the US problem. European banks are exposed in different ways, but none so serious as in the US banking world.

http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Warfare_Behind_Panic/warfare_behind_panic.html

New World Order:

Global co-operation, nationalisation and state intervention -

all in one day

As the London stock market steeled itself to open again following days of vicious battering, Alistair Darling, the Chancellor, rose to stake the future of the country and the Cabinet on an audacious £500 billion banking bail-out.

And barely had the City begun to digest the hugely complex and unorthodox scheme when it was sent reeling again by an unscheduled interest rate cut – mirrored across the world – by the Monetary Policy Committee. It was the first such co-ordinated approach since the 9/11 terrorist attacks in 2001 – yet another indicator, had one been needed, of the gravity of the situation.

The half percentage point drop was immediately passed on to millions of borrowers, with leading high-street banks cutting their mortgages.

The government’s scheme, a three-part plan which takes in short, medium and long-term measures, was welcomed by business leaders and analysts.

David Kern, adviser to the British Chamber of Commerce, said: “The government has taken a radical step, but it is one we welcome.”

But there was concern a phenomenal amount of taxpayers’ cash was being staked on a last-ditch measure that could fail. The Taxpayers’ Alliance accused ministers of failing to address other options first.

Meanwhile, the International Monetary Fund (IMF) issued a fresh warning that Britain was on the brink of recession.

In its latest World Economic Outlook, it predicted the UK economy would contract by 0.1 per cent next year as growth across the developed countries slowed to almost zero.

The downturn will mean lost jobs, with unemployment forecast to rise from 5.4 per cent to 6 per cent, while public finances were said to be “considerably weaker” than in previous slowdowns. However, the IMF said it was expecting Britain to bounce back strongly in 2010.

The £500 billion plan includes the government taking shares of up to £50 billion in leading banks, increasing funds available to banks to £200 billion, and guaranteeing their debts when they lend to one another. The guarantees are likely to cost up to £250 billion.

The Prime Minister called the plans “bold and far-reaching”, but admitted they would offer no quick fix.

Eight UK banks and building societies – including Royal Bank of Scotland, Halifax Bank of Scotland, Barclays, Lloyds TSB and Nationwide – have pledged to increase their capital by £25 billion but the government will pump in the funds if called upon. The Treasury also stands ready to make at least another £25 billion available, if necessary.

The Bank of England – alongside its interest rate cut – is taking emergency action to help ensure banks have enough cash to run their day-to-day activities. It has increased to £200 billion the size of its special liquidity scheme that lets banks swap risky assets for Treasury bonds.

The government is also making the further £250 billion available for banks to guarantee debt, but a fee will be charged.

Mr Brown moved to reassure taxpayers they would have the potential to “earn a proper return” from their investment. There would be “strings attached and conditions to be met” to protect taxpayer interests.

One key concern is whether there will be controls over the bonuses of the “fat cat” bank bosses. Gordon Brown, the Prime Minister, said such issues would be dealt with case by case. Remuneration should be “based on responsibility, hard work, effort and enterprise”, he said.

It had been claimed that RBS bosses, chief executive Sir Fred Goodwin and chairman Sir Tom McKillop, had offered to leave under a boardroom clear-out agreed with the government, but this was denied by the bank.

The announcement provided an initial boost to the FTSE 100 index of leading shares, and in particular to banking stocks, but this fell away later in the day. The FTSE closed at a loss of 5 per cent – its lowest close since 2004 – while banks failed to hold on to the huge gains of up to 60 per cent made earlier in the day.

When Mr Brown stood to address the House of Commons on the package, which could well determine how his premiership is judged, he was able to announce the interest rate cut.

Central banks across Europe, the US, Canada and China also reduced interest rates in an emergency move.

The banks hope to encourage nervous consumers and businesses to spend more freely again after widespread housing, credit and financial problems.

The cut – which was immediately passed on to more than five million homeowners – was cautiously welcomed by analysts and business leaders.

Miles Templeman, director-general of the Institute of Directors, said: “Before today’s announcement, the financial system was in the deep freeze. After today, it might be in the fridge, but there is no guarantee. Nobody should be under any illusion that the financial system is now fixed. Our concern now is for the real economy and how much it will slow.

“There remains a real risk that the economic downturn under way will further undermine bank capital due to rising repossessions and bad debt.”

Howard Archer, an economist, of Global Insight, said: “It’s not the magic pill. We have a lot of difficult times ahead. But the first stage is stopping things getting worse, and the hope is this will help to stabilise the economy.”

Martin Weale, director of the National Institute of Economic and Social Research, said that, for the UK, it was important that the move came alongside the £500 billion package.

He said: “The international banks concluded there is a major international banking crisis. Banks were collapsing in Europe, as well as the United States. I think they rather optimistically concluded a rate cut of this type can restore confidence.”

Rate cuts were “a valuable piece on the side”, but he added: “The key issue is for affected countries to do what Britain has done and show governments are prepared to inject equity capital into banks that look as though they need it.

“We will only be confident the worst is over when the US adopts a scheme like Britain.”

And Louise Cuming, the head of mortgages at moneysupermarket.com, warned: “This is not a magic cure-all, and we won’t see either the mortgage or the housing market bouncing back to where it was 18 months ago.”

Following the announcements, Mr Brown spoke by phone to the French president, Nicolas Sarkozy, the German chancellor, Angela Merkel, and the Italian prime minister, Silvio Berlusconi, as well as the EC president, José Manuel Barroso.

The government is expected to hold up its plan as a potential model for the rest of Europe. The EU – which is concerned about competition implications of a scheme by Ireland to safeguard its deposits – later said it saw no problem with Britain’s move.

Mr Darling is due to fly to Washington today to discuss global action on the crisis.

How clever was it? We offer some marks out of ten

Bill Jamieson,on the wisdom and implications of the British bail-out

IMMEDIATE IMPACT:

5 out of 10. Shares in HBOS and Royal Bank rallied after a faltering start. HBOS closed 24.5 per cent higher and RBS was up 0.8 per cent. UK shares overall continued to plunge, with the FTSE100 down another 5 per cent or 238.53 points at 4366.69. But the reaction in money markets to the package was notably more positive.

TIMING:

1 out of 10. Work has been under way on a bank rescue for weeks. So why the long delay?

RATE CUTS:

9 out of 10. The co-ordinated nature of the move by the world’s central banks was particularly impressive. But more will be needed in the coming weeks. The near immediate passing on of the half per cent rate cut to mortgage borrowers is desperately needed good news for home-buyers.

PRESENTATION:

3 out of 10. Not impressive. And negotiations going on till early hours smacked of panic.

CONTENT:

8 out of 10. The package itself broadly went down well in money markets. It is seems well thought out, targeted at the key problems of capital strength and liquidity, is flexible, and does not crush the ordinary shareholders into oblivion.

OVERALL EFFECT:

Jury out.

This is going to take time. And this emergency package for UK banks will be of little use if the fiery panic across the world’s markets is not staunched.

It will not stop the recession that is already under way. But what the deal has certainly prevented is a total collapse in confidence in the UK’s financial system. It has improved the odds that there will still be a functioning banking system left by the end of the month. Whether that will be true by the time the storm has run its course may depend on further injections of central bank funds – and more rate cuts.

The huge efforts of the US Federal Reserve, the US Treasury, and the British and European governments and central banks have still not turned the tide.

WHAT IS THE TREASURY’S AIM?

It is to staunch the flight of confidence and to revive the inter-bank market – banks lending to other banks. To meet these objectives, it has effectively created a core group of banks of capital strength that will form the heart of the new UK financial system. By doing so the hope is this will end the flight of confidence and stop the run on bank shares.

The government is setting aside a further £25 billion to help other institutions build their capital so that they too will be fit counterparties for the core members. But in reviewing eligibility for inclusion, the government “will have due regard to an institution’s role in the UK banking system and the overall economy”.

It is likely a two-tier banking system will develop, similar to the world of 40 years ago when there was a distinction between clearing banks and secondary banks. The government will require a full commitment from participants in its scheme to support lending to small business and to home-buyers.

WILL IT WORK?

No-one can be sure. And certainly nothing is going to work until the firestorm raging across global markets is put out. Overnight Japan’s stock market plummeted 9.4 per cent – its biggest one-day drop in 21 years. In Germany the Dax Index opened down 4.8 per cent while trading on the Moscow stock exchange was again halted.

Not even that co-ordinated rate cut by the US Federal Reserve (to 1.5 per cent), the Bank of England (to 4.5 per cent) and the European Central Bank (3.75 per cent) rallied markets as had been expected.

Tumbling share prices are a signal that a severe recession is going to hit whatever governments now do.

The overall aim of government is to reduce the risk that recession turns into depression through the vicious cycle between the worsening economy, deteriorating credit quality, heightened financial strains and reduced credit availability.

The aim is to ensure that there is still a functioning banking system left a) by the end of the month and b) once the recession ends.

The measures themselves will not on their own end the financial crisis. This is global in nature and the interlinkages are complex – and potentially highly flammable. So it is unlikely measures by any one country can return financial conditions to normal.

Says Saunders: “We are not yet even halfway through the decline in UK house prices. We are not even close to halfway through the UK recession, with associated job losses, business failures, mortgage arrears and repossessions and debt write- offs. Much pain lies ahead.”

TOO LITTLE TOO LATE?

Many fear so. Further bank recapitalisation and liquidity measures may be needed. And there will almost certainly need to be further rate cuts, taking UK rates down to 3 per cent – possibly lower.

Banks move to pass on benefits
LINDSAY MCINTOSH

BORROWERS finally got some good news yesterday when UK banks passed on a shock interest rate cut.

The Bank of England dropped the base rate from 5 to 4.5 per cent at noon, in the surprise move 24 hours ahead of its scheduled decision. Some economists said it might soon plunge much lower.

Yesterday’s action was mirrored by the world’s major central banks, including the Federal Reserve in the United States and the European Central Bank, in an attempt to prevent a global economic meltdown.

Almost instantly, Britain’s high street banks pledged to pass on the cut to customers. HBOS, Barclays and Lloyds TSB – which lends through the Cheltenham & Gloucester – were the first to cut their standard variable rates in line with the Bank of England.

Where the cut is passed on in full, it will knock about £47 off monthly repayments on a typical £150,000 mortgage, reducing repayments to £1,012.81 a month and saving consumers £570 a year, based on a new rate of 6.5 per cent.

Those with loans of £250,000 will benefit even more, saving £79 a month or £950 a year.

The rate reduction was welcomed by the Council of Mortgage Lenders, alongside the other measures taken by the government to help the banking sector.

Michael Coogan, the CML’s director-general, said in cutting mortgage rates, the banks had helped to strengthen the rescue package announced by Gordon Brown, the Prime Minister, and Alistair Darling, the Chancellor.

“Not only are the tripartite authorities now pulling together decisively to address domestic confidence, but international central bankers are also collaborating much more effectively on their position,” he said. “All this decisive action augurs well for an improving market situation, even though no-one is pretending the tough times are over yet.”

The US Federal Reserve reduced rates from 2 per cent to 1.5 per cent and the European Central Bank trimmed its rates from 4.25 per cent to 3.75 per cent. The central banks of Canada, Sweden and Switzerland all took similar action.

The Bank of England said that the drop was justified by likely falls in inflation in the coming months.

Howard Archer, the chief European and UK economist at Global Insight, predicted interest rates could be as low as 4 per cent by the end of the year.

Who thought what of rescue package

“Taken together with the co-ordinated cut in interest rates, today’s package represents a welcome step on the road to normality in financial mar-kets, which is so critical for the wellbeing of the United Kingdom economy.”

Keith Skeoch, CEO, Standard Life Investments

• “The government is using taxpayers’ money as an easy way out, and haven’t fully explored other options that don’t put £50 billion of our hard-earned cash on the line.”

Matthew Elliott, chief executive of the TaxPayers’ Alliance

• “At last, the UK Treasury and Bank of England Monetary Policy Committee are wakening up to the scale of the crisis triggered by the credit crunch.”

Jonathan Fair, chief executive of Homes for Scotland

• “In the wake of the recent financial carnage, the MPC’s decision to cut the base rate by 0.5 per cent to 4.5 per cent is welcome news for struggling UK homeowners. This is the first reduction since April, and many borrowers will be breathing a long-awaited sigh of relief.”

Ann Robinson, director of consumer policy at uSwitch.com

• “It is very welcome that the Bank of England has heeded calls for an interest rate cut to ease lending conditions and provide a stimulus to households and businesses, and brought forward the announcement in conjunction with other central banks.

Alex Salmond, First Minister

• “Excessive risk-taking should not be rewarded but punished.”

Gordon Brown, the Prime Minister

CREDIT CRUNCH
IN NUMBERS

So what could £500bn buy?

• Four-and-a-half NHS’s (based on annual UK health budget)

• Six UK education systems (based on budget for 2008-9)

• 55 UNs (based on its annual budget)

• 20 Beijing Olympics

• 1,250 Scottish Parliaments

• Seven Vietnam wars

• Four-and-a-half Iraq wars

• South Africa, Nigeria, Cameroon, Ghana, Tunisia, the Ivory Coast, Madagascar, the Republic of Congo, Chad and Malawi combined (based on their GDPs)

http://thescotsman.scotsman.com/