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F. William Engdahl. The Gods of Money: Wall Street and the Death of the American Century


Newsletter 45: Greenspan Sets Wall Street Loose


Dear readers,

I want to take this issue of my complimentary newsletter to present an excerpt

from my book, The Gods of Money: Wall Street and the Death of the

American Century (2010). The book traces American history from roughly the 1860s Civil War through to the present, showing how, step-by-careful-step, the

powerful international banks and their allies in Congress moved to de facto

transform the United States from a national economy and a political system

responsive to its citizens to o­ne responsive to those Gods of Money and their

private interests. Anyone wishing to better understand the problems of

America today should examine that monetary history as what it has been-- a

political bankers coup.

Here in what follows from the book we go into the actions of the Federal

Reserve System and specifically the long-serving chairman Alan Greenspan, to

give a case example of precisely how the Fed directly controls just when they

will create a market crash to serve the interests of Wall Street. This is o­ne of

the most well-hidden purposes of the Fed, very much why it was created by

Wall Street in 1913 in the first place.

In late 2018 US President Trump quite accurately identified Fed interest rate

policy as deliberately causing economic and financial weakness with repeated

rate hikes. That sent shock waves as a President broke a tabu, and accurately

called out the Fed game. The selection below will give a better context to

grasp how major that intervention by the President was.

If you find this excerpt interesting, consider buying the book, The Gods of

Money: Wall Street and the Death of the American Century. As well I would be

delighted if you consider a support via PayPal o­n my homepage so that I am

able to continue to offer my content, especially now with looming EU and US

censorship laws or actions o­n Internet content and the infringement of

political free speech for independent researchers as myself.

Best regards

F. William Engdahl




Readers are raving about Gods of Money:

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Click here to buy the book:


Chapter Sixteen:

Greenspans Revolution in Finance Goes Awry

As we move into the twenty-first century, the remnants of nineteenth-century bank

examination philosophies will fall by the waysideaffiliation with banks need not--indeed,

should not--create bank-like regulation of affiliates of banks.

--Alan Greenspan, 1999, calling for deregulation of banks 1


A long-term Greenspan agenda

Seven years of Volcker monetary shock therapy had ignited a payments crisis across the Third

World. Billions of dollars in recycled petrodollar debts, loaned by major New York and

London banks to finance oil imports after the oil price increases of the 1970s, suddenly

became non-payable.

In August 1987, just a year away from the 1988 Presidential elections, in which George H.W.

Bush was determined to succeed Reagan as President, Bush persuaded Reagan to name a new

chairman of the Federal Reserve, a man more amenable to bowing before Wall Street. Bush

did not trust Paul Volcker to be sufficiently partisan and feared he would choke off economic

growth for fear of inflation just in time to deprive Bush of election victory; he preferred Alan


Greenspan would rarely disappoint his Wall Street patrons during the 18 years when he

controlled the Fed with an almost iron grip. Those 18 years were marked by financial

deregulation, successive speculation bubbles and instability.

With Greenspan at the helm, and after the large New York banks had looted all that was of

value in the domestic US savings banks, the stage was set for the next phase in the

Rockefeller financial deregulation agenda.. The next phase would entail nothing less than a

revolution in the very nature of moneythe Greenspan New Finance Revolution.

A carefully cultivated public relations fest in the US media persuaded most Americans to

believe that Alan Greenspan was essentially just a dedicated public servant who might make

mistakes, but in the end always saved the day and the nations economy and banks through

extraordinary feats of financial crisis management, winning the appellation, Maestro.2 The

truth was somewhat different.


Maestro serves the Money Trust

Alan Greenspan, like every Chairman of the Board of Governors of the Federal Reserve

System, was a carefully picked, institutionally loyal servant of the actual owners of the

Federal Reserve. The Federal Reserve owners, it will be recalled, consisted of the network of

private banks, insurance companies, and investment banks which had created the Fed in

December 1913 by rushing its statutory authorization through an almost empty Congress the

day before Christmas recess. In Lewis v. United States, the United States Court of Appeals for

the Ninth Circuit confirmed the true nature of the misnamed Federal Reserve when the court

stated that the Reserve Banks are not federal instrumentalitiesbut are independent,

privately owned and locally controlled corporations. 3

Greenspans entire tenure as Fed chairman was dedicated to advancing the interests of

American world financial domination in a nation whose domestic economic base had been

essentially destroyed in the years following 1971.

Greenspan knew who buttered his bread and as Federal Reserve head he loyally served what

the US Congress in 1913 had termed the Money Trust, in reference then to the cabal of

bankers behind the 1913 creation of the Federal Reserve.

Not surprisingly, many of the same banks which were pivotal in the securitization revolution

of the 1990s and into 21st Century, including Citibank and J.P. Morgan had been at the center

of the 1913 Money Trust as well. Both had share ownership of the key New York Federal

Reserve Bank, the heart of the system. The real goal of the Money Trust whether in 1913 or in

1987 was to consolidate their control over major industries, economies and ultimately, over

the economy of the entire world through what would be called the globalization of finance.

Alongside well-known institutions like J.P. Morgan and Citicorp and AIG, another

shareholder of the New York Fed was a little-known company called Depository Trust

Company (DTC), the largest securities depository in the world. Based in New York, the DTC

held in custody more than 2.5 million US and non-US equity, corporate, and municipal debt

securities issues from over 100 countries, valued at over $36 trillion. DTC and its affiliates

handled over $1.5 quadrillion in securities transactions a year. That was to say,

$1,500,000,000,000,000 -- a lot of responsibility in the hands of a company that most people

never heard of.

The Depository Trust Company had a monopoly o­n the debt securities depository business in

the USA. They had become in effect the back office of the world financial system. DTC

advertised itself as a safe way for buyers and sellers of securities to make their exchange, and

thus "clear and settle" transactions. It also provided custody of securities. They had simply

bought up all other contenders, becoming in the process an essential part of New Yorks

continued dominance of global financial markets, long after the American economy had

become largely a hollowed-out, post-industrial wasteland.

While free market purists and dogmatic followers of Greenspans close friend self interest

ideologue Ayn Rand accused the Fed Chairman of hands-on interventionism, in reality there

was a common thread running through each major financial crisis during Greenspans near

two decades reign as head of the worlds most powerful financial institution. As Federal

Reserve chairman, Greenspan managed to use each successive financial crisis to advance and

consolidate the influence of US-centered finance over the global economy, almost always to

the severe detriment of the US domestic economy and general welfare of the American


In each crisis, Greenspan used the situation to advance an agenda of globalization of risk and

liberalization of market regulations to allow unhindered operation of the major financial

institutions. Whether it was the October 1987 stock crash, the 1997 Asia Crisis, the 1998

Russian state default and ensuing collapse of Long Term Capital Management, or his refusal

to make technical changes in Fed-controlled stock margin requirements to cool the dot.com

stock bubble, or his encouragement of ARM variable rate mortgages (when he knew rates

were at the bottom), Greenspans manipulations of each crisis had the same goal. Moreover,

most of the crises had been spawned or triggered by his widely read commentaries and

publicly announced rate policies in the first place, as we will see.

When Alan Greenspan arrived in Washington in 1987, he had been hand picked by Wall

Street and the big banks to implement their Grand Strategy. Greenspan was a Wall Street

consultant whose clients included J.P. Morgan Bank, among others. Before taking the post as

head of the Federal Reserve, Greenspan had also sat o­n the boards of some of the most

powerful corporations in America, including Mobil Oil Corporation, Morgan Guaranty Trust

Company and JP Morgan & Co. Inc. Greenspan had also served as a director of the Council

on Foreign Relations since 1982. As Federal Reserve Chairman his first test in October 1987

would be the manipulation of stock markets using the then-new derivatives markets.


The 1987 Greenspan derivatives paradigm

In October 1987, Greenspan led a bailout of the stock market after the spectacular October 20

crash by pumping huge infusions of liquidity to prop up stocks. He simultaneously engaged in

behind-the-scene manipulations of the market via purchases of Chicago stock index

derivatives backed quietly by Fed liquidity guarantees. It was an unprecedented step by the

central bank to intervene to manipulate stock markets covertly, something whose legality,

should it be discovered, would have been highly questionable.

Since that October 1987 event, the Fed had made abundantly clear to major market players

that they were, to use Fed jargon, TBTFToo Big To Fail. No worry if a bank risked tens of

billions speculating in Thai baht or dot.com stocks o­n margin. If push came to liquidity shove,

Greenspan made clear he would be there to bail out his banking friends.

The October 1987 crash saw the sharpest o­ne day fall in the Dow Industrials in history508

points. The depth of the o­ne day fall was exacerbated by new computer trading models based

on the so-called Black-Scholes Options Pricing theory, whereby stock share derivatives were

now being priced and traded just as hog belly futures had been before. As former Wall Street

trader and author Michael Lewis described it,

A new strategy known as portfolio insurance, invented by a pair of finance

professors at the University of California at Berkeley, had been taken up in a

big way by supposedly savvy investors. Portfolio insurance evolved from the

most influential idea o­n Wall Street, an options-pricing model called Black-

Scholes. The model is based o­n the assumption that a trader can suck all the

risk out of the market by taking a short position and increasing that position as

the market falls, thus protecting against losses, no matter how steep. 4

The Black-Scholes model had recently come out of the university o­nto major Wall Street

trading floors at the time of the 1987 crash. During the 1970s, academic economists Fischer

Black and Myron Scholes designed a model that appeared to give a scientific basis to predict

the price of an option o­n financial products in the future based o­n the price of the actual or

underlying stock, currency, or other financial commodity such as oil. The new instruments,

which were sold to Wall Street and then to corporate America as a form of cheap financial

insurance against sharp price swings, were priced in a relation to -- i.e., derived from -- an

underlying product such as crude oil, hence the term derivatives.

The use of such financial derivatives has been compared to trying to replicate a fireinsurance

policy by dynamically increasing or decreasing your coverage as fire conditions

wax and wane. o­ne day, bam, your house is o­n fire, and you call for more coverage?" 5

The 1987 crash and the role of financial derivatives for the first time in a major market crisis

made clear was that there was no real liquidity in the markets when it was needed. All fund

managers tried to do the same thing at the same time: to sell short the derivatives -- stock

index futures in this case -- in a futile attempt to hedge their stock positions.

But the selling spree triggered an automated trading spiral in effect, a computer-driven

freefall. Financial derivatives, in effect sophisticated bets o­n the future direction of stock

prices, had made their debut o­n Wall Street by helping trigger the largest o­ne-day fall in the

stock markets history. It was a shaky start and not by any means the last crisis to be fed by

the exotic new financial derivatives.

Stephen Zarlenga, then a trader who was in the New York trading pits during the crisis days

in 1987, gave a first hand traders view of the impact of the new derivatives o­n stock prices:

They created a huge discount in the futures marketThe arbitrageurs who

bought futures from them at a big discount, turned around and sold the

underlying stocks, pushing the cash markets down, feeding the process and

eventually driving the market into the ground.

Some of the biggest firms in Wall Street found they could not stop their preprogrammed

computers from automatically engaging in this derivatives

trading. According to private reports, they had to unplug or cut the wiring to

computers, or find other ways to cut off the electricity to them (there were

rumors about fireman's axes from hallways being used), for they couldnt be

switched off and were issuing orders directly to the exchange floors.

The New York Stock Exchange at o­ne point o­n Monday and Tuesday seriously

considered closing down entirely for a period of days or weeks and made this

publicIt was at this pointthat Greenspan made an uncharacteristic

announcement. He said in no uncertain terms that the Fed would make credit

available to the brokerage community, as needed. This was a turning point, as

Greenspans recent appointment as Chairman of the Fed in mid 1987 had been

one of the early reasons for the markets sell off. 6

What was significant about the October 1987 o­ne-day crash was not the size of the fall, some

23%. It was the fact that the Fed, unannounced to the public, intervened through Greenspans

trusted New York bank cronies at J.P. Morgan and elsewhere o­n October 20 to manipulate a

stock recovery through use of the new financial instruments, the derivatives.

The visible or presumed cause of the October 1987 market recovery seemed to occur when

the Chicago-based MMI (Major Market Index) future price of select New York Stock

Exchange blue chip stocks began suddenly to trade at a premium to the underlying actual

stocks, midday Tuesday, at a time when o­ne after another Dow stock had been closed down

for trading. That was interpreted as a sign that smart money knew a rebound was about to

happen. Brokers cautiously began buying the real stocks.

The meltdown began to reverse. Arbitrageurs, high-risk securities gamblers, bought the

underlying stocks, re-opening them, and sold the MMI futures at a premium. The New York

stock market had magically and for no clear reason begun a dramatic recovery. It was created

in the trading pits of the Chicago MMI futures exchange, far from view of most of the public.

Greenspan and his New York financial cronies had successfully engineered a stock market

recovery using the same derivatives trading models in reverse, to drive the price of stocks

sharply higher just as they had driven the same stocks to the bottom o­nly days earlier. It was

the dawn of the era of financial derivatives, a world of potential manipulation beyond belief.

For most mundane Wall Street traders, financial derivatives gradually became accepted as a

highly profitable new instrument to make money out of money. A few savvy financial insiders

realized that those who could gain control of the market for the new financial derivatives, and

control of their exchanges, had the potential to make or break entire financial markets. It was

the start of o­ne of the most colossal projects in the history of financethe derivatives


Historically, so most people were led to believe, the role of the Federal Reserve as the

Comptroller of the Currency, among others things, was to act as independent supervisor of the

largest banks to insure stability of the banking system and prevent a repeat of the bank panics

of the 1930s by serving as lender of last resort.

Under the Greenspan regime, after October 1987, the Fed increasingly became the lender of

first resort, as the Fed widened the circle of financial institutions worthy of the Feds rescue.

It was the birth of an insider game sold to the public during the late 1980s as the

democratization of capital, using the argument that because millions of Americans were

investing their pension funds into mutual funds and money market funds, that meant that the

people actually controlled finance, not the financial oligarchs of old like J.P. Morgan or John

D. Rockefeller. Nothing was farther from the truth.

The Greenspan Federal Reserves laissez faire policy towards supervision and bank regulation

after 1987 was crucial to implementing the broader deregulation and financial securitization

agenda that Greenspan had hinted at in his first Congressional testimony in 1987.

On November 18, 1987, o­nly three weeks after the October stock crash, Alan Greenspan told

the US House of Representatives Committee o­n Banking that, repeal of Glass-Steagall would

provide significant public benefits consistent with a manageable increase in risk. 7

Greenspan would repeat this mantra until Glass-Steagall, the law that had required separation

of investment and commercial banking, was finally repealed in 1999. The support of the

Greenspan Fed for unregulated treatment of financial derivatives after the 1987 crash was

instrumental in the explosion of derivatives trading worldwide. The global derivatives market

grew by 23,102% between 1987 and the end of 2006 when it was a staggering $370 trillion.

The volumes were incomprehensible.


Destroying Glass-Steagall Restrictions

One of Greenspans first acts as Chairman of the Fed had been to call for repeal of the Glass-

Steagall Act, something that his old friends at J.P.Morgan and Citibank had ardently

campaigned for. 8 Glass-Steagall, officially the Banking Act of 1933, had introduced the

separation of commercial banking from Wall Street investment banking and insurance. Glass-

Steagall originally was intended to curb the practices that had caused the severity of the 1930s

wave of bank failures and depression.

One problem that Glass-Steagall was designed to address was that, prior to 1929, banks had

been investing their own assets in securities, with consequent risk to commercial and savings

depositors in the event of a stock crash. Unsound loans were made by the banks in order to

artificially prop up the price of select securities or the financial position of companies in

which a bank had invested its own assets. A bank's financial interest in the ownership, pricing,

or distribution of securities inevitably tempted bank officials to press their banking customers

into investing in securities which the bank itself was under pressure to sell. It was a colossal

conflict of interest and invitation to fraud and abuse. That era was appropriately dubbed the

Roaring Twenties as the stock market roared to new inflated highs.

Banks that offered investment banking services and mutual funds were subject to conflicts of

interest and other abuses, thereby harming their customers, including borrowers, depositors,

and correspondent banks. The Glass-Steagall Act of 1933 was specifically intended to prevent


After the law was repealed in 1999, with no more Glass-Steagall restraints, banks offered

securitized mortgage obligations and similar products via wholly owned Special Purpose

Vehicles they created to get the risk off the bank books. They were directly and knowingly

complicit in what will go down in history as the greatest financial swindle of all timesthe

sub-prime securitization fraud.

Commenting o­n the origins of the 1930s Glass-Steagall act, Harvard economist John

Kenneth Galbraith noted,

Congress was concerned that commercial banks in general and member banks

of the Federal Reserve System in particular had both aggravated and been

damaged by stock market decline partly because of their direct and indirect

involvement in the trading and ownership of speculative securities.

The legislative history of the Glass-Steagall Act shows that Congress also had

in mind and repeatedly focused o­n the more subtle hazards that arise when a

commercial bank goes beyond the business of acting as fiduciary or managing

agent and enters the investment banking business either directly or by

establishing an affiliate to hold and sell particular investments.

.During 1929 o­ne investment house, Goldman, Sachs & Company, organized

and sold nearly a billion dollars' worth of securities in three interconnected

investment trusts--Goldman Sachs Trading Corporation; Shenandoah

Corporation; and Blue Ridge Corporation. All eventually depreciated virtually

to nothing.9


Deregulation means Too Big To Fail

From the 1980s Reagan era through the 1990s, major banks and Wall Street institutions

consolidated unprecedented power over the United States and its economic life. The

deregulation agenda proposed in 1973 by the Rockefellers was the driver of the power

consolidation. For most of the period the consolidation took place under the watchful eye of

the Greenspan Federal Reserve.

In the United States, between 1980 and 1994, more than 1,600 banks insured by the Federal

Deposit Insurance Corporation (FDIC) had been closed or had received FDIC financial

assistance. That was far more than in any other period since the advent of federal deposit

insurance in the 1930s. It was part of a process of concentration into giant banking groups that

would continue into the next century.

In 1984 the largest bank insolvency in US history seemed imminent. Chicagos Continental

Illinois National Bank, the nations seventh largest, and o­ne of the worlds largest banks, was

on the brink of failure. To prevent such a large failure the Government, through the Federal

Deposit Insurance Corporation, stepped in to bail out Continental Illinois by announcing

100% deposit guarantee instead of the limited guarantee provided by FDIC insurance.

This came to be called the doctrine of Too Big to Fail (TBTF). The argument was that

certain very large banks, because they were so large, must not be allowed to fail for fear it

would trigger a chain-reaction of failures across the economy. It didnt take long before the

large banks realized that the bigger they became through mergers and takeovers, the more

certain they were to qualify for TBTF treatment. So-called Moral Hazard was becoming a

prime feature of US big banks. 10

The TBTF doctrine, during Greenspans tenure as Chairman of the Federal Reserve, would be

extended to cover very large hedge funds (LTCM), very large stock markets (NYSE), and

virtually every large financial entity in which the US financial establishment had a strategic

stake. Its consequences would be devastating. Few outside the elite circles of the largest

institutions of the financial community even realized the TBTF doctrine had been established.

Once the TBTF principle was made clear, the biggest banks scrambled to get even bigger. The

traditional separation of banking into local S&L mortgage lenders, o­n the o­ne hand, and large

international money center banks like Citibank or J.P. Morgan or Bank of America, o­n the

other as well as the prohibition o­n banking in more than o­ne state -- were systematically

dismantled. It was a new version of leveling the playing field, whereby the biggest banks

simply bulldozed and swallowed up the smaller o­nes, thereby creating financial cartels of

unprecedented dimensions.

By 1996 the number of independent banks had shrunk by more than o­ne-third from the late

1970s -- from more than 12,000 to fewer than 8,000. The percentage of banking assets

controlled by banks with more than $100 billion doubled to o­ne-fifth of all US banking assets.

The trend was just beginning. The banks consolidation was formalized in the 1994 Interstate

Banking and Branch Efficiency Act which removed geographic restrictions o­n bank

branching and holding company acquisitions by the individual states. Under the rubric of

more efficient banking a Darwinian struggle for survival of the biggest ensued. The biggest

were by no means, however, the fittest. The consolidation was to have significant

consequences a decade or so later as securitization exploded at a scale beyond even the banks

wildest imagination.


Operation Rollback: Enter Greenspan

The major New York money center banks had long had in mind the rollback of that 1933

Congressional restriction, Glass-Steagall. And Alan Greenspan as Fed Chairman was their

man. The major US banks, led by Rockefellers influential Chase Manhattan Bank and

Sanford Weills Citicorp, spent over o­ne hundred million dollars lobbying and making

campaign contributions to influential Congressmen to get deregulation of the Depression-era

restrictions o­n banking and stock underwriting.

Within two months of taking office, o­n October 6, 1987, just days before the greatest o­ne-day

crash o­n the New York Stock Exchange, Greenspan told Congress that US banks, victimized

by new technology and ''frozen'' in a regulatory structure developed more than 50 years ago,

were losing their competitive battle with other financial institutions and needed to obtain new

powers to restore a balance: ''The basic products provided by banks - credit evaluation and

diversification of risk - are less competitive than they were 10 years ago.''

As the New York Times noted, Mr. Greenspan has long been far more favorably disposed

toward deregulation of the banking system than was Paul A. Volcker, his predecessor at the

Fed. 11

Greenspans first testimony to Congress as Chairman of the Fed was of signal importance to

understand the continuity between the policies he implemented right from that moment up to

the securitization revolution after 2001 -- the New Finance securitization revolution. Again

quoting the New York Times account,

Mr. Greenspan, in decrying the loss of the banks' competitive edge, pointed to

what he said was a too rigid regulatory structure that limited the availability

to consumers of efficient service and hampered competition. But then he

pointed to another development of particular importance - the way advances

in data processing and telecommunications technology had allowed others to

usurp the traditional role of the banks as financial intermediaries. In other

words, a bank's main economic contribution - risking its money as loans based

on its superior information about the creditworthiness of borrowers - is


The Times quoted Greenspan o­n the challenge in 1987 to modern banking posed by

technological change:

Extensive o­n-line data bases, powerful computation capacity and

telecommunication facilities provide credit and market information almost

instantaneously, allowing the lender to make its own analysis of

creditworthiness and to develop and execute complex trading strategies to

hedge against risk, Mr. Greenspan said. This, he added, resulted in

permanent damage to the competitiveness of depository institutions and will

expand the competitive advantage of the market for securitized assets, such as

commercial paper, mortgage pass-through securities and even automobile


He concluded, Our experience so far suggests that the most effective

insulation of a bank from affiliated financial or commercial activities is

achieved through a holding-company structure. 12

However, in a bank holding company, the Federal Deposit Insurance fund, a pool of

contributions to guarantee bank deposits at that time up to $100,000 per account, would o­nly

apply to the core bank, not to the various subsidiary companies created to engage in exotic

hedge fund or other off-the-balance-sheet activities. The upshot was that in a crisis such as the

unraveling post-2007 securitization meltdown, the ultimate Lender of Last Resort, the insurer

of bank risk, becomes the taxpaying American public.

The issues provoked a hard fight in Congress that lasted until the final repeal of Glass-

Steagall the Gramm-Leach-Bliley Act -- was signed into law by Clinton in November 1999.

Clinton presented the pen he used to sign the repeal as a gift to Sanford Weill, the powerful

chairman of Citicorp, a curious gesture for a Democratic President, to say the least. It seemed

Clinton, too, knew how to follow the money.

Alan Greenspan had played the decisive role in moving Glass-Steagall repeal through

Congress. Testifying before the House Committee o­n Banking and Financial Services o­n

February 11, 1999, Greenspan declared,

[W]e support, as we have for many years, major revisions, such as those

included in H.R. 10, to the Glass-Steagall Act and the Bank Holding Company

Act to remove the legislative barriers against the integration of banking,

insurance, and securities activities. There is virtual unanimity among all

concerned--private and public alike--that these barriers should be removed.

The technologically driven proliferation of new financial products that enable

risk unbundling have been increasingly combining the characteristics of

banking, insurance, and securities products into single financial instruments.13

In his same 1999 testimony Greenspan made clear that repeal meant less, not more, regulation

of the newly allowed financial conglomerates, opening the floodgate to the fiasco that

occurred less than a decade later:

As we move into the twenty-first century, the remnants of nineteenth-century

bank examination philosophies will fall by the wayside. Banks, of course, will

still need to be supervised and regulated, in no small part because they are

subject to the safety net. My point is, however, that the nature and extent of

that effort need to become more consistent with market realities. Moreover,

affiliation with banks need not--indeed, should not--create bank-like

regulation of affiliates of banks 14 (emphasis addedf.w.e.)

Congress had passed Glass-Steagall in the first place precisely in order to break up the bank

holding companies with their inherent conflicts of interest that had led tens of millions of

Americans into joblessness and home foreclosures in the 1930s depression. In 1999, this

protection vanished.

Strategies unimaginable a decade ago

The New York Times described the new financial world created by repeal of Glass-Steagall in

a June 2007 profile of Goldman Sachs, just weeks prior to the eruption of the sub-prime crisis:

While Wall Street still mints money advising companies o­n mergers and taking them public,

real money - staggering money - is made trading and investing capital through a global array

of mind-bending products and strategies unimaginable a decade ago. They were referring to

the securitization revolution.

The Times quoted Goldman Sachs chairman Lloyd Blankfein o­n the new financial

securitization, hedge fund and derivatives world: We've come full circle, because this is

exactly what the Rothschilds or J. P. Morgan, the bankers were doing in their heyday. What

caused an aberration was the Glass-Steagall Act.15

Lloyd Blankfein, like most of Wall Streets bankers and financial insiders, saw the New Deal

as an aberration, openly calling for return to the early, unregulated heyday of J. P. Morgan

and other tycoons, the Gilded Age of abuses in the 1920s.

Glass-Steagall, Blankfeins aberration, had been finally eliminated by Bill Clinton. Goldman

Sachs had been a prime contributor to the Clinton campaign and even sent its chairman,

Robert Rubin, to the Clinton Administration in 1993, first as economic czar then in 1995 as

Treasury Secretary.

In October 2007 Robert Kuttner, co-founder of the Economic Policy Institute, testified before

US Congressman Barney Frank's Committee o­n Banking and Financial Services, evoking the

specter of the Great Depression:

Since repeal of Glass Steagall in 1999, after more than a decade of de facto

inroads, super-banks have been able to re-enact the same kinds of structural

conflicts of interest that were endemic in the 1920s - lending to speculators,

packaging and securitizing credits and then selling them off, wholesale or

retail, and extracting fees at every step along the way. And, much of this paper

is even more opaque to bank examiners than its counterparts were in the

1920s. Much of it isn't paper at all, and the whole process is supercharged by

computers and automated formulas. 16

Dow Jones Market Watch commentator Thomas Kostigen, writing in the early weeks of the

unravelling sub-prime crisis, remarked about the role of Glass-Steagall repeal in opening the

floodgates to fraud, manipulation and the excesses of credit leverage in the expanding world

of securitization:

Time was when banks and brokerages were separate entities, banned from

uniting for fear of conflicts of interest, a financial meltdown, a monopoly o­n

the markets, all of these things.

In 1999, the law banning brokerages and banks from marrying o­ne another

the Glass-Steagall Act of 1933 was lifted, and voila, the financial

supermarket has grown to be the places we know as Citigroup, UBS, Deutsche

Bank, et al. But now that banks seemingly have stumbled over their bad

mortgages, its worth asking whether the fallout would be wreaking so much

havoc o­n the rest of the financial markets had Glass-Steagall been kept in


No o­ne really questioned the new fad of collateralizing bank mortgage

debt into different types of financial instruments and selling them through a

different arm of the same institution. They are now(emphasis added, f.w.e).

.Glass-Steagall would have at least provided what the first of its names

portends: transparency. And that is best accomplished when outsiders are

peering in. When every o­ne is o­n the inside looking out, they have the same

view. That isnt good because then you cant see things coming (or falling) and

everyone is subject to the roof caving in.

Congress is now investigating the subprime mortgage debacle. Lawmakers are

looking at tightening lending rules, holding secondary debt buyers responsible

for abusive practices and, o­n a positive note, even bailing out some

homeowners. These are Band-Aid measures, however, that wont patch whats

broken: the system of conflicts that arise when sellers, salesmen and

evaluators are all o­n the same team. 17 (emphasis added--f.w.e.)

Greenspans Dot.com bubble


Before the ink was dry o­n Bill Clintons signature repealing Glass-Steagall, the Greenspan

Fed was fully engaged in hyping their next crisisthe deliberate creation of a stock bubble to

rival that of 1929, a bubble which the Fed would then deliberately burst, just as it had in 1929.

The 1997 Asian financial crisis and the ensuing Russian state debt default of August 1998

created a sea change in global capital flows to the advantage of the dollar. With Korea,

Thailand, Indonesia and most emerging markets in flames following a coordinated,

politically-motivated attack by a trio of US hedge funds, led by George Soros Quantum

Fund, Julian Robertsons Jaguar and Tiger funds and Moore Capital Management, according

to Swiss and City of London financial insider reports, the Connecticut-based LTCM hedge

fund of John Merriweather.18

The impact of the Asia Crisis o­n the dollar was notable and suspiciously positive. Andrew

Crockett, the General Manager of the Bank for International Settlements, the Basle-based

organization of the worlds leading central banks, noted that in 1996 the East Asian countries

had been running a combined current account deficit of $33 billion. Then, as speculative hot

money flowed in, 1998-1999, the current account swung to a surplus of $87 billion. By

2002 the surplus had reached the impressive sum of $200 billion. Most of that surplus

returned to the US in the form of Asian central bank purchases of US Treasury debt, in effect

financing Washington policies, pushing US interest rates way down and fuelling an emerging

New Economy, the NASDAQ Dot.com IT boom. 19

During the extremes of Asias 1997-1998 financial crises, Greenspan refused to act to ease the

financial pressures until after Asia had collapsed and Russia had defaulted in August 1998 o­n

its sovereign debt, and deflation had spread from region to region. Then, when he and the

New York Fed stepped in it was to rescue the huge LTCM hedge fund that had become

insolvent as a result of risky bets it had made that came unstuck as a result of the Russian


To save the big New York financial institutions that had given the credit lines to LTCM and

other hedge funds, Greenspan made an unusually sharp cut in Fed Funds interest rates for the

first time in his tenure as Fed chief, by 0.50%. That was followed a few weeks later by a

0.25% cut. That gave the nascent dot.com IT bubble in the stock market a nice little shot of

whiskey as cheap money poured into stocks, fueling a new bubble in prices unrelated to any

long-term economic reality. The financial crises in Asia and Russia had, in effect, supplied the

new cash for the Wall Street stock market casino to play the next round.

Towards the end of 1998, amid successive cuts in Fed interest rates and pumping in of ample

liquidity, the US stock markets, led by the NASDAQ and NYSE, went ballistic. In 1999

alone, as the New Economy bubble got into full swing, a staggering $2.8 trillion increase in

the value of stock shares was registered. That was more than 25% of annual GDP, all in paper


Gone were the Glass-Steagall restrictions o­n savings & loan banks and investment banks

promoting the stocks they had brought to market. The exact conflict of interest that Glass-

Steagall had been designed to prevent was now the centerpiece of the New Economy. Wall

Street stock promoters were earning tens of millions in bonuses for fraudulently hyping

Internet and other stocks such as WorldCom and Enron. It was the Roaring 1920s all over

again, but with an electronic, computerized turbo-charged kicker. Blankfein and his Wall

Street cronies were no doubt satisfied that the aberration of regulation had given way to the

norm of free-wheeling speculative frenzy.


The March 2000 speech

In March 2000, at the very peak of the Dot.com stock mania, Alan Greenspan delivered an

address to a Boston College Conference o­n the New Economy in which he repeated his

standard mantra in praise of the IT revolution and its impact o­n financial markets. In this

speech he went even beyond previous praises of the IT stock bubble and its putative wealth

effect on household spending which he claimed had kept the US economy growing robustly:

In the last few years it has become increasingly clear that this business cycle

differs in a very profound way from the many other cycles that have

characterized post-World War II America, Greenspan noted. Not o­nly has

the expansion achieved record length, but it has done so with economic growth

far stronger than expected.

He went o­n, waxing almost poetic as he built momentum:

My remarks today will focus both o­n what is evidently the source of this

spectacular performance--the revolution in information technologyWhen

historians look back at the latter half of the 1990s a decade or two hence, I

suspect that they will conclude we are now living through a pivotal period in

American economic historyThose innovations, exemplified most recently by

the multiplying uses of the Internet, have brought o­n a flood of startup firms,

many of which claim to offer the chance to revolutionize and dominate large

shares of the nation's production and distribution system.

Then the Maestro revealed his real theme, the ability to spread risk by using technology and

the Internet, a harbinger of his thinking about the unfolding securitization phenomenon, then

in its infancy:

The impact of information technology has been keenly felt in the financial sector of the

economy. Perhaps the most significant innovation has been the development of

financial instruments that enable risk to be reallocated to the parties most willing and

able to bear that risk. Many of the new financial products that have been created, with

financial derivatives being the most notable, contribute economic value by unbundling

risks and shifting them in a highly calibrated manner. Although these instruments

cannot reduce the risk inherent in real assets, they can redistribute it in a way that

induces more investment in real assets and, hence, engenders higher productivity and

standards of living. Information technology has made possible the creation, valuation,

and exchange of these complex financial products o­n a global basis. 20

Most notable about Greenspans euphoric paean to the benefits of the IT stock mania was its

timing. He knew very well that the impact of the Feds six interest rate increases that he had

instigated in late 1999 were sooner or later going to chill the buying of stocks o­n borrowed


Sure enough, the dot-com bubble burst o­ne week after Greenspans speech. o­n March 10,

2000, the NASDAQ Composite index peaked at 5,048, more than double its value just a year

before. o­n Monday, March 13, the NASDAX fell by an eye-catching 4%.

Then, from March 13, 2000 through to the market bottom, the market lost paper values worth

more than $5 trillion, as Greenspans rate hikes brought a brutal end to a bubble he repeatedly

claimed he could not confirm even existed until after the fact. In dollar terms, the 1929 stock

crash was peanuts compared with Greenspans Dot.com crash. Greenspan had raised interest

rates six times by March, a fact which had a brutal, chilling effect o­n the leveraged

speculation in dot.com company stocks.



1 Alan Greenspan, Testimony before the House Committee o­n Banking and Financial Services, February 11,


2 Bob Woodward, Maestro: Alan Greenspan's Fed and the American Economic Boom (New York: Simon &

Schuster, 2000). Woodwards book is an example of the charmed treatment Greenspan was accorded by the

major media. Woodwards boss at the Washington Post, Catharine Meyer Graham, daughter of the legendary

Wall Street investment banker Eugene Meyer, was an intimate Greenspan friend. The book can be seen as a

calculated part of the Greenspan myth-creation by the influential circles of the financial establishment.

3 Lewis v. United States, 680 F.2d 1239 (9th Cir. 1982).

4 Michael Lewis, Inside Wall Street's Black Hole, Portfolio.com, February 19, 2008, accessed in



5 Ibid.

6 Stephen Zarlenga, Observations from the Trading Floor During the 1987 Crash, in


7 Alan Greenspan, Testimony before the Subcommittee o­n Financial Institutions Supervision, US House of

Representatives, Nov. 18, 1987.


8 Robert D. Hershey jr., Greenspan Backs New Bank Roles, The New York Times, October 6, 1987.

9 John Kenneth Galbraith, cited in Michael J. Laird, The Glass-Steagall Banking Act, its Demise,

Managerial Auditing Journal, 1998, Vol.13, no. 9, pp. 509-514.

10 Federal Deposit Insurance Corporation, History of the 80s, Volume I: An Examination of the Banking Crises of

the 1980s and Early 1990s, in www.fdic.gov/bank/historical/history/vol1.html, p.1.

11 Hershey, op.cit.

12 Ibid.

13 Alan Greenspan, Testimony before the House Committee o­n Banking and Financial Services, February 11,


14 Alan Greenspan, Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve

System, before the Committee o­n Banking and Financial Services, U.S. House of Representatives, February 11,

1999, in Federal Reserve Bulletin, April 1999.

15 Jenny Anderson, Goldman Runs Risks, Reaps Rewards, The New York Times, June 10, 2007.

16 Robert Kuttner, Testimony of Robert Kuttner Before the Committee o­n Financial Services, Rep. Barney Frank,

Chairman, U.S. House of Representatives, Washington, D.C., October 2, 2007

17 Thomas Kostigen, Regulation game: Would Glass-Steagall save the day from credit woes?, Dow Jones

MarketWatch, Sept. 7, 2007, in http://www.marketwatch.com/news/story/would-glass-steagall-save-day-credit.

18 Various market traders in private telephone discussion with the author during the 1997-98 Asia crisis reported

on the first hand knowledge of the three hedge funds in executing coordinated military-like attacks o­n the

various Asian currencies. o­ne source, a Swiss financial regulator, speaking off-record in 2002, told the author he

had been present in the office of the President of Thailands largest bank when a call came from the head of o­ne

of the three mentioned hedge funds telling him of a planned coordinated assault o­n the Thai currency and of the

futility of trying to resist.

19 F. William Engdahl, Hunting Asian Tigers: Washington and the 1997-98 Asia Shock, reprinted in


20 Alan Greenspan, The Revolution in Information Technology, before the Boston College Conference o­n the

New Economy, Boston, Massachusetts, March 6, 2000.

© Website author: Leo Semashko, 2005; © designed by Roman Snitko, 2005