The "dirty little secret" that Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks that are the source of the toxic poison causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality. The heart of the present problem, and the reason ordinary loan losses are not the problem as in prior bank crises, is a variety of exotic financial derivatives, most especially credit default swaps.
In the Bill Clinton administration of 2000, the Treasury secretary was Larry Summers, who had just been promoted from number two under former Goldman Sachs banker Robert Rubin to be number one when Rubin left Washington to take up the post of Citigroup vice chairman. As I describe in detail in my new book, Power of Money: The Rise and Fall of the American Century, to be released this summer, Summers convinced president Clinton to sign several Republican bills into law that opened the floodgates for banks to abuse their powers. The fact that the Wall Street big banks spent some US$5 billion in lobbying for these changes after 1998 was likely not lost on Clinton.
One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act, which prohibited mergers of commercial banks, insurance companies and brokerage firms such as Merrill Lynch or Goldman Sachs. A second law backed by Treasury secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernization Act of 2000. That law prevented the responsible US government regulatory agency, Commodity Futures Trading Corporation (CFTC), from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called over-the-counter (OTC) derivatives like credit default swaps, such as those involved in the AIG insurance disaster, (and which investor Warren Buffett once called "weapons of mass financial destruction"), be free from government regulation.
At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his assistant was none other than Tim Geithner, the man who today is US Treasury Secretary, while Geithner's old boss, the self-same Summers, is President Obama's chief economic adviser as head of the White House Economic Council. To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the henhouse.
What Geithner does not want the public to understand, his "dirty little secret", is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global "off-balance sheet" or OTC derivatives issuance.
Today, five US banks, according to data in the just-released Federal Office of Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The top three are, in declining order of importance: JPMorgan Chase, which holds a staggering $88 trillion in derivatives; Bank of America with $38 trillion, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs, with a mere $30 trillion in derivatives; number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain's HSBC Bank USA, has $3.7 trillion.
After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.