Here are some interesting numbers. What this tells me is that the USSR had every reason to believe the USA wanted detente as they were just as bankrupt indeed more so than the former Soviet Union which actually showed growth of 1-1.5%. Not even in recession.
Autumn 1990: Bank of New England, Citibank and Chase Bankrupt
During the Great Depression between the two world wars, the collapse of 1929 had been followed by a US banking disintegration that reached critical mass during the fall and winter of 1932-33. About 3 to 4 years had separated the collapse phase from the banking panic. By a remarkable coincidence, the stock market and dollar crashes of 1987 were followed 3 to 4 years later by the threatened disintegration of the US banking system.
Federal Reserve officials were aware that they were presiding over a possible re-run of the banking panic of 1932-33. The Fed was filled with “continual conversations about this period and the 1930s”, especially when “all the main money supply indicators suddenly collapsed in autumn 1930.” [S. Solomon, 465] Eliot Janeway and others were warning in the press of a deflationary crisis in full swing.
Greenspan acknowledged the peril of banking panic on September 13, 1990, noting that there were “all too many problems in the banking system, problems that have been growing of late as many banks, including many larger banks, have been experiencing a deterioration in the quality of their loan portfolios…. “ [Financial Times, September 14, 1990] A student of this period sums up: “Just how close the US banking system came to collapsing in 1990-91 was necessarily conjectural, since it depended much on developments in the economy. But there was little doubt that the wildfire spread of market fear of major bank collapses nearly became a self-fulfilling disaster….” [S. Solomon, 464]
It was noticeable that the banks had stopped making loans. The reason was simply that these banks feared panic runs and, like their predecessors of 1932-33, thought that had to conserve their own cash to cover demand deposits. Bank bonds were downgraded by Moody’s and the other agencies until many had reached BB, which was hardly reassuring. Many customers found that they themselves were more credit-worthy and could borrow more cheaply than the banks they were unsuccessfully trying to borrow from. As Greenspan later admitted, bank “fragility…in fact was the cause of the credit crunch.” [S. Solomon, 463]
The Bush administration railed against this new credit crunch and even indirectly blamed the Fed. The Bushmen claimed that “overzealous bank regulators” were responsible for the halt in lending, having become too strict now after their anything goes attitude of the 1980s bubble. Bush even used his triumphalistic post-Gulf war State of the Union speech of January 29, 1991 to call on the Fed to lower interest rates and on the banks to make “more sound loans now.” Greenspan responded with a critique of the 1980s, primly remarking that “it is now clear that a significant fraction of the credit extended during those years should not have been extended.” [S. Solomon, 458]
In the waning days of the Reagan Administration, the White House still claimed to have presided over the longest peacetime economic expansion since the 1960s, or even in all of US history. By the end of 1988, the foreign debt of the United States, now the greatest debtor on the planet, had attained $500 billion, equal to 10% of GDP. According to the National Bureau of Economic Research, the US went into recession in July 1990 – just before Iraq took possession of Kuwait. Economic activity had been weaker under Bush than under any American president since Herbert Hoover in 1929-1933. The Bush recession in the US was accompanied by a deep economic downturn in western Europe, which for most countries was the worst since World War II. Against this background, the US banking system started to blow, starting in January 1990 with the Bank of New England.
The Bank of New England had been among the ten largest bank holding companies in the United States, with $30 billion in assets. But BNE had also built up $36 billion if off-balance sheet activity, mainly in derivatives. Then came the collapse of the Boston real estate market. The Boston Federal Reserve pumped $18 billion in loans into BNE to keep it alive between January 1990 and January 1991, when it was finally seized and shut down. The huge covert bailout by the Fed was designed to allow BNE to unwind the vast majority of its derivatives positions, thus avoiding a likely short-term worldwide derivatives panic during 1990. William Seidman, the chairman of the FDIC, estimated that BNE would cost his agency $2.3 billion, the second most costly bank failure in US history after First RepublicBank Corp. of Dallas. It took the best part of a year to unwind BNE’s derivative exposure. In early 1991 the buyout artists of KKR, now converted to bottom-fishing, trained their sights on the insolvent BNE. KKR was joined in this venture by Fleet/Norstar. This acquisition was approved by federal regulators in April 1991.
The Forbearance of the Regulators
By Bush’s second year in office, most US money center banks were technically bankrupt, and were being kept going by what federal regulators call “forbearance” – leaving those tottering banks alone, while lending them money under the table. This is a form of mercy that banks do not ordinarily extend to homeowners fighting foreclosure, but it was emphatically Bush’s policy. On December 7, 1990, the Bush White House convened an emergency meeting, with Baker present, to figure out what to do about the US banks. Before them the Bushmen saw six big, insolvent banks: Citicorp, Chase Manhattan, Manufacturers Hanover, Security Pacific, Chemical Bank, and the Bank of New England.
Most dramatic was the case of Citibank. While Bush was attempting to whip up hysteria and focus it on Saddam Hussein, a “silent, slow-motion, global wholesale money market flight from America’s largest bank” was taking place day by day. [S. Solomon, 464] In April 1990, IBCA Banking Analysis of London declared that Citicorp was “undercapitalized and under-reserved.” Standard and Poor’s and then Moody’s downgraded Citibank. In July 1990, bank analyst Dan Brumbaugh stated on the ABC network program Nightline that not only Citicorp, but also Chase Manhattan, Chemical Bank, Manufacturers Hanover and Bankers Trust were all already insolvent. During September 1990, there was a near electronic panic run on Citibank, while Chase Manhattan and other New York money center banks were also under increasing pressure.
Thanksgiving 1990: Citibank Silently Seized By Federal Regulators
For Citibank, the biggest US bank with an alleged $213 billion in assets, survival entailed a period of two and one half years during which mighty Citicorp was silently seized and put into receivership by federal regulators who began operating the bank using its nominal officers, like the incompetent John Reed, as ventriloquists’ dummies. Citicorp was now a secret ward of the Fed and the Comptroller of the Currency. [EIR, November 1, 1991] In October 1990, an auction of Citicorp money-market commercial paper attracted no buyers; it was saved only by purchases arranged by Goldman Sachs, and by a 13% interest rate. On the day before Thanksgiving, 1990, Citicorp Chairman John Reed and President Richard Braddock were summoned to the New York Federal Reserve on Wall Street. Awaiting Reed and Braddock were E. Gerald Corrigan, the President of the New York Federal Reserve, and William Taylor, the director of bank supervision for the Federal Reserve Board in Washington.
The Citibank crisis was a product of the collapse in US commercial real estate prices during 1989-1990. A shock wave of real estate collapse had wiped out 9 of the 10 largest banks in Texas over previous years, and that shock wave had now engulfed New York City. Reed, anxious to re-orient Citibank away from Walter Wriston’s Latin American loan racket, had loaded up with real estate loans in the northeast states. Citibank had thought that only 1% of these loans would turn out to be unsound. Corrigan and Taylor had now concluded that 20% or more of the $30 billion loan portfolio would not perform, and that Citibank had to brace itself for a minimum of $5 billion in losses. Corrigan and Taylor were worried that Citibank, which had one of the lowest capital-to-asset ratios among major banks, didn’t have sufficient capital to survive those losses.
Citibank had lent money to Campeau, Donald Trump, Olympia & York, John Portman, and Moutleigh and Randsworth Trust. When the New York department store Alexander’s failed, Citibank was the big loser. Citibank also had to liquidate its London subsidiary of Citicorp Scrimgeour Vickers. At the end of 1990, Citicorp announced an addition of $340 million to its loan loss provisions, but this was grossly inadequate window-dressing. During 1990, Citicorp’s non-performing real estate loans were up 120% to $2.6 billion, while the bank’s portfolio of foreclosed real estate was up 78% to $1.3 billion, and the market value of these properties had fallen by 55%.
The New York Fed was in effect seizing control of Citibank, and would retain that control for a reported two and one half years. A small army of 300 federal bank regulators occupied Citibank’s headquarters. Reed was obliged to cut Citicorp’s dividend and then suspend it entirely, More than 11,000 Citicorp employees were fired. From November 1990 on, Reed traveled every month to Washington to report to the Fed and to the Treasury’s Comptroller of the Currency… The regulators cleared every major decision he made – which implicates them in the firings, in Citibank’s derivatives exposure, which was built up in those years, and in Citibank’s private banking and money laundering services that assisted the graft and embezzlement carried out by the family of then-Mexican President Carlos Salinas de Gortari.
The Threat of Funding Crisis
According to a recent journalistic account, “The stakes for the regulators in this case were enormous. ‘We were running fire drills in case they had a problem that required government attention,’ one top former official recalled. A run on Citibank would have required intervention by the Federal Reserve and help from the central banks of other nations, another key insider said.” “What regulators feared most … was a ‘funding crisis’ like the one that took down Continental Illinois National Bank a decade ago. Much of Citi’s funds are big corporate deposits, many from overseas, that are not protected by federal deposit insurance. If those depositors got nervous and decided to withdraw their funds, even a healthy bank could not survive.” In other words, the issue was a Systemic meltdown.
The Citibank crisis remained acute all during 1991. In December 1991, Citibank was officially placed on the government’s secret watch list of banks in critical condition. In August 1992 the Office of the Comptroller of the Currency required Citibank to sign a Memorandum of Understanding, a public reprimand whose exact terms remain secret. But Citibank was the biggest beneficiary ever of regulatory forbearance, the bending of the law. Some respite came in February 1991, when Saudi Prince Waleed bin Talal, already a 4.5% stockholder in Citibank, agreed to plough an additional $590 million back into the foundering concern. $600 million more soon flowed in from Middle East and domestic sources. Fidelity Investments also put some money into Citibank.
In the third quarter of 1991, Citibank posted a quarterly loss of $885 million, with non-performing loans at $6 billion and non-performing real estate loans at $3 billion. For the first time since 1813, no dividend was paid to the stockholders.
Citibank Technically Insolvent and Struggling to Survive
In August 1991, Rep. John Dingell (D-Mich.) observed that Citicorp was “technically insolvent” and “struggling to survive.” This comment triggered panic runs on Citicorp in Hong Kong and Australia, where the FDIC does not operate. During that same week, the New York Fed lent out $3.4 billion, with almost all of it reportedly going to Citicorp. Perhaps this was the money needed to make up for the loss of deposit base in the Far East. Certainly Citicorp had to fear panic runs in the US as well. During the summer of 1992, the former Wall Street broker turned austerity candidate for the presidency, Ross Perot, announced in delphic language that he was selling Citibank stock short, because he expected it to crash soon. In Perot’s opinion, Citibank was insolvent.
Bankrupt banks were reorganized through mergers, which promised bigger bankrupt banks in the future. Chemical Bank took over Manufacturers Hanover, while the Bank of America absorbed Security Pacific. Citibank and Chase remained more or less in their original form. During these months there were significant bank failures in Norway and in Sweden.
On April 11, 1991, First Executive Life had been seized by California regulators; its $49 billion in liabilities made it the largest insurance failure in US history. Mutual Benefit Life Insurance Company of New Jersey was also bankrupt. 1991 also saw the demise of BCCI – the Banque de Credit et Commerce Internationale – allegedly because of a $1.2 billion fraud carried out by shipping tycoon Abbas Gokal. BCCI had been the owner of First American Bank, which employed former Defense Secretary and Truman controller Clark Clifford.
Greenspan’s Backdoor Bailout
The Fed funds rate peaked at 9 7/8% between February and June of 1989, when the Fed began lowering, reaching 8.25% by the end of 1989. Then there was an interlude of paralysis before rates started slowly down again, touching 7.75% on October 29, 1990. Making up for lost time, Greenspan brought the Fed funds rate and the discount rate to 4.5% by early December 1991. Afraid of a banking collapse, and attempting to help Bush get re-elected the following year, Greenspan lowered the discount rate from 4.5% to 3.5% on December 19, 1991. Greenspan then took the Fed funds rate to 3%, and kept it there during late 1992 and during all of 1993. The direction of these interest rate reductions would not be reversed until February 1994.
Greenspan was providing a massive public bailout to US commercial banks at taxpayers’ expense and without Congressional authority. It was a backdoor bailout. He helped the banks to steer away from short-term bankruptcy: by mid-1992 the Fed was keeping the overnight rate for federal funds in the neighborhood of 3%. At the same time, the thirty-year long bond was paying 7%. This meant that a Federal reserve member bank could borrow money at 3%, and use it to buy Treasury securities paying 7%, thus locking in a nearly four-point spread which represented pure risk-free profit to the bank. This was soon the biggest racket in town. Naturally, it would have been more convenient for US taxpayers if the Treasury had been able to borrow directly from the Fed at 3% rates, eliminating the banks as middlemen. That would have shrunk the debt-service burden imposed on the Federal budget much more effectively than the austerity nostrums proposed around this time by Perot and other demagogues. But Greenspan would have been horrified by such a proposal – for the Fed to have bought the Treasury issues at such low rates would have gone back to the bad old days before 1952 when the Fed was de facto forced to do the bidding of the elected government. It would have been a violation of the sacred laws of the free market!
References
1 www.mudslide.net/TopTen...