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Greenspan Stuck Taxpayers With Bank Losses

  • Fed Chairman Alan Greenspan devised a seedy scheme to bail out -- at taxpayers' expense -- banksters who played fast and loose with bank funds.
Exclusive to The SPOTLIGHT
By George Nicholas

Third in a Series

It is not always easy to retrace the step-by-step descent of an august, powerful public official into corrupt compromises and ultimately into criminality. But in the career of Federal Reserve Chairman Alan Greenspan the events of Nov. 14, 1990, marked a turning point, a SPOTLIGHT investigation has found.

To understand what happened that day, it is necessary to know that each year the Federal Deposit Insurance Corporation (FDIC) submits every U.S. bank whose deposits it insures to a thorough, top-to-bottom audit. As a result of these audits, the FDIC classifies banks into five categories.

Categories one, two and three are as signed, in that order, to well-functioning or moderately troubled money centers. Category four is for deeply troubled financial institutions that need federal assistance to survive. Category five is a rare classification: it is reserved for spent, wrecked banks that require immediate federal shutdown.

In the early afternoon of Nov. 14, 1990, a staff courier delivered a file marked "TOP SECRET -- EYES ONLY" into Green span's hands at his Fed office.

It contained the stunning news that after auditing Citibank, then the largest U.S. commercial bank, the FDIC had placed it into category five and urged its immediate closedown.

Greenspan knew that the entire U.S. banking system was in turmoil and close to real trouble, but the report about Citibank's insolvency hit him like a bombshell. The underlying causes of the disaster were not a secret.

Under the chairmanship of Walter Wriston, a headstrong, high-flying financier, Citibank had plunged into "buccaneer banking," transferring many of its operations to the Bahamas, where U.S. regulations and the requirements of fractional reserve banking did not apply.

Through its Nassau branch, Citibank made feckless loans across the continent, many of which inevitably turned sour. It gambled heavily in the Euromarket, sometimes profitably, sometimes disastrously. To be sure, Citibank grew fast, but much of its increased turnover represented losses rather than real gains.

The law now required that upon receipt of the FDIC's audit, Greenspan initiate the federal takeover of this recklessly extended, insolvent commercial bank, no matter how large.

But by 1990, Walter Wriston had re tired. Citibank's new boss was John Reed, a close personal friend of Greenspan and of the powerful president of the New York Fed, Gerald Corrigan. The two Federal Reserve chieftains decided to bail out Citibank -- and make American taxpayers pony up the uncounted billions of dollars the rescue would cost.

"In the sense that it contravened the statutes and regulations on how to deal with a bank driven into insolvency by its own management, Greenpan's and Corrigan's decision to stage a bailout was illegal, " says Dr. Aldo Milinkovich, a former Treasury bank examiner.

In the sense that it secretively diverted billions in public funds into refinancing a private bank without the consent or even knowledge of the American taxpayers who were made to pay for the bailout, it was a scam, Dr. Milinkovich added. And in the sense that the operation was set up to generate billions in profits for insider investors, the scheme was corrupt, he concluded.

The two Fed bosses went about the operation as deceptively as possible.

Pretending that he was needed for "consultations," Corrigan flew to Saudi Arabia, where he went into a closed-door huddle with Prince Al-Waleed bin Talal, one of the few international investors with deep enough pockets to refloat Citibank.

Corrigan managed to persuade the Arab mogul to sink two billion dollars into a refinancing of the foundering U.S. bank. He did so by promising the prince that with the Fed's secret support he would find this outlay the "most profitable investment" of his life.

As soon as Citibank had the Arab cash, Greenspan turned to a curious maneuver: he began to drastically lower the borrowing costs of banks by chopping the two principal loan rates -- known as the "Fed funds" and the discount rate -- directly controlled by the Federal Reserve.

In 1991, the Fed funds rate stood at 9 percent; in six months, Greenspan trimmed it to 2.7 percent. When startled congressional committees inquired about the reasons for such drastic manipulation of the financial markets, Greenspan stoutly testified that the realignment was necessary to "preempt inflation."

But there was no inflation anywhere in sight, said veteran Wall Street loan broker Wally Merkel. "Greenspan lied," he noted. "The real purpose of his rate slashing was to enable embattled banks like Citi to borrow from the Fed very cheaply -- and then to re-lend the same money to the U.S. Government by buying Treasury bonds that paid between 5.5 percent and 6 percent interest."

This covert bank bailout became known among financial insiders as the "carry trade," because all a big bank had to do was to pick up its money at the Fed, then carry it over to the Treasury and re-lend it, in effect, to U.S. taxpayers at a secure, fat profit margin.

The "carry trade" eventually broadened into a covert Fed bailout of troubled banks.

Prince Al-Waleed bin Talal's original investment in Citibank generated an $8 bil lion profit in rising bank-share prices. Greenspan acquired the reputation of a financial wizard. Everyone won something -- except for the bilked American taxpayers, who were conned into financing the entire scheme, without ever being told the truth about it.