rights, said Rothbard, the whole banking system should be put into
receivership and the bankers should be jailed as embezzlers.
If the taxpayers were to withdraw the taxpayer-funded props
holding up a bankrupt banking system, the banks, or at least some of
them, could soon collapse of their own weight; and the first to go
Chapter 43 - Bailout, Buyout, or Corporate Takeover?
would probably be the big derivative banks that have been called
āzombie banksā ā“ banks that are already bankrupt and are painted
with a veneer of solvency by a team of accountants adept at ācreative
accounting.ā Insolvent banks are dealt with by the FDIC, which can
proceed in one of three ways. It can order a payout, in which the bank
is liquidated and ceases to exist. It can arrange for a purchase and
assumption, in which another bank buys the failed bank and assumes
its liabilities. Or it can take the bridge bank option, in which the FDIC
replaces the board of directors and provides the capital to get it running
in exchange for an equity stake in the bank.4 An āequity stakeā means
an ownership interest: the bankā™s stock becomes the property of the
The bridge bank option was taken in 1984, when Chicagoā™s
Continental Illinois became insolvent. Continental Illinois was the
nationā™s seventh largest bank, and its insolvency was the largest bank
failure that had ever occurred in the United States. Ed Griffin writes:
Federal Reserve Chairman Volcker told the FDIC that it
would be unthinkable to allow the world economy to be ruined
by a bank failure of this magnitude. So, the FDIC assumed $4.5
billion in bad loans and, in return for the bailout, took 80%
ownership of the bank in the form of stock. In effect, the bank was
nationalized . . . . The United States government was now in the
. . . Four years after the bailout of Continental Illinois, the
same play was used in the rescue of BankOklahoma, which was
a bank holding company. The FDIC pumped $130 million into
its main banking unit and took warrants for 55% ownership. . .
By accepting stock in a failing bank in return for bailing it out, the
government had devised an ingenious way to nationalize banks
without calling it that.5
The FDIC sold its equity interest in Continental Illinois after the
bank got back on its feet in 1991, but the bank was effectively
nationalized from 1984 to 1991. Griffin decries this result as being
antithetical to capitalist notions; but as William Jennings Bryan
observed, banking is the governmentā™s business, by constitutional
mandate. The right and the duty to create the national money supply
were entrusted to Congress by the Founding Fathers. If Congress is
going to take back the power to create money, it will have to take
control of the lending business, since over 97 percent of the money
supply is now created as commercial loans.
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As Dave Lewis observed, in some sense the big banks considered
ātoo big to failā are already nationalized, since their survival depends
on a system of taxpayer-funded bailouts. (See Chapter 34.) If tax-
payer money is keeping the ship from sinking, the taxpayers are en-
titled to step in and take the helm. Banking institutions supported by
taxpayer money can and should be made public institutions operated
for the benefit of the taxpayers.
Some Choice Bank Stock Ripe for FDIC Plucking?
Continental Illinois may not be the largest U.S. bank to have been
bailed out from bankruptcy. Weā™ve seen evidence that Citibank be-
came insolvent in 1989 and was quietly bailed out with the help of the
Federal Reserve, and that JPMorgan Chase (JPM) followed suit in 2002.
(Chapters 33 and 34.) These are the countryā™s two largest banks, and
they are the banks that are the most perilously over-exposed in the
massive derivatives bubble. Recall the 2006 report by the Office of the
Comptroller of the Currency, finding that 97 percent of U.S. bank-
held derivatives are in the hands of just five banks; and that the first
two banks on the list are JPM and Citibank. According to Martin
Weiss in a November 2006 newsletter:
The biggest [derivatives] player, JPMorgan Chase, is a party to
$57 trillion in notional value of derivatives. Its total credit
exposure adds up to $660 billion, a stunning 748% of the bankā™s
risk-based capital. In other words, for every dollar of its net
worth, JPMorgan Chase is risking $7.48 in derivatives. All it
would take is for 13.3% of its derivatives to go bad . . . and
JPMorganā™s capital would be wiped out, gone. . . . Citibank isnā™t
far behind ā“ with $4.24 at risk for every dollar of capital, more
than double what it was just a few years ago.6
These two banks are prime candidates for receivership, and the
FDIC might not even have to wait for a massive derivatives crisis in
order to proceed. It might just need to take a close look at the banksā™
books. JPM and Citibank were both defendants in the Enron scandal,
in which they were charged with fraudulently cooking their books to
make things look rosier than they were. To avoid judgment, they
wound up paying $300 million to settle the suits; but while a settlement
avoids having to admit liability, evidence in the case clearly showed
fraudulent activities.7 Banks with a record of engaging in such tactics
could still be engaging in them. A penetrating look at their books
might confirm that their complex derivatives schemes were illegal
Chapter 43 - Bailout, Buyout, or Corporate Takeover?
pyramid schemes concealing insolvency, as critics have charged. (See
Chapter 34.) If the banks are insolvent, they belong in receivership.
JPM and Citibank have many branches and an extensive credit
card system. Recall that JPM now issues the most Visas and
MasterCards of any bank nationwide, and that it holds the largest
share of U.S. credit card balances. If just these two banks were acquired
by the government in receivership, they might be sufficient to service
the depository, check clearing, and credit card needs of the citizenry.
That result would also make a very satisfying ending to our story.
JPM and Citibank are the money machines of the empires of Morgan
and Rockefeller, the Robber Barons whose henchmen plotted at Jekyll
Island to impose their Federal Reserve scheme on the American people.
They induced William Jennings Bryan to endorse the Federal Reserve
Act by leading him to believe that it provided for a national money
supply issued by the government rather than by private banks. It
would only be poetic justice for these massive banking conglomerates
to become truly ānationalā banking institutions, serving the public
interest at last.
Time for an Audit of the Banks and a Tax on Derivatives?
Even if the mega-banks (or some of them) are already bankrupt,
we might not hear about it without an independent Congressional
audit. John Hoefle writes, āMajor financial crises are never announced
in the newspapers but are instead treated as a form of national security
secret, so that various bailouts and market-manipulation activities can
be performed behind the scenes.ā The bailouts are primarily conducted
by the Federal Reserve, a private corporation answerable to the private
banks that are its real owners. Hoefle argues that Congress delegated
the money-creating power to the Federal Reserve in violation of its
Constitutional mandate, making the Fedā™s activities illegal. He
This is not an academic question, as the Fed is actively involved
in looting the American population for the benefit of giant U.S.
and global financial institutions, and the global casino. Few
Americans have any idea the extent to which the Fed and its system
reach into their pockets on a daily basis, and the extent to which their
standard of living has been eroded by the financier-led
deindustrialization of the United States. . . . [N]ot only do we suffer
from an inadequate infrastructure, but we have lost the benefits
of those breakthroughs which would have occurred, the
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technologies which would have been developed, had the
parasites not taken over the economy. It is the failure to push
back the boundaries of science that is responsible for most of our
In order to bring the largely-unreported derivatives scheme into
public view and under public control, Hoefle favors a tax on all
derivative trades. This form of tax is called a āTobin tax,ā after
economist James Tobin, who received a Bank of Sweden Prize in
Economics in 1981. Hoefle notes that even a very modest tax of one-
tenth of one percent would bring derivative trades out into the open,
allowing them to be traced and regulated; and because derivative
trading is in such high volume, the tax would have the further benefit
of generating significant revenue for the government.
Dean Baker of the Center for Economic and Policy Research in
Washington is another advocate of a tax on derivatives. He points out
that financial transactions taxes have been successfully implemented
in the past and have often raised substantial revenue. Until recently,
every industrialized nation imposed taxes on trades in its stock mar-
kets; and several still do. Until 1966, the United States placed a tax of
0.1 percent on shares of stock when they were first issued, and a tax
of 0.04 percent when they were traded. A tax of 0.003 percent is still
imposed on stock trades to finance SEC operations.9
Baker notes that the vast majority of stock trades and other finan-
cial transactions are done by short term traders who hold assets for
less than a year and often for less than a day. Unlike long-term stock
investment, these trades are essentially a form of gambling. He writes,
āWhen an investor buys a share of stock in a company that she has
researched and holds it for ten years, this is not gambling. But when
a day trader buys a stock at 2:00 P.M. and sells it at 3:00 P.M., this is
gambling. Similarly, the huge bets made by hedge funds on small
changes in interest rates or currency prices is a form of gambling.ā
When poor and middle income people gamble, they usually engage in
one of the heavily taxed forms such as buying lottery tickets or going
to the race track; but wealthier people who gamble in the stock mar-
ket escape taxation. Baker argues that a tax on derivative trades would
only be fair, equalizing the rules of the game:
Insofar as possible, taxes should be shifted away from
productive activity and onto unproductive activity. In
recognition of this basic economic principle, the government . . .
already taxes most forms of gambling quite heavily. For example,
Chapter 43 - Bailout, Buyout, or Corporate Takeover?
gambling on horse races is taxed at between 3.0 and 10.0 percent.
Casino gambling in the states where it is allowed is taxed at
rates between 6.25 and 20.0 percent. State lotteries are taxed at
a rate of close to 40 percent. Stock market trading is the only
form of gambling that largely escapes taxation. This is doubly
inefficient. The government has no reason to favor one form of
gambling over others, and it is far better economically to tax
unproductive activities than productive ones.
. . . From an economic standpoint, the nation is certainly no
better off if people do their gambling on Wall Street rather than
in Atlantic City or Las Vegas. In fact, there are reasons to believe
that the nation is better off if people gamble in Las Vegas, since
gambling on Wall Street can destabilize the functioning of
financial markets. Many economists have argued that
speculators cause the price of stocks and other assets to diverge
from their fundamental values.10
A tax on short-term trades would impose a significant tax on specu-
lators while leaving long-term investors largely unaffected. Accord-
ing to Baker, a tax of as little as 0.25 percent imposed on each pur-
chase or sale of a share of stock, along with a comparable tax on the
transfer of other assets such as bonds, options, futures, and foreign
currency, could easily have netted the Treasury $120 billion in 2000.
By December 2007, according to the Bank for International Settlements,
derivatives tallied in at $681 trillion. A tax of 0.25 percent on that
sum would have added $1.7 trillion to the governmentā™s coffers.
Solving the Derivatives Crisis
A derivatives tax might do more than just raise money for the
government. Hoefle maintains that it could actually kill the deriva-
tives business, since even a very small tax leveraged over many trades
would make them unprofitable. Killing the derivatives business, in
turn, could propel some very big banks into bankruptcy; but the fleasā™
loss could be the dogā™s gain. The handful of banks in which 97 per-
cent of U.S. bank-held derivatives are concentrated are the same banks
that are engaging in vulture capitalism, bear raids through collusive
short selling, and a massive derivatives scheme that allows them to
manipulate markets and destroy businesses. A tax on derivatives could
expose these corrupt practices and bring both the schemes and the
culpable banks under public control.
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THE QUICK FIX:
GOVERNMENT THAT PAYS
The strange creatures set the travelers down carefully before the
gate of the City . . . and then flew swiftly away . . . .
āThat was a good ride,ā said the little girl.
āYes, and a quick way out of our troubles,ā replied the Lion.
ā“ The Wonderful Wizard of Oz,
āThe Winged Monkeysā
A tax on derivatives could be a useful tool, but the ideal govern-
ment would be one that was self-sustaining, without imposing
either taxes or a mounting debt on its citizens. As Richard Russell
observed, if the U.S. issued its own money, that money could cover all
its expenses, and taxes would not be necessary. If the Federal Reserve
were made what most people think it now is ā“ an arm of the federal
government ā“ and if it had been vested with the exclusive authority to
create the national money supply in all its forms, the government would
have access to enough money to spend on anything it needed or
wanted. The obvious problem with that āquick fixā is that it would
eventually produce serious inflation, unless the money were siphoned
back out of the economy in some way. The questions considered in
this chapter are:
How much new money could the government put into the economy
annually without creating dangerous price inflation?
Would that be enough to replace income taxes? How about other
Would it be enough to fund new and needed projects not currently
in the federal budget, such as sustainable energy development,
restoration of infrastructure, and affordable public housing?
Chapter 44 - The Quick Fix