This is the third installment in a series of chapter summaries from G. Edward Griffin’s must-read book The Creature From Jekyll Island. This book may be the most important “red pill” available and we highly recommend that you buy and read the full book at RealityZone.
G. Edward Griffin
Chapter 3 Summary: Protectors of the Public
The game called bailout is not a whimsical figment of the imagination, it is real. Here are some of the big games of the past and their final scores.
In 1970, Penn Central railroad became bankrupt. The banks which lent the money had taken over its board of directors and had driven it further into the hole, all extending bigger and bigger loans to cover the losses. Directors concealed reality from stockholders and made additional loans so the company could pay dividends to keep up the false front. During this time, the directors and their banks unloaded their stock at unrealistically high prices. When the truth became public, the stockholders were left holding the empty bag. The bailout, which was engineered by the Federal Reserve, involved government subsidies to other banks to grant additional loans. Then Congress was told that the collapse of Penn Central would be devastating to public interest. Congress responded by granting $125 million in loan guarantees so that banks would not be at risk. The railroad eventually failed anyway, but the bank loans were covered. Penn Central was nationalized into AMTRAK and continues to operate at a loss.
In 1970, as Lockheed faced bankruptcy, Congress heard essentially the same story. Thousands would be unemployed, subcontractors would go out of business, and the public would suffer greatly. So Congress agreed to guarantee $250 million in new loans, which put Lockheed 60% deeper into debt than before. Now that government was guaranteeing the loans, it had to make sure Lockheed became profitable. This was accomplished by granting lucrative defense contracts at non-competitive bids. The banks were paid back.
In 1975, New York City had reached the end of its credit rope. It had borrowed heavily to maintain an extravagant bureaucracy and a miniature welfare state. Congress was told that the public would be jeopardized if city services were curtailed and that America would be disgraced in the eyes of the world. So Congress authorized additional direct loans up to $2.3 billion, which more than doubled the size of the current debt. The banks continued to receive their interest.
In 1978, Chrysler was on the verge of bankruptcy. Congress was informed that the public would suffer greatly if the company folded, and that it would be a blow to the American way if freedom-of-choice were reduced from three to two makes of automobiles. So Congress guaranteed up to $1.5 billion in new loans. The banks reduced part of their loans and exchanged another portion for preferred stock. News of the deal pushed up the market value of that stock and largely offset the loan write-off. The banks’ previously uncollectable debt was converted into a government-backed, interest-bearing asset.
In 1972, the Commonwealth Bank of Detroit — with $1.5 billion in assets, became insolvent. It had borrowed heavily from the Chase Manhattan Bank in New York to invest in high-risk and potentially high-profit ventures. Now that it was in trouble, so was Chase. The bankers went to Washington and told the FDIC the public must be protected from the great financial hardship that would follow if Commonwealth were allowed to close. So the FDIC pumped in a $60 million loan plus federal guarantees of repayment. Commonwealth was sold to an Arab consortium. Chase took a minor write down but converted most of its potential loss into government-backed assets.
In 1979, the First Pennsylvania Bank of Philadelphia became insolvent. With assets in excess of $9 billion, it was six-times the size of Commonwealth. It, too, had been an aggressive player in the70s. Now the bankers and the Federal Reserve told the FDIC that the public must be protected from the calamity of a bank failure of this size, that the national economy was at stake, perhaps even the entire world. So the FDIC gave a $325 million loan — interest-free for the first year, and at half the market rate thereafter. The Federal Reserve offered money to other banks at a subsidized rate for the specific purpose of relending to First Penn. With that enticement, they advanced $175 million in immediate loans plus a $1 billion line of credit.
In 1982, Chicago’s Continental Illinois became insolvent. It was the nation’s seventh largest bank with $42 billion in assets. The previous year, its profits had soared as a result of loans to high-risk business ventures and foreign governments. Although it had been the darling of market analysts, it quickly unraveled when its cash flow turned negative, and overseas banks began to withdraw deposits. It was the world’s first electronic bank run. 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, but no one called it that. The United States government was now in the banking business.
All of the bail outs of previous years pale by comparison to the trillions of dollars pumped into the banks beginning in 2008 in response to the subprime meltdown. This huge amount of money will not come from the government or The Federal Reserve. It will come from the American consumers in the form of higher prices.
All of the money to accomplish these bailouts was made possible by the Federal Reserve System acting as the “lender of last resort.” That was one of the purposes for which it had been created. We must not forget that the phrase “lender of last resort” means that money is created out of nothing, resulting in confiscation of our nation’s wealth through the hidden tax called inflation.
Get the book for yourself or for others you want to wake up. It reads like a mystery novel and is filled with colorful metaphors that make the seemingly complex world of banking very easy to comprehend. Visit RealityZone for your copy today. Summary is re-printed with permission from G. Edward Griffin.