"Who is saving Whom?"

WHO IS SAVING WHOM? THE CRISIS AS BUSINESS MODEL


By Herdolor Lorenz, Leslie Franke and Gabriele Koppel


[This foreword is translated abridged from the German on the Internet.]


FOREWORD


The film “Who is Saving Whom?” leaves behind many questions after a single viewing. Whoever wants to focus more intensively on the themes addressed here and seeks background information will find it in this book.


The film project “Who is Saving Whom?” begins when the first bailout package for Greece was crafted at the beginning of 2011. This was accompanied by a propaganda battle from the “Bild” newspaper to Angela Merkel in which “lazy Greeks” with their “inconceivably high pensions” were denounced.


This made us bewildered and speechless. What coordinated perfidious lies! Bailing ou8t Greeks was obviously not central. That was clear to all experts. The banks, hedge funds and insurance corporations that held Greek bonds called for help. The value of their bonds fell incredibly. Severe losses were imminent. However the call of capital was granted. The banks and insurance companies were compensated 100% under the breach of essential laws meant to ensure the stability of the Euro. What is truly perfidious is that on one side Greece was saddled with the costs of the bank bailout as an additional debt. On the other side, the worthless Greek state bonds belong to us! We bear the risk though the risk really belongs to the banks. We are now the creditors of the state debts with which Greece was saddled with its supposed bailout.


What we experience today was pre-programmed. Greece rightly demands debt relief and requires this sacrifice from the citizens of the Eurozone! The banks that have to answer for this slight mishap stand laughing on the sidelines. A conflict between banks and citizens was changed into a conflict between peoples. How truly satanic!


Up to the end of 2014, the politicians of the Eurozone largely made these lies disappear and gave the impression that the Euro crisis and the bank bailout was yesterday’s theme. Then the film “Who is Saving Whom?” was completed. We hoped that some truth about this history glossed over as a bailout would come to light. Happily the crises catapulted into public consciousness with the election victory of Syriza in Greece in January 2015.


The stigma of lazybones who didn’t want to take responsibility was tied to the Greeks. At the same time ever greater circles of Europe’s population realized something was rotten in this bailout policy and the debt crisis was by no means ended. Greece will probably never be able to pay back the credits sold to the country as a bailout. At the beginning of this crisis, France’s debts were as high as Greece’s debts in relation to the gross domestic product. Despite the strictest austerity measures, Spain and Italy could not drive back the state indebtedness inflated in the crisis. Half of the youths in these countries are without work and training.


The financial crisis and the subsequent bank bailout give an unparalleled breakneck speed to a fundamental change of western societies that was underway for 20 years. Youth have poor chances for an acceptable secure vocation. Obviously there are big differences. Spain, Greece and Italy can hardly be compared with the supposedly leading country Germany. The younger must expect a low starting wage if they find a job with the stress of permanent time limits and precarious working conditions. A long-term occupation perspective is hard to come by. This picture has radically changed compared to the situation of new employees 20 years ago.


For seniors, average pensions are falling and becoming more uncertain. In Ireland, Spain and Greece, state pension funds became the plaything of the Troika and the bank bailout. The outrageous seizure of pensions cut the pension benefits in half. More cuts can be expected in the future. However the pension level has already fallen 10% in Germany. Different from the times of labor minister Norbert Blum (1982-1998), reserves are exposed to the risks of the private capital market. Germany is the great guarantor of many hundreds of billions of euros made available for bank bailouts in the Eurozone. Seizing German pensions is not unlikely if the payment promises explode in the next crisis. Even beyond the pensions, the fate of seniors and the infirm will be more and more precarious. Privatization and competition have increased the stress of those working at the lowest wages in geriatric care so enormously that humane relations with the “clients” become the exception.


Only the intermediate generation still largely enjoys the relative job security of past days – a result of widespread union presence. With the exception of verdi, unions have largely abandoned the claim to political organization and responsibility for society and are only concerned about current “job holders.” Incomes and consumption possibilities are not rising as in the past. The stress of the constantly more efficient and competitive culture has produced a generation of self-optimizers at any price.


This is not happening all over the world. Still the attraction of the so-called western model of life has been wounded tremendously. If the latest Arab rebellion beginning in December 2010 was inspired by ideas like freedom and democracy, the celebrated movement fizzled out two years later as another step to implementing the neoliberal society. For most, freedom turned out to be the freedom of the hopeless with deregulation, mass unemployment and the lack of social security systems. A seeming counter-model to western freedom gains ground, ideological Islam. Not entirely accidentally, young educated women with headscarves are forming a true mass movement in western European cities in the last three or four years.


The real director of European economic and social policy, the former vice-president of the Goldman Sachs investment bank and today president of the European Central Bank (ECB) Mario Draghi summarized this social development in an interview with The Wall Street Journal: “The European social model is history.” Saving the euro will cost vast amounts of money. That means we have to take leave of the European social model. By “saving the euro,” he obviously meant the bank bailout that continues when the ECB buys bonds in the billions from the banks. So stock prices shot up in unsuspected heights at the expense of the taxpayers. At the same time, public education institutions for differently-abled youths close – for lack of money. This is a little example. But money is saved from the poorest of the poor everywhere in Germany with this argument.


This development did not start in the 2007/08 financial crisis but experienced an enormous push with the bank bailout in the billions since 2008. Never before since the Second World War was there such gigantic redistribution from bottom to the top.


THE RETURN OF HISTORY


As generally known, the 2007 financial crisis began in the US with the so-called sub-prime crisis – a real estate bubble. The fact that this was the first global crisis to damage the world economy since the disastrous 1929 world economic crisis is less known. Something happened like what happened 74 years ago that was long regarded as overcome and no longer seemed possible. The classical seven-year cycle of crises observable since the second half of the 19th century was long considered defeated. After the 1992/93 crisis years, crisis returned in the 1999-2001 dotcom crisis and the 2007-2010 financial crisis. The next crisis is approaching…


What triggered the reappearance of this destructive power? What once tamed the forceful power of the market after 1929?


After the worldwide economic crisis, President Franklin D. Roosevelt began with a fundamental regulation of the financial markets. With the Glass-Steagall Act, US financial institutes were forced to decide. They could either be a strictly regulated commercial bank that concentrated on ensuring deposits and awarding credits to the real economy or operating in the securities business where they could rely on the capital of shareholders. Or they are insurances with the strictest conditions for reserves. These different sectors of the financial industry were separated with a firewall. Trade with foreign capital and with speculative securities was prohibited. Later no bank could take over a rival from another US state. Thus no financial institute was allowed to be system-relevant. Wall Street howled and predicted catastrophes. However this law gave the US and the world more than 60 years of relatively stable economic conditions after the Second World War.


THE GREAT DEREGULATION


In 1991 the US Congress annulled a large part of the Glass-Steagall Act – with far-reaching consequences. “Commercial-, investment- and insurance banks could merge. So powerful financial giants like Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Bank of America arose. That had a ten-year development.” [Professor Andrew Ross from the Department of Social and Cultural Analysis of New York University in an interview for the film “Who is Saving Whom?,” 4/11/2014]


In 1981 when Ronald W. Reagan was elected 40th president of the US, a development was already underway with large US commercial banks on one side and investment houses on the other side. With so-called vehicles, they began to dodge the Glass-Steagall Act. They founded conduits, commercial banks, securities trading and investment banks in unregulated, tax-saving offshore regions utilizing customer deposits. In this grey area, the beginnings of the lucrative derivative trade developed and the hedge funds that operate with a minimum of their own capital.


In the US Treasury department, there are different initiatives for taming or restraining these developments in a regulating way. To counteract this, the US bank Merrill Lynch sent its head Donald Regan as Treasury secretary in the Reagan administration. In his documentary film “Capitalism: A Love Story,” the American director Michael Moore showed its grotesque characteristics. The Merrill Lynch man whispered the “right” sentences to an uncertain Reagan in public addresses on economic questions.


Another law followed in 1982. “The deregulation law triggered a competition of US states over casualness and loosening laws on bank regulation. The states that went the furthest were California and Texas – where practically anyone with trifling capital could found a bank. California supervisory personnel approve a bank every working day on average [Prof. William Black, US bank regulator 1984-89 in an interview for the film “Who is Saving Whom?” 1/24/2013]


The foundation of this growth was the so-called Ponzi scheme, named after the famous US financial fraud Charles Ponzi (1882-1994). To potential clients, he presented a little business idea that had a true core. He collected money for this credible idea. He enticed investors with 50% profit in 45 days or doubling their invested money in 90 days. So more and more people began investing in his project. But the little business idea with the true core was not able to supply the profits with such a great investment… Ponzi told his story again and again about the unusually high profits and paid the interests of the new patrons with the deposits of the first investors. That made his story credible. The news of the high profits spread. So Ponzi always had enough new deposits to pay the investors. This snowball system functioned as long as there were enough new patrons. The trust tottered when there weren’t enough new depositors and the first did not gather the promised profits. 40,000 patrons entrusted Ponzi with $15 million when the edifice collapsed. The money was gone and Ponzi was sentenced to nine years prison.


Back in the 1980s. Ponzi’s snowball system was practically legalized with the bank deregulation. Banks hardly needed their own capital for securities. The interests for bestowed credits were financed with the new deposits. As with Ponzi, it took eight years until the collapse. In 1989, more than 750 fast-growing banks declared bankruptcy. That was a first warning signal for the deregulation rage.


So the first president from the Bush dynasty largely cancelled the 1989 Reagan deregulation.


In 1999 when Bill Clinton was US president, he made the investment banker Robert E. Rubin, a Goldman Sachs CEO, into his Treasury secretary. His undersecretary was Larry Summers. Summers also came from Goldman Sachs and later worked for hedge funds. In the meantime, the new super-banks that arose since 1993 invented new financial instruments, so-called financial derivatives. A bank named Bankers Trust that is part of Deutsche Bank today invented the first of these derivatives.


The great breakthrough of the derivatives occurred when J.P. Morgan Chase invented the “credit default swap.” “The chairman of the US regulatory authority Brooksley Born understood the explosiveness of credit default swaps. She warned credit default swaps are very dangerous and must be regulated!” [William Black in the interview for the film “Who is Saving Whom?”] In 1999, the experiment of regulation started. She urged prohibiting its general application and only allowing it in strictly limited exceptions. “That was the signal for Robert E. Rubin, Larry Summers and Alan Greenspan, the chairman of the US Federal Reserve. They completely silenced Brooksley Born. In 2000 they passed a law that said: any legislation on credit default swaps is prohibited. This law did not only say: you cannot regulate. [William Black]


At the same time the Glass-Steagall Act was completely repealed. Under Clinton, US regulatory authorities lost three-quarters of their personnel. The watchword of the Clinton administration was: “We want to cooperate with business. We don’t want regulations, actionable guidelines or execution measures.” That was total deregulation. Wall Street was set outside the law. No criminal prosecution of the banks was possible any more!


FINANCIAL DERIVATIVES – A MYSTERY?


Financial derivatives have an incredibly dominant significance in the world today. “The volume of traded derivatives as far as they are public amounts to between $600 and $700 trillion. The entire global gross domestic product, everything that the countries produce amounts to only $60 trillion. In other words, derivatives exceed what is produced ten or twelve times! In trade with derivatives, for example, only 3% is trade with real currencies.” [Satjayalt Das in an interview for the film “Who is Saving Whom?,” 3/22/2013. He works in the derivate trade in one of the largest investment banks of the world. He jointly invented many derivatives. Traders all over the world are trained with textbooks on financial derivatives that Satjaylt Das wrote.] Trade with derivatives – with bets! – dominates in 97% What are these derivatives, above all the credit default swaps about which Brooksley Born warned so energetically? They appear as mysteries to average persons. The world of derivative trading loves the hidden and the dark. Transparency and understanding are its enemies. Derivatives are so-called desk-to-desk businesses while the stock trade on the exchanges must still follow certain rules and guarantee transparency to a certain degree. They are agreed privately on the telephone, mostly through coded connections from business partner to business partner. No transparency, publicness or control exists with derivatives.


This is reason enough to dispel the mystery from financial derivatives. In the following, we attempt to increase understanding of these “weapons of mass destruction” (quotation from Warren Buffett, star speculator).


Derivatives are a kind of insurance. They have the advantage over convention al insurances that they do not have to satisfy the strict regulations of the insurance industry as to solidarity and reserves. Derivative traders do not have to disclose the risk to the insured…


DERIVATIVES AS BETS


…The sociologist and globalization critic Jean Ziegler [in the interview fro the film “Who is Saving Whom?” 4/23/2013] is critical. World market prices explode since the financial markets speculate with so-called agro-derivatives. Then national prices rise correspondingly. Corn, grains and rice in normal years cover 75% of world consumption in basic foods. The world market price of core climbed 63% from 2011 to 2013. A ton of wheat doubled in price; it rose to 211 euro and the ton of Philippine rice increased from $110 to $1200. 57,000 persons die of hunger everyday and one billion of the seven billion people in the world are permanently and seriously malnourished. Thus this virtual capital kills.


Deutsche Bank is one of the worst actors in this murderous business today. Realizing profits for their clients and for themselves is the only motivation. For Deutsche Bank, the raw material trade is counted as a growth segment in the capital market business.


As with bets on good, everything in our lives can be a bet with derivatives. There are derivatives on pension funds of businesses. Ultimately even the death of the insured becomes abet. With such bets, the interests of state bonds can be pushed up where whole states like Greece can be forced to their knees.


DERIVATIVES – THE ALL-PURPOSE WEAPON


Derivatives are not counted in usual bookkeeping. The value of the bet first appears at the end of the insurance period – which can be many years. In combination with swap techniques, derivatives can change short-term losses of firms into profits and undesired profits into losses. If a firm fears undesired losses in one year, it buys a swap from a bank that guarantees profits for that year. The bank seeks sponsors who do not need as high profits or liquid funds. They can also buy a swap from a bank so these profits or fluid funds disappear before taxes. In this way Goldman Sachs helped Greece make debts disappear that would have prevented admission to the euro. The debts did not really disappear. The sponsors wanted their money returned with interest when the credits surfaced again at the end of the running time. Together with the costs for the swap business, the disappeared credits must be paid back double or triple.


Generally “derivatives can be used to hide losses, to smuggle profits past the tax authorities and conceal everything possible in balance sheets. Derivatives allow practically sailing around all laws. [Satyajlt Das in an interview for the film “Who is Saving Whom?”]


So it is not surprising that investment bankers feel elevated above laws. Big investment banks obviously see themselves as superior to nation states and their laws.


CREDIT DEFAULT SWAPS MAKE POSSIBLE UNLIMITED MONEY CREATION OF PRIVATE BANKS


When banks gave a customer a credit 15 to 20 years, they bore the risk that the customer would not pay any interests or pay back the loan. “However they could do nothing. They had to bear the risk. A bank must make a certain contribution to capital reserves for covering losses in a pinch. This means capital must remain in the balance sheets for five years for a loan designed for five years. Until the credit was paid back, the bank could not reuse the money. The bank could not give any new credits with the reserves. It had to wait until the credit was repaid. Then it could give new credits. However the rise of credit default swaps fundamentally revolutionized awarding credits and the business activity of banks.” [Satyajlt Das]


When banks now bestow a credit, they buy an insurance against the risk that the patron may not pay with the credit default swap. Then they can immediately award a new credit and also insure that credit. As soon as they have enough, they bundle the insured credits (that means “guarantee” them in the technical jargon) and sell them again. With the revenue, they have massive capital reserves as in the past – and mostly even greater capital. Awarding credits can continue in an unlimited way. New credits are given with the revenue – insuring guaranteeing and reselling. Since then no bank needs to wait until the credit is paid back. This accelerates awarding credit exponentially. The speed with which credits move in the system grows in a breathtaking way.


Satyajlt Das adds: “in the short-term, profits can expand enormously. The problem is: one has to repay as soon as one accepts the loan.”


Thus it is kind of Ponzi game. The lucrative reselling only functions as long as enough new credits can be awarded.


Who Is Saving Whom?
The crisis as business model at the expense of democracy and social safety
An international coproduction of Kernfilm by Leslie Franke and Herdolor Lorenz, 2015, 104 min. http://whos-saving-whom.org/index.php/en/

„Who is saving whom?“ is not just another bank rescue and Euro rescue film. It reveals much more what it is that all the “rescues” hide, right up to the present day tragedy of Greece. The radical alteration of society in Europe. The transformation of private debt into public debt which has been papered over and presented as a “rescue” has not only driven democracy to absurdity. It has shaken societies which consider themselves socialist societies with rule of law to their foundations. No one formulates this better in the film than Mario Draghi, who as a one time vice president of Goldman Sachs and present president of he ECB steers the economies in the Euro area: “The European social model is history”. “Saving the Euro will cost a lot of money. That means we will have to take leave of the European social model”. For seven years now the rescue is taking place with the help of hundreds of Billions of public money.

Screenings of the documentary
The premiere of the film “Who's saving whom? on Wednesday the 11th February 2015 was a terrific success.
The film debuted in many hundred film theaters and other venues in all of Europe to full and overflowing audiences with many exciting discussions. Join us, together we can achieve a lot! Check out this map to find out if there is a screening already next to your place. If you want to know more about how to organize your own event, please have a look to our campaigning manual.

„Who is saving Whom?“ shows what remains hidden. A tremendous redistribution from the bottom to the top. Before the crisis the rich of he world owned three times more than the yearly GDP of the world. After seven years of “crisis” they now own four times as much. Now, in the middle of Europe, there are again people working for starvation wages. Rescuing is taking place, for the 99% however, there is no sign of a rescue.

Many Europeans think of Greece as a country which has live d beyond its means, and which in spite of expensive aid is unwilling to reform - a bottomless barrel. “Who is saving Whom?” reveals that the expensive rescue packages since 2010 rescued exclusively only the creditors, the banks, the hedge funds and the insurances. When in 2011 the head of the Greek government A. Papendreou demanded a national referendum on this matter he was replaced, seemingly in a putsch, by the council of Europe. Replaced by a so called technocrat, Lukas Papademos. Exactly the person who, together with the investment bank Goldman Sachs, had by deceit brought Greece into the Euro zone. His job now was to enforce the conditions of the credit: Destruction of the health insurances and pensions, deregulation of labor laws, privatization of public assets etc.
The rescue policies practiced throughout the EU, not just in Greece, are proven in the film to be a milestone in neo-liberal development which makes the rich richer and the poor poorer. Both private and state budgets are being fleeced in favour of the financial world. Social rights are being replaced by the right to debt. Debts are the medium by which people are being prevented from thinking and behaving freely. The film shows how this has been functioning in the USA for some time now. Students leave university with a load of debt. Debt which often cannot be paid back. One works a whole life long to pay back the debt. That's how the banks love it.

“Who is saving Whom?” shows the beginnings of this development when after seventy years of relative stability the financial world was deregulated. The financial world immediately used its new freedom to develop those new financial derivatives which today dominate the economy. The film demonstrates the usage of and the enormous danger from derivatives. But it also shows the possibilities of defense, as in Iceland, where international capital was not saved, but rather a redistribution from the top to the bottom took place.

TIP-Berlin: "Whoever does not wake up from his neo-liberal slumber when viewing “Who is saving Whom?” is lost forever. The Film should be capable of getting even the most lethargic citizen of Europe up from his sofa and on to the barricades."