Meeting of the Executive Board of the International Monetary Fraud August 1, 2003 Unauthorized, Unedited and Apocryphal
STRICTLY CONFIDENTIAL
A meeting of the Executive Board of the International Monetary Fraud was held in the offices of the IMF in Washington, D.C. on Friday, August 1, 2003 at 12:00 p.m.
PRESENT:
CHAIRMAN UBERMENSCH. So. We resume our discussion of the monetary crisis in the United States. As this subject is most sensitive we will keep no record of these proceedings. A special thanks to our American colleagues for participating, despite the delicacy of their position. I commend them for their commitment to the principles of multilateralism and to the important work of the IMF.
Before we begin I would like to make a few comments.
As you know, this institution was created during the Second World War to implement the postwar monetary system, the gold exchange standard known as Bretton Woods. That system ended in the early 1970's. In logic, we should have been terminated too. But we survived. We not only survived, we flourished. We flourished because we adapted. We reinvented ourselves, defined a new mission, and made ourselves useful to the Americans as the enforcers of the Dollar Standard that succeeded Bretton Woods.
Now, thirty years later, we face a crisis every bit as challenging as the termination of Bretton Woods. The same conditions that led to the collapse of that system are leading inexorably to the collapse of the Dollar Standard. As we near the end of the current system, we must reinvent ourselves once more.
SPEAKER. (?) I'm too old to learn Chinese!
MR. UBERMENSCH. But this time, it will not be enough merely to adapt to change. Too much is at stake. We must take charge of our own destiny, and shape events to suit our needs. To that end, I have asked Mr. Fixit to present a plan for the consideration of this Board.
MR. PIMPERNELL. Brilliant, Mr. Chairman. Just brilliant. As always, I might add. Now, gentlemen, if I could have your attention for just a moment, please. I'd like to introduce Mindy, Amber, Tawny and Monica. They'll be our stress management coordinators today. Today's music is a selection of slightly naughty retro numbers from Nino Rota. Petrus, why don't you run through the wines? Thank you and enjoy the meeting.
MR. HAUT-BRION. Good day, gentlemen. In the reds we bow once more to popular demand, with a selection of bold and sassy Latours and Lafite Rothschilds from the Roaring Twenties. In the whites we have some especially frisky vintage d'Yquems. The aperitifs and cordials will circulate in customary fashion. Please note that we have a rather splendid Armagnac today. As always, just raise your flag when thirsty.
CHAIRMAN UBERMENSCH. Thank you, Stanley, Petrus. Peter?
MR. FIXIT. Thank you, Mr. Chairman. I'll just briefly set the table here. We're all familiar with the peculiar structure of the US financial system -- a financial system that dwarfs its host economy. We have discussed at length its five main sparkplugs: the Federal Reserve, which functions as the central bank of the United States; JP Morgan Chase, which serves as the commercial and investment banking arm of the Fed; the two biggest GSE's, Fannie Mae and Freddie Mac, which serve the Executive branch as providers of low-cost housing finance; and the Exchange Stabilization Fund, an arm of the Treasury that serves the Executive branch as its primary instrument of market management.
The Fed and the ESF effectively share control of the financial markets. Since they answer to different constituencies, at times their actions are in conflict, which can generate confusion and anomalous market behavior. The Fed is unique as regulator, lender of last resort and issuer of the currency.
Fannie and Freddie are the largest players in the critical mortgage backed securities market. Their accounting is rather opaque, to say the least. Nevertheless we believe that together they account for just over half the US mortgage market. Although their only formal connection to the US government is a $2.25 billion Treasury line of credit to each, they are treated in the capital market as effectively backed by the full faith and credit of the United States, a fact that confers on them a remarkable funding advantage. Because they fall within the Treasury's ambit, you will occasionally see Fed officials sniping at them – advocating tighter regulation, higher capital requirements and what have you. However, in a financial crisis we would expect the jurisdictional niceties to disappear and both Fannie and Freddie to become the Fed's problem rather than the Treasury's.
SPEAKER. (?) We're out of shrimp down here. Phillipe?
MR. FIXIT. There have been a number of troubling developments in both Freddie and Fannie of late, and I won't take the time to detail them here. Suffice it to say Freddie in particular is in a state of turmoil, with a comprehensive restatement of their financial statements under way, ongoing civil and criminal investigations into questionable financial reporting practices, the serial termination of virtually all senior management, and market rumors of large losses on recent interest rate reversals.
All this is occurring against the backdrop of a US budgetary situation that threatens to spiral out of control. We have discussed at length the $44 trillion net present value of future federal budget deficits and the $480 billion annual trade deficits. In addition, we have noted the negative budgetary implications of the ongoing Islamic wars.
But the statistic that continues to give us greatest pause is the most basic of all: $38 trillion of aggregate debt in relation to a GDP of $10 trillion.
The sheer size of this debt, everything else aside, puts severe constraints on the US monetary authorities. As a practical matter, given American political considerations, there is only one avenue open to them: a radical reduction in the real and nominal value of the US currency. If this policy were carefully and gradually implemented with the cooperation and assent of the major market participants, the reduction in nominal value might bring about a diminution in the trade deficit, and the reduction in real value might render the existing debt manageable, after a fashion, and thereby keep the system turning over. At least for a time.
MR VACANCE. Bo-ring! When can we go over those new T&E forms?
MR. FIXIT. But this policy will be devilishly difficult to execute. Compounding the basic problem and the related imbalances and vulnerabilities, the US financial system is shot through with derivative contracts -- $61.4 trillion in total notional value just in commercial banks, and rising. JP Morgan alone holds about $31 trillion, or just over half the banks' position.
Now granted, only speculative derivatives, a small fraction of the total, pose any systemic risk in their own right. The real issue is these things' capacity to magnify and transmit shocks through financial institutions and across markets, linking events and players in ways we can't predict. This is all thanks to our American friends' insistence on keeping them non-transparent, unregulated, and off balance sheet, the better to hide their tracks in undisclosed market management.
SPEAKER. (?) Get out of town with that crazy talk!
SPEAKER. (?) Who let the dogs out?
MR. FIXIT. Obviously, even an orderly implementation of a devaluation policy would pose a serious threat to the safety and soundness of the international monetary system. This flows from the fact that US "dollars", which are actually just unredeemable, non-interest- bearing promissory notes of the Fed, now serve as the international reserve currency. I don't need to remind you that these notes are not backed by anything other than the confidence of the credulous, and holders are effectively at the mercy of the US monetary authorities under the best of circumstances. So the competence, or rather the perception of the competence, of those authorities, is of paramount importance. That is of course why the Americans have created a personality cult around Fed Chairman Alan Greenspan.
SPEAKER. (?) Too right, mate. So where does he stand on natural gas these days? And what about the infield fly rule?
MR. FIXIT. Which brings us to our immediate problem. A critical mass of serious players in the financial markets has lost confidence in Chairman Greenspan and his colleagues on the Board of Governors. This comes after a recent series of troubling public missteps whose net effect was to convey the distinct impression that monetary policy is in disarray. You are all familiar with the recent mousetrapping of the bond market, and the earlier "printing press" imbroglio.
MR. PIMPERNELL. Gentlemen, if I could have your attention for just a moment, please. Kindly direct your attention to the center of the conference table, where we have arranged a little international diversion for you in the form of the Lapp Dancers. It's for your eyes only, though; let's keep our hands to ourselves, gentlemen!
MR. FIXIT. The most alarming and dangerous misstep, however, is one that fortunately has received little notice. So far. I refer to the "pricing" of gold by President McTeer on CNBC, of all places. There, apparently on his own motion -- we haven't been able to run this down -- he announced a price of $350 as the benchmark for validation of Fed policy.
MR. BON VOYAGE. But what is the problem? Tout le monde knows we've been managing the gold price for years. So he showed a bit of leg. Where's the harm?
MR. TRUEGRIT. Mr. Chairman, perhaps I can help. Mr. McTeer's statement was stupid and dangerous for two reasons. One, he has boxed the Fed in on the devaluation. Think about it. Against what, exactly, is the "dollar" supposed to decline in value, if not other currencies and gold? Just how does Bob think he's going to pull off a devaluation and keep the lid on gold at the same time? Why would he tell the market to judge him a failure if he succeeds in the devaluation? That's one. Two, we believe this is the first time since the collapse of the London Gold Pool back in 1968 that the US monetary authorities have risked their prestige on the maintenance of a specific target price. A price of $350 today is just as ludicrous as the price of $35 was back in the 60's, and it makes no sense to pledge publicly to defend it. We've been there before. Mr. McTeer has recklessly taunted the market with a "bring 'em on." If the big hedgies decide to take a run at that number, we are in trouble. Big time. Neither we nor the other large holders, individually or in aggregate, have enough bullion left to turn back a challenge in size. Having said that, failure is unthinkable, and could set in motion a cascading series of events culminating in a catastrophic systemic collapse.
MR. VACANCE. Hans, I'm famished. Why don't we run through the entrees and get lunch going before we go any further. By the way, this shrimp is special. Try some, everyone.
CHAIRMAN UBERMENSCH. Just a moment, Iggie.
MR. FIXIT. Ted's right. In fact, recent actions by Fed officials are so disturbing that I've had my staff prepare psychological profiles of Messrs. Greenspan, Bernanke and McTeer. Gentlemen, the results are not encouraging. They tell us unequivocally that the senior Fed officials have begun to crack under the strain. They are, in a word, unsound.
MR. BON VOYAGE. With all due respect, Monsieur Fixit, this is hardly news. Please be so good as to get to the point.
MR. FIXIT. Under our Articles of Agreement, we are charged with responsibility to ensure the stability of the international financial system…
SPEAKER. (?) Give me a break.
[Laughter.]
MR. TRUEGRIT. Mr. Chairman, if I may. When Captain Ahab's little quest comes to its inevitable and cataclysmic end, there will be, shall we say, a rather ugly mood among the American public. Dark passions will be aroused. Unilateralism will rear its ugly head. Scapegoats will be needed, sought and punished. I'm afraid Martha Stewart won't be enough this time. Let me speak frankly. As a large, mysterious, NGO with, shall we say, a rather questionable mission and a rather mixed record, we will make a most convenient candidate. In serving as the Storm Troopers of the Dollar Standard we have not made a great many friends. I can state without fear of contradiction that support for us and our work does not run deep in the American psyche. In fact, our only friends will be the first to point their fingers at us to save their own skins. We are at risk of having reality finally catch up with us.
Not to put too fine a point on it, Dominique, this would mean you'd resume your career as senior staff liaison officer seconded to the Oil Ministry in Yauonde. That is, if they'll have you. No more Georgetown pad. No more privileges and immunities. No more junkets, and no more shrimp.
SPEAKER. (?) Nooooooooo!
[Disturbance.]
MR. VACANCE. No more shrimp? I'd like to smack that shrimp Buck Rogers who takes all those cheap shots at us in that new book of his, Travels with My Wife. Stiglitz, too, the little weasel.
MR. BON VOYAGE. Merde! Quelle horreur. What shall we do to avert this calamity?
MR. LARDON. Gentlemen, if I could have your attention for just a moment, please. Our lunch today will be broiled oysters with arugula puree and Champagne Sabayon; foie gras sautéed with raspberries; parslied rack of lamb; pear and parsnip puree; arugula and chevre salad with trastevere dressing; and for dessert we'll have the dacquoise with chocolate ganache, accompanied by some very nice chilled sauternes. For those on a diet, and I do hope we have more sinners than saints today, we have our regular menu as well.
CHAIRMAN UBERMENSCH. Outstanding, Phillipe. Let's pass out the Cohibas early today, shall we?
Thank you, Ted. Peter?
MR. FIXIT. In view of our potential exposure here, the question arises whether we can act preemptively under a crisis prevention mandate.
MR. NEWBIE. You mean go in there, seize control of the financial system, hike rates, raise taxes, cut spending, throw everybody out of work, and precipitate a depression? Inject a little moral hazard, get the speculators rocking and rolling? Render bogus advice? Make them open themselves up to volatile and destabilizing flows of foreign capital? All the while living it up at five star hotels?
MR. SOFTROCK. Excuse me, Mr. Chairman. I really must interject some pompous and sanctimonious twaddle about the tireless efforts of our selfless staff to bring the fruits of globalization to miserable backwaters throughout the world.
CHAIRMAN UBERMENSCH. Yes, thank you, Kenny.
MR. FIXIT. Not exactly, Mr. Newbie. I'm afraid the situation is too far gone for our customary policies to have much effect. The Dollar Standard is about to become a footnote in financial history, a thirty-year, Cold War wonder, and there's nothing we, or anyone else for that matter, can do about it.
CHAIRMAN UBERMENSCH. This is it, precisely. This is where we need to think outside the box, gentlemen. Conceptualize and realize a future in which we continue to be relevant. Not just relevant, but indispensable. Gentlemen, the flip side of this crisis is our opportunity to establish the IMF as the central bank of the world, replacing the Fed, the ECB and the rest. Imagine it: our notes, circulating as global legal tender. Think of the power; think of the prestige; think of the perks…
MR. FIXIT. Right. The idea would be to perform a surgical restructuring of the Fed. This would have two main objectives. One, secure the position of our members, who are large holders of Federal Reserve Notes – notes that will soon become worthless absent intervention. Two, create a foundation for the emergence of the IMF as the anchor in a successor monetary system. Both objectives can be achieved by going for the gold. Literally.
MR. NEWBIE. Hang on, Sloopy. You're talking about the UNITED STATES. We can't just barge in there and slap everybody around the way we do everywhere else. Bankrupt or not, they're still a superpower. They're still dangerous. And don't they still have 17% of the votes here, giving them a veto over anything we do? What's Legal say about all this?
MR. MAZZONI. Brent raises a fair point. They'd have to invite us in, not just because of the veto power, but also a requirement under Section 2(b) of Article V that the consent of a member must be in hand before we sic Technical Assistance on it. Once we get the consent, of course, we can do anything we want. There's ample precedent for what Peter's talking about: the Ruination of Russia, the Massacre of Malaysia, the Torture of Thailand, the Crushing of Korea...
MR. FIXIT. Right you are. I'll come to the consent issue in just a moment.
But first I'd like to sketch out what we have in mind. It's a kind of financial tourniquet, a variant of a technique developed in prior financial crises, the so-called "good bank, bad bank" model. Basically, you strip an insolvent bank's balance sheet of problem assets, and put them in a separate vehicle called the "bad bank". The bad bank then goes off and functions as an asset management company; workout people run it, and collect whatever they can on the assets over time. The thing is ultimately wound down and liquidated. The "good bank", the part that's left after you've removed the crud, now has a big hole in its balance sheet where the bad assets used to be. You plug this with some new paper, typically bonds issued by the sovereign. Once it's fixed, the good bank can continue on as a viable financial institution.
MR. PIMPERNELL. Gentlemen, if I could interrupt for just a moment, please. If you will direct your attention once more to the center of the conference table, Raul is setting up the animal acts. The first number is entitled, "Piggies at the Trough."
MR. NEWBIE. So you propose to do a Good Fed, Bad Fed, and plug the hole with SDRs?
[Laughter.]
MR. FIXIT. Not exactly. More like a Bad Fed, Worse Fed. The Fed's balance sheet is in very rough shape, once you give effect to all its contingent and off-balance sheet exposures. Have a look at the tip of the iceberg. Thank you, Amanda. This is a snapshot of the Fed's balance sheet as of yearend 2002. Rather unexceptionable, as these things go: On the asset side, we have Total Assets of about $730 billion, or just a little smaller than JP Morgan. Most of this, about $640 billion, consists of Treasury paper. Other noteworthy items include repos, accounting for another $40 billion; foreign currency-denominated assets, about $17 billion. Of greatest interest to us is the line item, "gold certificates," at about $11 billion. Then of course there's about $2.2 billion in SDR certificates.
[Laughter.]
On the liability side, we have mostly Federal Reserve Notes, or "dollars" outstanding of some $650 billion. Other substantial liabilities include bank reserves on deposit – this is the famous "high powered money" in the US system -- of some $23 billion; repos, another $21 billion; and equity of about $17 billion.
Highly leveraged, mind you, but if this were all there were to it, we'd be talking about something else. No, the problem lies outside the four corners of the balance sheet, in those externalities we noted earlier: the runaway federal spending, which promises to bloat the asset side with more and more scrip of more and more questionable value, and in the fragility of the financial system itself, which should be thought of as an off-balance-sheet liability of the Fed. The exposure is so vast it is difficult to grasp, even for us, the world's smartest people. And it all rests atop this little equity base of $17 billion.
MR. NEWBIE. But the Fed has the legal monopoly to create US currency. There's no way they can go bankrupt. They have a printing press, and they're not afraid to use it. Bernanke said so himself.
MR. FIXIT. Forget bankruptcy. That's a legal technicality. Have you ever considered the practical ramifications of full monetization of the trillions of dollars in exposures here? This would make Weimar Germany look like a walk in the Tiergarten.
MR. NEWBIE. I see. I have another question. Why does everybody crack up when somebody mentions the term "SDR"?
[Laughter.]
MR. TRUEGRIT. Mr. Chairman, if I may. The Special Drawing Right, Mr. Newbie, is the Edsel of the monetary world. It's neither a currency nor a claim on the IMF. It's a derivative, is all, although we didn't call it that when we rolled it out in the last days of Bretton Woods. It was a joke from its first appearance. It was introduced with great pomp and circumstance, and was intended to serve as a new international reserve asset. Take some pressure off the dollar. It was reviled and ridiculed from day one, an obsolete embarrassment from day two. It's now used just as a unit of account for the IMF, a way of settling up outstanding accounts among consenting members. It's self-reflexively defined in terms of paper currencies of members, and has meaning only to the extent that issuers of that paper condescend to exchange their currencies for it. So it always prompts a chuckle around here when it's mentioned in any sort of serious context.
MR. NEWBIE. I see. But under Section 7 of Article VIII, aren't all members of the IMF still obligated to work to make the SDR the principal reserve asset in the international monetary system?
[Laughter.]
CHAIRMAN UBERMENSCH. SHHH! Someone might overhear you and conclude that we're an anachronism. But seriously, folks, that's precisely why we're here today. No more SDRs. The next time we roll out a reserve asset, it's going to have teeth. Teeth with gold fillings. A desperate and grateful world will stand up and salute.
MR. FIXIT. Returning to the Fed's balance sheet, the only thing that will have any real value in the coming crunch is the gold certificates. And even these are problematic.
MR. NEWBIE. Howso?
MR. TRUEGRIT. Mr. Chairman, I think I can handle this one. Several points to bear in mind here, Mr. Newbie. First, those gold certificates are effectively theft receipts, certificates of confiscation. They just signify that gold once owned by the Federal Reserve System and the US citizens was seized by the Treasury, under the confiscation measures of 1933 and 1934. They do not entitle the Fed to demand delivery of the underlying gold. As a practical matter, these certificates are merely the preferred way for the Treasury to monetize the gold it holds. The same methodology is used in the case of the Treasury's SDRs.
[Laughter.]
Second, we have no idea how much gold is really behind these certificates. There has been no independent audit of the gold stock within living memory, if ever. Also, there are persistent rumors in circulation, unsubstantiated as yet, regarding clandestine airlifts of gold to London during the Vietnam War, and location swaps with the Bundesbank following the price spike in the wake of the Washington Agreement.
MR. MAZZONI. But under the "firm surveillance" provisions of Section 3(b) of Article IV, the US is required to provide us with current & accurate information on all this.
MR. FIXIT. They provide us with plenty of information, all right. But we know they've been lying through their teeth; the numbers just don't add up. And we're in no position to complain, since our own accounting rules purposely authorize members throughout the world to overstate their gold holdings. The only way we're going to know what's actually there is to go in and grab it.
MR. NEWBIE. Let me see if I've got this straight. We go in to the Fed, take out the trash, put the garbage in the disposal, plug the hole with SDRs…
[Laughter.]
MR. NEWBIE. …and somehow we end up with the US gold? That is, assuming there is any?
SPEAKER. (?) Why not? It's a barbarous relic. They won't miss it.
MR. NEWBIE. But even if the all the gold is still in Fort Knox, if all that's in the Fed is these "certificates of confiscation," how do we get it?
MR. TRUEGRIT. Mr. Chairman, I'd like to field this one. It's a matter of using the right tools for the job, Mr. Newbie. It always comes down to the people. Peter's plan rests on retaining Goldman Sachs as financial advisor. Oh, they'll play hard to get, demand half the gold and so forth, but at the end of the day they'll do it for about 30%, by my reckoning. If it's there, they'll find it and get it out. Just have to wet their beaks, is all.
MR. NEWBIE. Why Goldman Sachs?
MR. TRUEGRIT. Ever read any history, Mr. Newbie? Perhaps you've heard mention of the House of Rothschild, the power behind the scenes in 19th century Europe, then the center of the world? The Rothschilds made and broke monarchs and ministers, started and ended wars, and profited throughout. Well, Goldman is the Rothschild of the 21st century. Their people are everywhere: the Executive, the Legislative, the key agencies, you name it. They're on all sides of the gold thing. You want something done in the US, you get Goldman on board. Period. And that goes for the Brits, too. Look how Goldman helped the US get the Bank of England to dump half the country's gold at the bottom of the market. These guys are good. Very, very good.
MR. MAZZONI. Maybe now we should talk about consent.
MR. FIXIT. Right. We'll definitely need the Americans' consent. Fortunately, that does not appear to be a problem. Ted, would you help us out here?
MR. TRUEGRIT. One hyphenated word, gentlemen: Neo-cons. These guys are the Goldman Sachs of the American political scene. They are so good, they got the US into a preemptive war on false pretenses. Who else could have done that? They make Old Man Hearst look like a piker. Now, the Neo-cons aren't in it for the money, so it won't be quite as straightforward as hiring Goldman. We have to push the right buttons. My people are gaming this out. But basically the idea would be to wrap the issue in an Israeli flag, convince the Neo-cons the collapse of the Dollar Standard will mean curtains for Israel, the ultimate paper satrapy. If we play our cards right, they'll move heaven and earth, as it were, to get us invited into the Fed. They may even team up with the Christian Fundamentalists again, for good measure. Put an eschatology spin on it. We'll leave the details to them, once we sign them up.
MR. VACANCE. Hans, I'm spent. Can we adjourn already?
MR. UBERMENSCH. Very well, gentlemen. We have a lot on our plates. I'd like to resume this discussion the Tuesday after Jackson Hole. That should give us time to chew this over.
SPEAKER. (?) Wonder what entertainment Alan has in store for us this time.
MR. UBERMENSCH. Do I hear a motion for adjournment?
SPEAKER. (?) So moved.
SPEAKER. (?) Second.
MR. UBERMENSCH. So. This meeting is adjourned. Thank you, gentlemen. Doreen, please ensure that any recording of these proceedings is destroyed. And now I invite you all to join me, together with your key staffers, in executive session over in the Boom-Boom Room.