VEON FINANCIAL SERVICES, INC.
A Registered Investment Advisor
|301/924-2056 Double Issue-First and Second Quarter, 1997 Vol. 11, Issue 1-2|
|Part 2: ECONOMIC GLOBALIZATION, GLASS STEAGALL AND THE DOW|
Although many people have termed the world a "global village," most Americans operate on the local level, not realizing that the changes affecting us originate much higher than our daily thought processes. The global level has been evolving politically since the 1920's with the League of Nations, now the United Nations, and economically since the birth of the Bank for International Settlements in 1929. Other global players include: the ten most powerful central banks of the world (Group of Seven plus Holland, Sweden, Luxembourg, Switzerland and Belgium), the International Monetary Fund-IMF, the Organization for Economic Cooperation and Development-OECD, the International Organization of Security Commissions-IOSCO, the International Association of Insurance Supervisors-IAIS, the Group of Ten-G10 and Group of Seven-G-7, the World Trade Organization-WTO, and multinational organizations.
In order to integrate, i.e. harmonize all of the countries of the world into one, national laws must be changed --- financial, economic, commercial , industrial and structural. The entity needed to handle the demands of the 21st Century" are financial conglomerates or banks who can offer and sell stocks, bonds, mutual funds and insurance. The only barrier is the Glass- Steagall Act of the United States which was passed as a result of the 1929 Stock Market Crash to separate the functions of commercial banking from investment banking, i.e. banks who offer stocks, bonds, and mutual funds. Once this law is erased, banks will then be able to move the world past financial conglomrates to an electronic money system which is a 21st Century goal.
Concurrent with the rise of financial conglomerates is the consolidation of power within each country by its central bank. As central bank powers are increased, the influence and hold which they have over the finances of a country are strengthened. The new powers given to the Bank of England and Bank of Japan are an example. In June, when the Group of Seven meet in Denver, they will be looking to intensify international operations in financial markets and broaden supervision in the areas of banking, insurance and securities trading, all of which facilitate financial conglomerates. This global economic landscape is further enhanced by an emerging international accounting system and international tax system, along with innovative international bonds.
Interestingly enough, all of the above proposed changes for developed countries have been implemented in the new stock markets of developing countries. Overseeing th e world's stock markets is the International Organization of Security Commissions- IOSCO who have been facilitating these changes for the past 22 years.
In looking to tear down Glass-Steagall Act, the U.S. Federal Reserve, fired the first shot by changing the amount of income a bank can earn from an investment subsidiary from 10% to 25% in December, 1996. This has prompted a flurry of mergers between commercial and investments banks (Bankers Trust buying Alex Brown and PNB looking to buy Oppenheimer Mutual Fund), different types of investment banks merging (Salomon Brothers and Fidelity Funds, Morgan Stanley and Dean Witter), banks and insurance companies (First Union and Hartford Insurance) and foreign investments firms buying American investment firms (SB Warburg and Dillon Reed). The last barrier will soon be tested. No corporation, year to date, has made public their desire to buy a bank and visa-versa. All of the above has been accomplished without any law being passed.....a blatant end-run around Congress and the Constitution.
While the above is being orchestrated, the U.S. economy is paying the bill to facilitate economies of the world. High U.S. interest rates are the fuel for a strong dollar, making our products noncompetitive overseas. As result, Japanese and German products are more affordable than ours. High U.S. interest rates punish America, creating a cat chasing its tail effect. The growth in our stock market which is a natural result of high interest rates can only be curtailed if interest rates are lowered. High interest rates line the pockets of the Fed and act as a hidden tax for average Americans.
It was Pontius Pilot who asked "What is truth?" Since then those words have been echoing throughout history. Is what we see and hear on television, radio and in the newspapers truth or fable?
To know truth, one must search for it. In the December, 1996 issue, we examined the demise of the Glass-Steagall Act, the stock market, and the following global players: the Federal Reserve, the Group of Seven/Group of Ten, the Bank for International Settlements and the Basle Committee on Banking Supervision, the Tripartite, and IOSCO. Special mention was given to the World Bank, the International Monetary Fund and the United Nations. A flow chart is presented on the following page. An important group of players not addressed were multinational corporations. A subsequent newsletter will be devoted to them.
Just as the strings of a marionette doll are pulled to make its body move, the above "puppeteers" are manipulating the markets of the world by pulling various "strings" which come in the form of complex global agreements, treaties,and memorandums of understanding to put in place their " agenda of change." The way of life, as we know it, will and is changing.
The Federal Reserve
The December newsletter examined the truth about the Federal Reserve---a private corporation with control of the entire monetary system of the United States. Its form of money is a "Federal Reserve Note" versus debt issued by our Treasury. Congressman Charles A. Lindberg, Sr. said on the floor of the House of Representatives, on the eve the Federal Reserve Act was passed in 1913, "This Act established the most gigantic trust on earth. When the President signs this bill, the invisible government by the Monetary Power will be legalized...The worst legislative crime of the ages is perpetrated by this banking bill." (Secrets of the Federal Reserve, Eustace Mullins, Bankers Research Institute, 1993, p. 28) Because the Government is paying the Federal Reserve interest on money borrowed instead of the Treasury, the American people can never pay off the interest on the debt because we owe it to a private corporation.
The Group of Seven (Eight)
The Group of Seven (Eight if you make Russia a full partner), began meeting in 1973 as a result of President Nixon taking the dollar off of the gold standard. These world leaders met originally to provide the newly floating currencies of the world stability and guidance. Since then, they appear to have formed their own power structure as appointed advisers to the President such as the Secretary of the Treasury, Commerce, Labor, Energy, Transportation, etc. work throughout the year with their G-8 counterparts in order to move the political structures of each government in the same direction.
Since actions speak louder than words, the G-7/G-8 arrangement could possibly indicate we are no longer a sovereign nation making independent decisions but are "interdependent" on each other. The G-7/G-8 will be meeting in Denver in June to continue discussing the direction of the
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dollar, the strengthening of the International Monetary Fund, financial conglomerates, and other global issues which affect us.
The Group of Ten - B.I.S.
More powerful than the G-7 is the Group of Ten which expands the G-7 by adding the the five major money centers of the world: Switzerland, Holland, Sweden, Belgium, and Luxembourg. The central banks of these same countries comprise the Bank for International Settlements (B.I.S.). According to Dr. Carroll Quigley, Bill Clinton's history professor and mentor from Georgetown who wrote about the B.I.S., "...the powers of financial capitalism had another far- reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole....The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the worlds' central banks which were themselves private corporations....the B.I.S. is generally regarded as the apex of the structure of financial capitalism whose remote origins go back to the creation of the Bank of England in 1694 and the Bank of France in 1803...." (emphasis added) (Tragedy and Hope, Quigley, p.324)
It is this emerging global structure, which the B.I.S. used in 1987 when the Stock Market Crash occurred, to support its "Basle Capital Accord." This Accord set in place new global rules which countries were to adhere to for the oversight of ALL financial firms. Several years previous to that, the United States passed the 1980 Monetary Control Act which changed national laws so as to allow for the flow of money on a global basis between countries. Today the movement of money between countries on a daily basis amounts to $1.2T.
It is through the Basle Committee on Banking Supervision that the Tripartite, comprised of banks, financial services and insurance companies, was formed in 1993. The purpose of the Tripartite is to bring together, under one roof, financial services, banks and insurance. Because of the Glass Steagall Act, the United States is the holdback to "financial conglomerates." Financial conglomerates have the ability to offer banking, investments, and all kinds of insurance at one money center. It is this kind of massive financial power which banks want as they move to control the key financial areas as the world, which will lead to the cashless society being engineered by the B.I.S.
The International Organization of Security Commissions-IOSCO operates as a sort of "Global SEC." This writer attended the 1996 meeting in Montreal and found it to be extremely enlightening. Who has more power---the banks or the financial markets? At their October meeting, the security commissioners from around the world debated whether or not they could prevent a total global economic meltdown. They felt, in their smug, self-assured way, that if they put enough controls and regulations on the global security marketplace they indeed could prevent a global meltdown from taking place. The role of IOSCO appears to be one of harmonizing national laws so as to strengthen international jurisdiction over global financial markets.
To go back to the 1929 Crash, the Glass-Steagall Act was set in place in 1933 to erect a "wall" between the activities of banks and investment banking firms, i.e. those who bring new shares of stock to market. Currently, direct ownership of foreign banks is not permitted, nor are commercial banks allowed to earn more than 25% of their profits from a brokerge firm or investment bank. The only way an American bank can own a foreign bank or brokerage firm is through a foreign subsidiary. The repeal of the Glass- Steagall Act would open the door to allow foreign banks and brokerage firms to own American banks and brokerage firms directly, as well as pave the way for the cashless society.
In 1996, there was a concerted effort to bypass Congress and repeal the Glass-Steagall Act. The Federal Reserve fired the first volley on December 21 when they increased the revenues bank subsidiaries may earn from underwriting and dealing in securities from 10% to 25%. Then the Comptroller of the Currency, Eugene Ludwig, said that he had the power, according to four U.S. Supreme Court verdicts, to give banks broader entree into a range of financial services through new operating subsidiaries which could enable commercial banks to acquire large Wall Street Investment firms. (Business Week(BW), November 4, 1996, p. 184) In 1996, the stock market broke 6000 on October 15. Its stupendous rise was as a direct result of continued globalization through mergers and acquisitions, corporate downsizing and de-regulation, a strong dollar and high interest rates.
The end result of globalization is the convergence of many areas such as money, law, finance, labor, energy, the environment, transportation, commerce, etc. into ONE. The following provides how this will be accomplished. The stock market, is the barometer of globalization!
At the Gorbachev State of the World Forum in October, 1995 which this writer attended, Zbigniew Brzezinski said "the New World Order will emerge step by step and stone by stone." The B.I.S. is constantly throwing stones. At the April meeting of The Group of Ten at the B.I.S., there was offered a "set of core principles for worldwide banking supervision to be presented at the IMF meeting in Hong Kong in October." Coincidently, Morris Goldstein, former IMF in house expert on banking crises, has just written a book explaining from his perspective what banks should do. His list includes "voluntary standards covering disclosure of financial information, accounting rules, loan provisions and government involvement. In particular, he wants the IMF to have a new role 'supervising the [national] supervisors in developed and developing countries over the past 20 years.'" (The European, 10-16-April, 1997, p 22) (JV: This includes U.S. banks. Can you see the expansion of power? If we thought the Chemical Weapons Convention was intrusive with foreign govenments now able to inspect our chemical companies, this would give the IMF power to inspect our banks!!)
Central Bank Chairmen More Powerful than Presidents
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In light of the above and the fact that the world monetary system is dependent on private corporations, i.e. central banks, it is important to go back and take a look at what the central banks are doing.
In an article on 12/2/96 about Hans Teitmeyer, Chairman of Germany's central bank, the Bundesbank, The Washington Post, wrote, "Hans Teitmeyer may wield greater power than any president or prime minister in Europe. He has never been elected to public office, yet he can make or break the fortunes of governments as well as investors. In this era of global markets and instant communications, the clout of central bankers has become awesome. Their word can affect the trillion dollars a day that churn through foreign exchanges. As chairman of Germany's Bundesbank, Teitmeyer holds special influence because the market affects the fate of other currencies."
What does this reveal? (1) Teitmeyer (or any other central bank chairman) has more power than presidents or prime ministers. (2) Central bank governors and Chairmen are UNELECTED since they are appointed. (3) Because all of the world's countries have borrowed money from these private corporations called central banks, they are beholden to them. The article further states, "Politicians and not unelected authorities, must take political deaccession [de = away, down, reverse; accession = the attainment of or the succession to an office--in other words, politicians rank under the central bank chairman in power]. We are living in a world where financial markets are instanteous, and the behavior or control of central banks an important role in what I call the confidence game." (ibid)
Central Banks Consolidating Power
Currently central banks, corporations and financial markets are in the process of consolidating power. This is seen first of all by the amalgamation going on in Europe as individual central banks are taking steps to eventually be folded into one new united central bank of Europe, the European Investment Bank--EIB which is paving the way for a united Europe in 1999 when those countries who wish to join ECM will be merged into the European Common Market. Their new currency is the euro which is already being floated in the form of bonds.
Bank of England
The actions of the Bank of England and Japan reveal the consolidation. On May 6 the Bank of England received a number of new powers which includes the power to set interest rates without permission from the government , as well as have a separate pool of foreign exchange reserves be given them from the Treasury which they can use at their discretion to intervene in the currency markets. These powers are viewed as the "most radical internal reform to the Bank of England since it was established in 1694--over 300 years ago," according to Gordon Brown, the chancellor of the exchequer. (WT, 5/7/97, p.1) The article went on to say that Brown is "modeling the Bank of England much more closely after the U.S. Federal Reserve, which can adjust rates even if that causes short-term political discomfort for the White House."(emphasis added) He said this new independence will provide strong political say on the makeup of a nine-member committee which will set interest rates and will function like the US Federal Reserve Open Markets Committee and the Bundesbank Council. (FT, 5/7/97, p.8) As well, the [Bank of England] monetary policy committee would be monitored by a reformed Court, which is part of the Bank's governing body. This Court would be comprised of no more than 19 members--the governor, two deputy governors and 16 non-executives, which would be representative of industry, commerce and finance. (FT, 5/7/97, p.8) [Note: This writer has been researching a new form of governance--public- private partnerships. Later this year, a special edition will feature public-private partnerships.]
British interest rates are expected to rise 1/4 of 1% to 6.25% before any vote in Parliament on these new powers. The stated justification for this premature rise is based on the feeling formal legislation will probably be approved and therefore, they might as well act.
Bank of Japan
In February, Japan's central bank was given more power to determine monetary policy under new proposals which would abolish the official role of the central banks' finance ministry. Under these reforms, the bank's seven member policy-making body would be restructured and strengthened so as to have the same number of members as the U.S. Federal Reserve and the Bank of England, nine. The Bank of Japan's new policy making board would draw six of the members from business and academia plus the central's bank's governor and two vice governors. The stated purpose for this move is to provide more autonomy in line with international standards and the government's plans for the deregulation of financial markets by 2001, a topic which the G-7 will be discussing in Denver.
Harmonization of Powers
Interestingly enough, the Bank of Japan, the Bank of England, the Bundesbank, the EIB, and the Federal Reserve Bank all have the same freedom to set interest rates apart from government opinion. With regard to other powers, such as intervening in foreign exchange markets the Bank of England and the Bank of Japan do not have that authority (yet). With regard to setting inflation or monetary targets, the Bank of England and the Bank of Japan do not have authority to do so at this time. Lord Acton said something along the lines of, "Absolute power corrupts and absolute power corrupts absolutely."
Secretative Fed Allows Foreigners to Observe Proceedings
Ashtonishingly, the Federal Reserve Bank of Kansas City allowed 28 bank officials from China and Eastern Europe to observe a critical meeting where the bank made interest-rate decisions. This is part of a new program to show foreign officials how a central bank functions. According to The Washington Times, 5/7/97, p. A1, "These and other details of the privileged few the Fed has allowed to observe sensitive policy discussions, including the 8-year-old daughter of a Fed staffer on Take Our Daughters to Work Day, were disclosed in an April 25 letter from Fed Chairman Alan Greenspan to the House banking committee."
The G-7 to Broaden Central Bank Powers
With regard to the G-7 meeting in Denver, the Federal Reserve in Washington D.C. has gone on record to say there will be a broad agenda as they are expecting "progress...on
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intensifying international co-operation on supervision of financial markets and broadening supervision to cover overlapping areas such as banking, insurance and securities trading." Hans Teitmeyer said the G-10 central bank governors, (which includes Alan Greenspan), would be reviewing the world payments system and electronic money and wanted to involve the emerging countries of Latin America and east Asia (FT, 2/10/97, p.4)
When Alan Greenspan Talks, World Markets Listen
With regard to the power of the Federal Reserve and specifically, the Chairman, Alan Greenspan, The Washington Post wrote, "Second to the president, Alan Greenspan is arguably the nation's most powerful person. As Chairman of the Federal Reserve, he guides U.S. monetary policy, adjusting short-term interest rates to change the cost of borrowing...and with a couple of choice words, he can momentarily send the stock market to heaven or hell. Tomorrow, Greenspan will preside over the mysterious ritual that is at the heart of his power, the Federal Open Market Committee, the Fed's top policy making group will gather here to debate whether to raise short-term interest rates for the first time in two years....the most careful Fed watchers can't be sure what the wizard of monetary policy will ultimately opine." Should America's financial system be governed by a private corporation that is described as "mysterious" in which the unelected Chairman is called a "wizard?" (WP, 3/24/97, p.A1)
Who Is Alan Greenspan?
Perhaps we had better re-consider the kind of power unelected people have in our government and ask, "Who is Alan Greenspan? " According to a human interest story, he played for a year with the Henry Jerome swing band. The manager of that band went on to become Richard Nixon's law partner. Greenspan is a fan of Ayn Rand and "was swept away by Atlas Shrugged, The Fountainhead, and her philosophy of objectivism or enlightened selfishness. At 71, he recently married TV reporter Andrea Mitchell after being divorced for a long period of time. He earned both his masters and doctorate from NYU. James Wolfensohn, president of The World Bank is a close friend of his and he has served under Nixon, Ford, Reagan, Bush and Clinton. (ibid) In summary, Greenspan is a "Man for All Seasons" who does the bidding of the B.I.S. as he is a key player on their team. This should say something to Americans who are concerned about the economy and our sovereignty.
Integration of Financial Markets
In a speech given a year ago, May 18, 1996, by Secretary of the Treasury Robert Rubin at a Meeting of Western Hemisphere Finance Ministers said, "We have just concluded the first meeting of the finance ministers from this hemisphere since the Summit of the Americas....We state our common view of what is necessary....to develop stronger and more prosperous economies, policies that address the problems of poverty and that strengthen and support the integration of our markets...." (emphasis added) Secretary Rubin called on the International Development Bank-IDB, which is part of the World Bank, to develop programs to help financial supervision, to work with national financial market regulations [which] will be an initial step toward liberalization and integration of world markets and to work towards accounting standards that are universally understood, and to establish an institute to train bank and securities supervisors and examiners to promote sounder financial institutions. (Speech from Office of Public Affairs-Department of the Treasury)
Global Accounting Standards
When this writer interviewed the above-mentioned member of the IOSCO Executive Committee, she asked him about the global stock market since IOSCO is preparing for all the stock markets of the world to be merged into one. He provided an understanding as to how it would be done. First the stock markets of the West Indies--Barbados, Tobago, Trinidad, will merge. Then all of the Central American stock markets will merge and then those two regions will merge. This system will be used to combine all the other markets until at some point, they are one.
For the past nine years, the International Accounting Standards Committee (IASC), has been working to bring the various methods of accounting used by all the different countries into conformance by developing an international accounting system. This new set of international rules will become part of the international legal system which the UN is perfecting.
IASC is looking to help foreign companies use an accounting system which would qualify their stock to be listed on U.S. stock exchanges. Once the rules are completed, our SEC is expected to consider letting foreign companies use them in U.S. markets. (WSJ, 12/6/96, A9A) (This writer had an opportunity to meet Sir Bryan Carsberg, head of IASC in Montreal.)
International Tax System
On December 12, 1996, Deputy Secretary of the Treasury, Lawrence H. Summers, gave a speech at a conference at George Washington University on the "International Tax System." This pertains to the taxation of cross-border transactions of multinational corporations. Secretary Summers called for "increasing international economic integration [which] creates an increased need for international harmonization of tax policies." He went on to say, "The dismantling of economic barriers to cross-border trade is stimulating additional cross-border investment flows, with US investment abroad and foreign investment in the United States each rising nearly 10% annually. US direct investment into Europe has increased more than $150B since the Europeans embarked on their project to create a barrier-free Single European market and now exceeds $360B in manufacturing and services industries. At the same time, US direct investment in the dynamic Asian economies rose 16% in 1995 and now exceeds $100B. Our present system is flexible enough to permit us to accommodate advances in electronic commerce....Nevertheless, the growth in new technologies coupled with the greater integration of the world economy suggests that it may be time to examine whether more radical changes to our tax system are in order."
As we blend financially, it will necessitate not only a blending from an accounting standpoint, but also from a tax standpoint.
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For a number of years the world markets have offered "international bonds." In fact this writer remembers when Putnam Funds held a workshop for brokers to introduce them to such bonds. We were told they were "second in safety to U.S. Government Bonds" because they were the bonds of the other developed governments of the world. In addition, they paid a much higher interest rate than U.S. Government Bonds at the time. Even now, the sales literature for a number of funds offering international bonds has not changed and shows the same relationship to U.S. Government Bonds. Most of those bonds are issued in the currency of the country.
New Breed of International Bonds
With everything evolving, there now is a new breed of international bonds as they are being issued in currencies of other countries, through various syndicators. For example, Russia issued its first bonds since 1917, in November, 1996 to be used to prop up Yeltsin's government which are rated the same as bonds from Mexico or Argentina. Advisors to Russia on this issue are J. P. Morgan of New York and SB Warburg of Europe. (WT, 11/22/96, B8) Recently, Russia issued bonds denominated in German Deutsche Marks which are managed by Credit Suisse First Boston and Deutsche Morgan Grenfell. (FT, 3/13/97, p.17)
McDonalds Corporation is issuing bonds denominated in French Francs. The German Company Bayerische Landesbank is issuing bonds in Canadian dollars. And the British Bank, Abbey National is issuing bonds in Swiss Francs (FT, 6/25/96, p. 28) In March, 1997, the first Philippine europeso bond was issued. Toyota Credit used the Canadian dollar to float bonds which will be aimed at retail investors in Germany, Switzerland and the Benelux region. The Argentine oil and gas production company, Perez Companc, launched its first offering of lira-denominated bonds through Chase Manhattan Bank. Morgan Stanley issued French Franc bonds while the Kingdom of Belgium, Toronto- Dominion Bank, the Korea Exchange Bank and Banco Bozano Simonsen issued dollar denominated bonds. (FT, 3/17/97, p,.22)
The World Bank - The Biggest Global Bond Issuer
Interestingly enough, the world's biggest global bond house is the World Bank where in an average day there are some 300 transactions. The world Bank manages about $33B. The bank raises about $10 to $15 billion worth of bonds a year in dozens of currency.
Mergers and Acquisitions
Bush Opened Door for Globalization
Starting in 1991, some of the biggest mega-mergers in banks occurred. The Bush Administration pushed bank reform very hard looking to allow banks to diversify so they could improve their profitability and compete in the global marketplace. Until then, banks could only do business with adjoining states. One of the changes was to phase in interstate banking, giving banks with a large capital base, the ability to cross any state boundary. This created a wave of mergers among smaller banks so they could take advantage of the opportunities created for the large banks. Mergers that year included BankAmerica buying Security Pacific for $84.7B, Chemical Bank buying Manufactures Hanover Trust for $61.3B, NCNB Corp. buying C&S/Sovern Corp for $49.22B, Bank of New York buying Irving Bank Corp for $24.2B, Sovran Financial Corp buying Citizens & Southern Corp for $23.B and Chemical New York Corp., buying Texas Commerce Bankshares for $19.2B. (WT, 8/13/91, C1) It is evident that what was begun then was only the beginning of the repeal of Glass-Steagall.
In 1996 there were $1.15 trillion mergers and acquisitions worldwide. The two industries which experienced the most activity were telecommunications and electric utilities. Natural resource companies, including oil, gas and mining, are just beginning to consolidate, according to Anne Lutz, director for business development in the mergers and acquisitions department of Credit Suisse First Boston. (WT, 2/11/96, B6)
Global Economy Being Birthed As Result M&A
In 1996, it was reported that foreign investment by multinationals grew 40% in 1995 as a result of mergers. Cross-border acquisitions in pharmaceutical, telecommunications, financial-services and entertainment industries spurred the big jump in foreign investments. According to the U.N.'s 1996 World Investment Report, the U.S. was the "star performer" with $96B of U.S. outflows. The acquisition by Crown Cork & Seal of a French packaging products company for $5.2B was key. David Mulford, chairman of CS First Boston said, "What's emerging is truly a global economy. It used to be that a large U.S. company had investments all over the world. Now if a company like that buys a European company of the same size, it becomes a very different situation." One third of the 100 largest multinational companies, ranked by foreign assets, are based in the U.S. (WSJ, 9/25/96, A2)
In November, 1996, it was announced that British Telecom and MCI would merge to form a new international carrier of telephone traffic, called Concert. which would be the second largest in the world next to AT&T. It was announced in December that Boeing would buy McDonnell Douglas Corporation to create the world's dominate aircraft manufacturer. (WT, 12/16/96, A1) Then in February, Marriott purchased Renaissance Hotel Group to give it instant access to 40 markets worldwide including Russia, China, Japan, India and Turkey. (WT, 2/19/97, B7)
The owner of Burger King and Bailey's Irish Cream plans to merge with the producer of Guinness Stout and Johnnie Walker scotch. The mixture of Grand Metropolitan PLC and Guinness PLC would form an industry giant worth $34 B and the new company, GMG Brands, would rank by sales as the world's sixth-biggest food-and-beverage company. (WT, 5/13/97, B6)
So far in 1997, U.S. corporate mergers are ahead of the activity for the same period in 1996 with $183B. (WT, 4/1/97, B7) This has created fear and panic in Europe fearing their companies will be "biting the dust." According to Gerard Mestrallet, chairman of the French holding company Cie. de Suez, "We have to step up the pace. What we see happening around us is frightening."
Michael Cicurel, chief executive of Cerus SA, Italian businessman Carlo De Benedetti's French holding company
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said, "Unlike a similar merger wave in the late 1980s in which many European companies expanded and diversified, today's rush underscores a new trend: Companies are seeking to grow while refocusing on their core business to become global competitors. " (WSJ, 4/4/97, A1)
Globalization and the Dow Jones
Establishment of Third World S.E.
In 1956, the World Bank established the International Finance Corporation (IFC) in order to create stock exchanges around the world. Since the Berlin Wall came down in 1989, 60 securities markets have emerged or are about to open in countries from Albania to Uganda. The U.S. Government is helping to jump-start these markets as seen by USAID which spent $23M in Romania to buy computers, train brokers and establish regulatory structures. A sample of stock markets established by country and year follows: 1989: Bermuda, Argentina, Botswana and Spain; 1990: China, Ghana, Panama and Russia; 1991: Poland, Bulgaria; 1992: El Salvador, Honduras, Hungary, India, Pakistan; 1993: Armenia, Columbia, Czech Rep.; 1995: Latvia; 1996: Albania, Cayman islands, Estonia, Brazil, Palestine.
IOSCO Not A Cure for Economic Meltdown
At the IOSCO Conference in October, 1996, regulatory authorities from 69 countries participated in the Conference as members represented by 568 persons. They made it clear that if they put enough rules and regulations in place, they could prevent a global economic meltdown. This writer was able to have an interview with a commissioner from the Executive Committee. She pointed out that on one hand they (the BIS/IOSCO) had created derivatives, futures and options in which they had no sure understanding as to how the market would react on any given day, while on the other hand, the emerging market countries of the world who were basically jumping from the "dark ages" to using computers, creating stock markets and sophisticated trading tools in which they were not experienced. How then could IOSCO prevent an economic meltdown when it cannot predict all the different combinations of human action it is trying to regulate? This very gracious man nodded his head in agreement.
Privatization - Change of Ownership & Control
If a country does not have stock to offer, it does not need a stock market. What is necessitating the need for all these stock markets? Privatization. The World Bank, International Monetary Fund and United Nations, are among those facilitating privatization. What is it? In brief, it is taking a privately owned company or a state owned industry, "public." When a private company is brought "public," it necessitates a "Wall Street" action of finding buyers and marketing a company so that the public will buy its shares. The key to understanding privatization is the change in ownership. When an industry is private, such as a city water utility, the city owns and manages that facility, i.e. the tax-payer residents of the city own the water facility. When it is privatized, i.e. brought public, whoever owns the most stock has control of the company. Ownership changes which means the control, i.e. management changes. In recent years, we have read about stockholder meetings which were nasty because shareholders did not agree with how the company was being managed. The bottom line is they do not own enough stock to take control and will not be able to do anything other than sell their shares.
Many of the developing countries now establishing stock markets are doing so because they are privatizing all of their state-owned industries, such as water, sewer, electricity, agriculture, and natural resources---gold, silver, copper mining, etc. This is the source for the shares available from the stock markets of Benin, Angola or Zaire, etc. (Note: Much of America's state/governmental assets are being privatized as well.)
Privatization - The World for Sale
The bottom line: the world is being privatized--its "up for sale" to whoever has the most money. This is part of the reason why the stock market is rising. Is it inconceivable that those who own the central banks are also busy buying controlling interest in the assets of the world?
Glass-Steagall to Come Down Stone by Stone
The agenda which the G-7 wish to pursue, directly affects U.S. policy as it basically is the repeal of the Glass-Steagall which stands in the way of creating financial conglomerates in the U.S. and a cashless global society.
Stone 1: Proposed Law is End Run Around Glass-Steagall
In December the Fed increased the amount of revenue which a bank can earn from a financial subsidiary from 10% to 25%. Since January, there has been a flurry of activity to acquire securities firms. Congressman Jim Leach, a key supporter of financial conglomerates, introduced the "Financial Services Competitiveness Act" which would repeal Section 20 of the Glass-Steagall Act , separating banking from securities. This law would create a new category of "investment bank holding companies" which would be permitted to work in a wider range of activities than currently allowed. In addition, the Fed announced it was looking to remove some of the "fire-walls' which banks must keep between their main operations and non-bank subsidiaries which deal in securities. (FT, 1/14/97, p. 7)
Stone 2: Proposal to Allow Bank to Own Commercial Firms
For example, Secretary of the Treasury Robert Rubin is reviewing a proposal forwarded to him by Undersecretary John D. Hawke to let banks own and be owned by commercial companies, breaching the longstanding wall between banking and commerce. Treasury is leaning toward a proposal that would allow nonfinancial companies to own banks and permit mergers between banks, insurers and securities firms. Obviously removing the barrier between banking and commerce would reshape the financial-services industry. Some of the nation's largest banks could find themselves as take-over candidates by multinational corporations, such as Amoco or IBM. (WSJ, 1/24/97, A2)
Stone 3: Testimony by Interested Parties
In February, while testifying before Congress, both bank and securities regulators called for the overhaul of federal banking laws to suit the changing [global] financial landscape. Comptroller of the Currency Eugene A. Ludwig said, "Banks are facing competition not only from non-bank financial
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service companies such as GE Capital, Merrill-Lynch and GMC, to name but a few, but also from firms that traditionally have not offered financial services such as telecommunications and computer companies." Alan Greenspan said Congress should allow banks to get into new businesses such as insurance or securities underwriting as long as the activities do not create new risks for the financial system or taxpayers. (WP, 2/14/97, G1) Interestingly enough, those who testified just happen to represent the areas of the Tripartite, having a vested interest in banks, financial services and insurance.
Stone 4: Non-Financial Banks & Non-Financial Companies Getting Positive Vibes to Merger
In commenting on the above activity, the WSJ on 5/23/97 said, "The momentum to restructure U.S. banking law appears to be growing, even as an array of regulators warn against letting banks merge with manufacturers and other non-financial companies." (A2).
Recently Treasury Secretary Robert Rubin has gone on record with his approval of banks merging with commercial entities. There are concerns that this type of merger could concentrate financial power in too few hands and any crises in banks could then spread to the corporate parent. (WSJ, 5/23/97, A2) (emphasis added)
Stone 5: Without Law Passed, Banks/Financial Services Merge
In order to enhance the need for the repeal, the market has been very busy with mergers and acquisitions beginning with the alliance of Salomon Brothers and Fidelity Investments which will enable Salomon to distribute some of the equities they underwrite through Fidelity's discount brokerage network. Fidelity has 1.5 million customers and is the largest mutual fund company in the U.S. and is now the second largest discount brokerage firm. (FT, 1/20/97, p.19)
Several days later, ABN Amro, Holland's largest bank, agreed to buy Standard Federal Bankcorp, a Troy, Michigan thrift for $1.9B, making this acquisition the largest in ABN Amro's history, giving it control of one of the biggest thrifts in America. ABN already has an extensive U.S. banking empire concentrated mostly in Chicago. ABN has been buying up American banks for about 15 years and ABN has 15 North American offices and employs 11,000 with $75B in assets. Their offices include LaSalle National Corp, LaSalle Bank FSB, LaSalle Home Mortgage, the largest single-family mortgage lender in Chicago, ABN Amro Capital Markets Holding Company and a number of other branches and banks in Michigan, Indiana, Illinois and northwest Ohio. The ABN acquisition could lead to other non-U.S. banks such as Hong Kong and Shanghai Banking Corp, Royal Bank of Scotland and Allied Irish Bank acquiring U.S. banks. (WSJ, 1/25/95, A3)
In other news, Morgan Stanley and Dean Witter, Discover & Company, agreed to merge into the world's biggest securities company in a transaction valued at $10.2B. Morgan Stanley has offices in 19 countries while Dean Witter has mutual funds and credit cards which serve more than 40 million Americans. This merger would move Merrill Lynch out of the number one spot and move Morgan Stanley/Dean Witter in. (New York Times-NYT, 1/26/97, p. A1) Morgan Stanley was formed during the 1935 breakup of the J.P. Morgan empire.
In April it was announced that Bankers Trust would buy the nation's oldest stock brokerage firm, Alex, Brown, Inc. for $1.7B. This action by Frank N. Newman, Chairman, CEO and President of Bankers Trust, erases the barriers between commercial and investment banking before Glass-Steagall is repealed. Newman targeted Alex. Brown before the Fed changed their rules to 25% in December. By acquiring Alex Brown, total income generated would be around 20%. It is apparent , due to the obvious desire to eliminate Glass- Steagall, that the Federal Reserve will approve this purchase since it facilitates the erosion the 50 year old barrier between the banking and brokerage industries. (WT, 4/8/97, B7 and WP, 420/97, H1)
Currently Oppenheimer & Co., a midsize Wall Street securities firm is in talks to be acquired by PNC Bank Corp. for as much as $500 million. These talks, "are the latest sign of a widely predicted consolidation on Wall Street as U.S. and foreign commercial banks scramble to build beachheads in the U.S. securities business." (WSJ, 5/15/97, C1) Announced the same day was the buyout by SBC Warburg, the Swiss-British investment bank of Wall Street's Dillon, Read & Company for $600 million. (ibid) Among those looking for a buyer are Paine Webber, if it wants to stay in the same ball game with the full-service giants and Scudder, Stevens & Clark with $115B in assets under management. Potential companies include Union Bank of Switzerland and Chase Manhattan.
Stone 6: Banks & Insurance Companies Partner
While all of the above have been between banks and financial firms, First Union Corp, the nation's sixth-largest bank has just entered into a partnership with the Hartford insurance company, one of the oldest insurance companies in the U.S. to provide property and casuality coverage for businesses with less than $5 million in annual sales. The bank says it expects other financial institutions to launch similar programs in the next 12-18 months. (WT, 5/20/97, p.B6)
When Glass-Steagall is Gone, A New World Order will Begin Glass-Steagall is coming down without legislation being enacted since actions speak louder than words. It will crumble as a result of precedence. This paves the way for a whole new world order as a cashless society is now possible- -no dollars, yen or marks, only computer units. Just think what could happen if the computer lost your account! Also, it underscores the fact that central banks, not the Congress, are in control. Lastly, brokerage firms have been reducing the number of days for a trade to settle -- it used to be 5 days, now it's 3 going to one.
Interest Rates/the Dollar and Trade Deficit
Interest Rate Manipulation
For the last seven years this writer has watched with curiosity as interest rates in the U.S. have moved like a roller coaster---up, down, up and now up again. In 1991, the Federal Reserve reduced interest rates 18 times in an effort to "jump start" the economy, cutting the discount rate to a 27
year low of 3.5%, forcing small investors into the stock market. Then in 1994, the Fed increased interest six times to "pre-empt inflation." Our high interest rates have attracted large amounts of the $1.2T trading daily on world markets.
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In 1995, foreign investors bought a record total of U.S. Treasury notes and bonds totaling $133.99B which was a 70% increase over 1994. Foreign assets in the US increased $525B, compared with an increase of $424.5B in 1995. (Wall Street Journal, WSJ, 4/8/96, 12C)
As a result of murmurings from the Fed, there has been much speculation in the last year as to how high interest rates could go. According to the Fed and the financial press, there are sufficient reasons for an interest rate hike. Some feel the January increase in U.S. factory orders for big-ticket durable goods is one, while others say growth is too fast. The power of the Fed is seen by the response of world markets to Alan Greenspan's comments when he testified before the Senate in February. His phrase, "history counsels caution," sent shock waves through markets worldwide (WSJ, 2/27/97, A1) On March 21, five days before the Fed raised interest rates, both U.S. and European stock and bond prices tumbled after Greenspan repeated his recent warnings that the U.S. central bank was ready to make a preemptive strike against inflation with an increase in short-term interest rates. (Financial Times- FT, 3/21/97, p.1) On March 26, interest rates rose by 1/4 of 1%. Another 1/4 point will be assessed later this year. U.S. interest rates are at 8.50%, the highest in the world. In May, the Fed decided not to raise interest rates for the time being.
Higher Interest Rates Give the Fed More Profit
The rate increase brought much criticism. Senator Byron L. Dorgan said, "The Federal Reserve is standing logic on its head by increasing interest [rates] at a time when inflation is falling. Mr. Greenspan and the Fed have imposed an unjustified new tax in the form of higher interest rates on every American family." (Washington Post-WP, 3/26/97, A1) Even 64 members of Congress wrote to Greenspan asking him not to raise interest rates as it could upset the political landscape, stating, "The domino effect of their actions will be felt by farmers, businesses, employees and consumers in their everyday lives." (Should I mention there were more Democrats than Republicans?) The stock market responded by dropping 217 points only to recover and end the day down 140 points, its 8th biggest drop ever. (Washington Times-WT, 3/28/97, p.1)
What is the real affect of increased interest rates? It is exactly as Senator Dorgan stated, "an unjustified tax" on the American people since the interest is compounding on the federal deficit at a higher rate. Since the Federal Reserve is a private corporation, this interest is not paid to the U.S. Treasury and is a tax on you and I. The Federal Reserve says they want to have a pre- emptive strike against inflation by raising interest rates. Is this a case of the "Emperor's New Clothes" or is the Fed to be seen as "21st Century Crusaders," saving the U.S. from itself?
High Interest Rates Attract Foreign Investments & Inflation
In a conversation with a portfolio manager in March, 1997 this writer asked his opinion about rising interest rates and the Fed's stated desire to curb inflation. His response was to reiterate their jargon. It was pointed out that when a country has the highest interest rates in the world, it automatically acts as a magnate for foreign money, thus creating the growth, i.e. inflation, which the Fed says they want to curb.
1980 Monetary Control Act Erased National Boarders
Before the 1980 Monetary Control Act, the quest to find the highest interest rate was contained to one's own locale--going from bank to bank. As a result of the 1980 Monetary Control Act which erased investment and specific legal barriers between countries--national financial boarders---the quest for the highest interest rate is now country by country!
The Fed Should Lower Interest Rates, Not Raise Them
It is foreign investment which has fueled our stock and bond markets, precipitating growth, i.e. the inflation which the Federal Reserve say they want to curb. However, when you look at the rationale of the Fed and the end-result of the 1980 Monetary Control Act, what is really going on is a case of the "cat chasing its tail." If the Fed was really concerned about inflation, they would reduce interest rates to the point where investors would go elsewhere and they would not not have to deal with this problem.
High US Rates Bail Out Ailing Germany and Japan
Avinash Persuad, an international economist at J.P. Morgan and Company said, "If anything, U.S. interest rates are headed higher, not lower given Germany's high unemployment...Germany rates aren't going to be raised, neither will Japan's because their banking industry is still a disaster and the economy isn't moving." (WSJ, 4/25/97, C1)
High US Rates Punish American Manufacturers This brings us to perhaps the real reasons for the rise in interest rates which is a double-edged sword. For example, in order for foreigners to invest in America, they have to sell their currency such as the yen and Deutsche mark for dollars which then strengthens the dollar while it depresses the currency being sold. In addition, if America does not have sufficient exports to offset the flow of foreign money into the U.S., it then increases our trade deficit, which at $187.7B is the highest since 1987. A strong dollar accentuates this serious imbalance. To quote Clyde Prestowitz of the Economic Strategy Institute, "The U.S. has been able to import capital from abroad to invest in the U.S. at higher levels, and that's good. But the debt is growing faster than the economy and that could mean trouble later on."
High US Rates Punish America Three Ways
America is not in a win-win situation with high interest rates
(which is like a tax hike), a stronger dollar and higher trade deficits. As mentioned, a strong dollar increases the cost of our goods overseas so that they are not competitive with goods from other countries since it takes more of their money to buy our products. The dollar has risen to a 31 month high--a 50% increase on the yen and 20% increase on the mark--- since its low in April, 1995 when it dropped to .80 on the yen and 1.35 on the Deutsch mark. As a result, GM, Ford, Chrysler and the autoworker's union issued a joint statement asserting that the dollar's rise on the yen "has gone from being a troubling trend to a serious problem." A strong dollar provides German and Japanese manufacturers with significant advantages over American manufacturers and products. (WSJ, 2/8/97)
In summary, only a floating currency system could produce the albatross which Americans find "around their necks." The following chart diagrams the result s of high interest rates.
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Both the Japanese and German economies are in trouble. Japan is having problems with its banking system and the value of its real estate while Germany has the highest unemployment in 34 years as a result of trying to merge East and West Germany together. Is it any wonder that America is being used as the sacrificial lamb to save the world?
1997 Stock Market
The Dow Invincible!
After reaching 6000 on October 14, 1996, the Dow shattered 7000 on February 13, 1997, a 16.7% gain from the previous milestone. Although trading has been extremely volatile with the Dow closing up or down by more than 135 points a day, it rose to new historic highs when it went through 7300 on May 16, after passing 7200 on May 6.
Dow Restructured to Reflect High Tech Stocks
The Dow Jones was restructured for the first time since 1991 when Hewlett-Packard, Johnson & Johnson, Travelers Group, and Walmart Stores were added, replacing Bethlehem Steel, Texaco, Westinghouse Electric and Woolworth as the top stocks. (WT, 3/14/97, B8)
In 1996, Americans invested $235B in mutual funds versus $22B in 1990. Reasons for this increase include: the beginning of the bull market in 1982 and the change in 1984 in corporate pension plans from defined benefit to 401K plans. (NYT, 2/6/97, D1) The amount invested in 1996 exceeded 1995 by almost $100B.
High Tech Stocks Down
While bluechips are up, the Morgan Stanley High-Tech Index has dropped almost 18% since mid-January. There are those who say high tech stocks now comprise the new business cycle. (BusWeek, 4/14/97, 36) Time will tell. There is no doubt that America is a high-tech center. Will high tech stocks be able to pull America out of a depression like the steel and manufacturing stocks did in 1929? How does a high tech business cycle work? The experts are unsure--we haven't been there before.
The amount of money fIowing into the stock market by way of mutual funds is evident as the amount invested in December, 1995 was $2.8T. When compared $3.7T for February, 1997, two months later, it is very interesting. Bank assets totalled $4.5T In addition, in 1996 bank assets grew by less than 6% while mutual fund assets grew 26%. According to Greg Smith, chief investment strategist at Prudential Securities, "Not only are mutual fund assets rivaling the economic power of the bank system, but the equity market last year was a source of $115B of new capital."
SUMMARY - Consolidation of Financial Power Worldwide
It is evident that what is taking place is the consolidation of financial and economic power on a worldwide basis. The push by the Tripartite to repeal the Glass-Steagall has high stakes. The economic power of banks, mutual funds, and the non- commercial sector is apparent. Add to this the wealth of the insurance industry which owns most of the "manufactured assets" of the world in the form of office buildings and real estate. Yes, the strings of the marionette doll are being pulled while you and I are watching the play. "For they speak not peace, but they devise deceitful matters against them that are quiet in the land." Ps. 35:20