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A Registered Investment Advisor

301/924-2056 October, 1997 Vol. 11, No. 3


Over the last eighteen months, this newsletter has taken on a decidedly global tone, which has not been intentional but is as a result of my research and travels. The United States is, for the most part, in a "stirring" process--being mixed financially and economically--with the other countries of the world. This stirring process is called "globalization," and can be compared to the process of adding chocolate syrup to milk. Until deliberate action is taken to blend the two, you still have two separate components. Once the stirring process is initiated, a third entity- -chocolate milk--is the result. My recent reports on the various aspects of globalization are reflected in the following summaries.


March 1996

This was the first time I wrote on the topic of globalization, providing both the above definition and a review of the dollar, yen, and deutsche mark, the North American Free Trade Agreement (NAFTA), the United Nations (UN), the World Bank (WB) and the International Monetary Fund (IMF), mergers and acquisitions in all sectors, the currency crisis, and the U.S. stock market.

August 1996

I discussed how globalization was birthed as a result of deregulation. The 1980 Monetary Control Act, has created a financially "borderless" world, spawning numerous mergers and acquisitions. In the last three years, mergers and acquisitions have doubled and have occurred in every industry. This newsletter highlighted the auto industry, banking and mutual funds, airlines, consumer products, and energy. The movement towards a global stock exchange was introduced.

October 1996

As a result of attending my first Group of Seven (G-7) meeting in Lyon, France, I reported on the history of the Group of Seven, providing a chart which showed a rather sophisticated global organizational structure. As an example, I pointed out how Robert Rubin, our Secretary of the Treasury, also serves in several financial global positions. He is the liaison between the Federal Reserve (a private monetary corporation) and the U.S. Treasury, he serves as a Group of Seven Finance Minister, meeting with his foreign counterparts from the other G-7 countries throughout the year, and he is an alternate to Alan Greenspan at IMF/World Bank meetings. It appears the G-7 functions as a "Global Board of Directors," assisting in the harmonization of policies, laws, and business between the developing and industrialized countries. In June 1997, I attended another G-7 meeting called "The Denver Summit of

the 8." More and more, it appears that it is not the United Nations from which the Group of Seven gets its orders but the Bank for International Settlements.

December 1996

In this issue many of the major players on the global level were identified, which included: The Bank for International Settlements in Basel, Switzerland, which is the "central banks' bank;" the Federal Reserve Bank which controls the monetary system of the United States; the International Organization of Security Commissions (IOSCO), which considers itself "the United Nations of Security Commissions" since it is comprised of the security and exchange commissions from around the world; the World Trade Organization (WTO); the World Bank (WB); the International Monetary Fund (IMF); and the United Nations (UN). In addition, this report explained the changes needed, including the elimination of our Glass-Steagall Act, to bring about the global banking system. A key reference book is Tragedy and Hope by Dr. Carroll Quigley, Bill Clinton's mentor.

March-June 1997

This very comprehensive newsletter reviewed the players from the December 1996 report, and went on to show how the central banks of the world are taking more power to themselves and are acting more openly to facilitate the changes necessary for financial harmonization. Several central banks have recently adopted new policies to bring themselves into conformance with the powers held by the Federal Reserve Bank. It is the Bank for International Settlements, as Dr. Carroll Quigley pointed out in his book Tragedy and Hope, which directs all of the movements and integration of the world's central banks, all of which are private corporations.

Other components of the world financial system were discussed: international bonds, a global accounting system, an international system of taxation, the strengthening of the International Organization of Security Commissions (IOSCO), and the World Trade Organization (WTO). Furthermore, it was shown that the change in the recent two-year strengthening of the dollar, after a ten-year drop against the Japanese yen and German deutsche mark , is necessary to hold up the shaky currencies of Japan and Germany.

September 1997

This newsletter will review continuous changes in the above situations and introduce several more components to the harmonization of the world's financial markets. A short report on the June G-7/G-8 meeting in Denver is included.


In a speech given on October 3 by Deputy Treasury Secretary Lawrence H. Summers called "Investing in a Secure Millennium," he said

"...[T]wo seismic events have helped set off a tide of global integration with enormous potential. But it is not enough to watch that tide wash away the remnants of the old order. As the President said last week in his address to the United Nations General Assembly, we have to decide what will be left in its wake. As he said then, to seize the opportunities, and defeat the threats of this new global era we need a new strategy of security---one aimed at forging a new network of policies and institutional arrangements... The United States has a vital interest in helping to build this new foundation...And we believe that proactive, internationalist economic policies can play an integral role in bringing it about." (emphasis added)

The integration, i.e. harmonization can be seen in: the merger and acquisition activity, the World Trade Organization (WTO) Financial Services Agreement, the Organization for Economic Cooperation and Development (OECD) proposed Multilateral Agreement on Investment, the European Common Market and euro currency, and emerging support systems such as global: accounting, stock exchanges, custody and settlements system, custody, and an electronic network for insurance companies. Open skies provides another form of integration.

Closely connected to the stock market is the futures/options and derivatives market. As a result of the exploding volume on these exchanges, we must look at the harmonization occurring there as it is related to the "new network of policies and institutional arrangements" building a new foundation for the 21st century. [Note: This is not a foundation which I agree with. However, in order for you to make decisions that you need to make, it is reported because it will change how and where we invest, the kind of retirement we can expect, etc. "Washing away the remnants of the old order" applies to everything we know and have known.]


Mergers and acquisitions are part of a major shakeout occurring on the global level among corporations. This is Darwinian as only the strong or strongest will survive. In addition, key areas of control---finance, telecommunications, and manufacturing are the first wave.


The German government is in the process of asking seven international banks to find buyers for their airline Lufthansa. Meanwhile Boeing and Mcdonnell Douglas merged after the European Commission approved the merger plans satisfying its concerns over market competition. As part of the approval, Boeing made concessions by making licenses and patents from Mcdonnell Douglas's military research programs available to rival firms.

European Mergers

On October 14, a number of corporate deals were announced, prompting the Financial Times (FT) to highlight the mergers in their lead article, "Markets Surge on Corporate Deals." The

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insurance company BAT Industries and the Zurich Group had

announced a number of deals, including the merger of Reed

Elsevier with Wolters Kluwer and the bid for Redland from Lafarge, as well as the bid by the Italian Group Generali for the French insurer AGF. The merger of Reed Elsevier of the United Kingdom with Wolters Kluwer would result in the world's biggest supplier of professional and scientific information. Barriers to cross-border takeovers are falling and with stock markets close to record highs, companies were well placed to offer their shares as consideration. It is felt the case for the restructuring of European industry was given further encouragement by the approach of a single currency (FT, 10/14/97, 1). The merger of Zurich, the Swiss financial services group, and BAT Industries, the U.K. tobacco and insurance conglomerate, would create one of the world's biggest insurance groups. This $37 bn merger between two of Europe's biggest insurance companies is unprecedented and shows again that cross-border deals are the wave of the future. Christopher Adams wrote, "There is a buzzword in the industry to characterise the recent deal-making: "globalisation." Certainly, companies are getting bigger and operating in more countries. But few yet have sufficient market share outside their home markets to be called global. That is a process that will take several years and is only the beginning" (FT, 10/20/97, 15).

Financial Industry Mergers

(1) Banks with Brokerage Firms, and Banks with Banks

As a result of major bank mergers and acquisitions, most financial stocks are up 30% or more. In June, Wachovia Corp. of North Carolina purchased Central Fidelity Banks in Virginia to become the biggest bank in the South (WT, 6/25/97, B6). NationsBank purchased Montgomery Securities, a 26-year old firm which specializes in fast-growing industries such as health care, communications, and technology. "The agreement comes amid a wave of acquisitions in the security industry as the 1933 law that separates commercial and investment banking crumbles. Many banks in the United States and overseas are pouring money into building or buying brokerage units" (Washington Times, (WT), 6/28/97, A14). Several months later, NationsBank purchased the Florida-based Barnett Banks in the biggest bank acquisition in U.S. history. This deal will make NationsBank the third largest bank in the United States (WT, 8/39/97, 1). Most recently NationsBank acquired the St. Louis- based Boatmen's Bankshares (FT, 10/15/97, 19). Also, First Union Corp. recently acquired Wheat First Butcher Singer Inc. (WT, 8/21/97, B7). Other securities firms acquired by a big bank include, Robertson, Stephens, purchased by BankAmerica.

(2) Insurance Companies and Mutual Funds or Brokerage Firms

Helping to bid up these stocks are numerous recent mergers, such as the purchase by Zurich Group, Switzerland's biggest insurer, of Scudder, Stevens & Clark for $2b. Scudder began as a private money management firm and was the first to introduce a no-loan mutual fund in 1928 (USA Today, 6/27/97, B1). Zurich purchased Kemper Funds in 1996. The combined assets of all three firms will be $200 billion.

ING, one of the biggest financial groups in Europe, purchased Furman Selz, a Wall Street brokerage firm, as well as Equitable of Iowa (FT, 8/29/97, 16). Swiss Bank purchased Dillion Reed, and Bankers Trust New York purchased Alex. Brown and Sons.

(3) Global Mergers by Country

On the global level, two Bavarian banks recently merged to create the second biggest bank in Germany. Bayerische Berinsbank and Bayerische Hypotheken-und Wechsel-Bank merged in July. The new bank, Bayerische Hypo-und- Vereinsbank, is second only to Deutsche Bank in Germany (FT, 7/22/97, 15). Speaking of Deutsche Bank, it is preparing to offer mutual funds in America.

In Finland, the government approved the merger of Postipankki, the country's third largest bank, with Finnish Export Credit, the state-controlled commercial lender. The new group will be the second largest banking consortium in Finland. Industry analysts suggest this could pave the way to the privatization of state owned banks (FT, 10/8/97, 18). On October 13, Finland's largest bank, Merita, announced a plan to create the largest financial services group in the Nordic region by merging with Norbanken, Sweden's fourth-largest lender. In what is considered the first cross-border merger between retail banks, it marks the latest stage in the rapid consolidation of the region's financial services industry (FT, 10/14/97, 17).

(4) Cross-Global Mergers: Latin America

In Latin America, Spain's Santander Banking Group purchased the Brazilian bank Banco Noroeste. Earlier in the year, HSBC Holdings, which owns the HongkongBank Group in China and Midland Bank in the United Kingdom, purchased Brazil's Bamerindus Group. This purchase is part of a concerted effort to have a presence in Latin America (FT 8/16-17/97, 1). In Venezuela, overseas groups now control 47% of all bank assets, compared to .5% three years ago. Banco Bilbao Vizcaya of Spain now controls Venezuela's largest bank, Banco Provincial. In addition, American Express Bank joined with Banc SRL to form Banco Inter American Express in Sao Paulo. American International Group, the U.S. insurer recently purchased 51% of Banco Fenicia (FT, 9/4/97, 15).

(5) Mergers by Country: Switzerland

Credit Suisse, Switzerland's oldest bank, and Winterhur, its oldest insurance company, merged to create the country's largest financial conglomerate. This merger will put the Credit Suisse Group, which owns America's First Boston, ahead of its two rivals, Union Bank of Switzerland and Swiss Bank Corporation. In addition, "Union Bank of Switzerland purchased Germany's Schroder Munchmeyer Hengst, a Frankfurt-based bank owned by Lloyds TSB of the UK " (FT, 8/27/97, 11).

(6) American Banks Purchasing Foreign Financial Firms

American banks purchasing foreign banks include Citibank, which will buy Canca Confia in Mexico (WT, 8/28/97). Meanwhile Donaldson Lufkin & Jenrette, the specialist U.S. investment bank expanding its European activities, is looking to acquire London Global Securities. DLJ recently purchased Phoenix securities (FT, 8/19/97, 17).

(7) Insurance Companies Buying Brokerage--the Final Step in Erasing the Glass-Steagall Wall of Separation

The deal of the year, and possibly the century, is the purchase by Travelers Group of Salomon Inc. for $9.3b, moving

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Travelers closer to its goal of becoming a financial supermarket, handling everything from health insurance to retirement plans. Called "Wall Street's Big Bang," Travelers Group becomes the

third-largest securities firm after Morgan Stanley Dean Witter Discover & Co. and Merrill Lynch & Company. Andrew Fraser, reporting for The Washington Times commented, "It raises the stakes in the consolidation game being played out across the financial services industry as relaxed regulations and global competition cause an urgent rearranging of the landscape." Salomon will be merged with Smith Barney, also owned by Travelers, to create Salomon Smith Barney Holdings Inc. Commenting further on the merger, Linda Chase, a financial services analyst at Towers Perrin (a New York-based business consulting firm) said, "This is the beginning of the creation of the financial supermarket of the future, which is why it is so cutting edge. Nobody is in a position to do this" (WT, 9/25/97, B9). Warren Buffet is the largest stockholder of Salomon Inc (WT, 9/25/97, B9). (emphasis added)

Open Skies

If it wasn't enough to deregulate the banks and the flow of money around the world, now the skies are also being deregulated. There are two types of "open skies" treaties or agreements that are changing the skies. The first is the 1992 Open Skies Treaty which was signed by 27 nations in order to promote unity by allowing participating countries to gather information about one another's military forces through unarmed observation flights. The first flight over the United States by a Russian aircraft occurred this past August. A 20-member Russian crew flew over part of the United States, stopping at a number of Air Force bases in Washington, Ohio, and Georgia before flying over the Kennedy Space Center (WT, 8/5/97).

Another type of open skies agreement is a program to allow participating U.S. airlines to fly as many routes as they wish between the United States and other countries in exchange for similar rights by other countries' airlines, whereby foreign airlines have total access to U.S. airports. Since each airline treaty is negotiated one country at a time, there is no all-encompassing international standard. To date, the United States has signed open skies agreements with over 24 countries (Washington Post (WP), 9/20/97, D1). No borders period!!!

Other Mergers

The nation's two largest semiconductor manufacturers, Intel, (the world's largest semiconductor chip manufacturer) and National Semiconductor, have announced plans to acquire rivals. Intel will buy Chips and Technologies, a company that specializes in technologies to enhance the graphics performance of personal computers, while National Semiconductor will buy Cyrix, a developer of microprocessor chips that clone Intel's Pentium designs. Two U.S. hotel companies announced in September their plans to merge in order to position themselves for international growth (FT, 7/29/97, 13). The Promus Hotel, whose hotel chains include Embassy Suites and Hampton Inn, and Doubletree, which recently added the Red Lion, will merge. Two shareholders controlling 40% of the stock, General Electric Pension Trust and Kohlberg Kravis Roberts, will support the merger (FT, 9/3/97, 17).


A significant telecommunications merger is an alliance called World Partners, which spans 33 countries and includes many of the world's largest communications companies, such as AT&T, U.S.; Singapore Telecom; KDD, Japan; and Unisorce of Europe, a venture between PTT Telecom of the Netherlands, Telia of Sweden, and Swiss PTT. In addition, there are 13 other non-equity partners. Joining in July was Stet, an Italian telecommunications group. Other similar alliances include Concert, which is a partnership between British Telecommunications and MCI, as well as Global One, an alliance between Deutsche Telkom and France Telecom. The emergence of a world telecommunications system is at hand.


The 1980 Monetary Control Act paved the way for money to flow "borderless" around the world without any constraints. This then opened the door for continuous mergers and acquisitions on a global level. In addition to breaking down remaining financial barriers, the World Trade Organization is seeking to pass a Financial Services Agreement, which will allow financial firms to merge and do business as if there were no national borders.

This "financial deregulation," as it is called, appears to be the final step in creating a global market place where only the strong will survive. It is birthing a "global investment banking industry" in which global investment banks will bring to the global marketplace global stocks, bonds, and mergers. Leading the way are America's own global investment banks: Goldman Sachs (Robert Rubin's former employer), Morgan Stanley, and Merrill Lynch which have expanded into Europe and Asia (FT, 1/31/97, 1). In size, Morgan Stanley is the largest bank, followed by Merrill Lynch and JP Morgan. To counteract their strong presence abroad, a number of foreign banks, including the Union Bank of Switzerland and Deutsche Morgan Grenfell, have hired teams from Wall Street to build their presence and expertise in the United States.

In anticipation of the Financial Services Agreement, many countries are in the process of making internal changes to allow for compliance. Japan, for example, recently conceded that it would allow the deregulation of its financial industry. However, the United States refused to sign the Agreement in 1995, stating that a number of developing countries had not gone far enough to open their domestic markets. The countries of the world are now hoping to reach a global agreement by December.

In preparing for the reporting of global financial news, our Security and Exchange Commission recently scrapped regulations enacted after the 1929 crash, which have prevented U.S. newspaper and new agencies from reporting on forthcoming bond and equity offerings of foreign companies. The SEC says these laws were "anti-competitive and potentially disadvantageous to U.S. investors" (FT, 10/15/97).

Other countries that have passed or are in the process of passing similar domestic legislation include Australia (whose legislation is now similar to that of the United States), the European Union, and Japan. Japan has been a holdout for some time, and perhaps rightly so, since they are the country

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with the highest rate of personal savings. Their financial

deregulation will begin in April 1998 and be completed in 2001. Included in the list of key proposals is: the introduction of options trading in individual stocks, liberalization of brokerage commissions on very large amounts, liberalization of foreign exchange operations, overseas deposits and cross-border securities transactions, giving the Bank of Japan nominal independence in setting interest rates, strengthening the powers of the Securities and Exchange Surveillance Commission, allowing banks to sell mutual funds, and commercial banks being allowed to issue bonds.

It should be noted that England had their "Big Bang" in financial deregulation in 1986 which paved the way for the rest of the world. This means they are "one up" on all of the other countries of the world!

Multilateral Agreement on Investment

While I have been reporting on the "deregulation" that has occurred since the 1980 Monetary Control Act, it is important to understand its deeper repercussions. All of this deregulation has facilitated big business, and in a minor way, small business. We know that powerful multinational are kept in check through national laws. When national restrictions are eliminated, corporations no longer need to pay allegiance to their countries. The rise of multinational corporations has brought about changes in rules and regulations between countries to facilitate business. One of the reasons, we are told, for the existence of NAFTA and GATT, which are eliminating all national laws concerning trade and production, is "free trade."

There is another development that should be examined very closely. The Multilateral Agreement on Investments (MAI), proposed by the Organization for Economic Cooperation and Development (OECD) in Paris, is a new "corporate rule" that will give corporations open rights. In short, the MAI will increase the powers of multinational corporations over the laws of a country in order to facilitate business. In the words of Renato Ruggerio, Director General of the Word Trade Organization (WTO), "We are writing the constitution of a single global economy." The United States Council for International Business (USCIB) says, "When concluded, the MAI will become the next pillar in the global system of trade, finance, and investment" (Wisconsin Reports, 10/2/97, 3). (emphasis added)

According to Tony Clarke, Director of the Polaris Institute in Canada, "[T]he MAI is designed to establish a whole new set of global rules for investment that will grant transnational corporations the unrestricted 'right' and' 'freedom' to buy, sell, and move their operations whenever and wherever they want around the world, unfettered by government intervention or regulation. In short, the MAI seeks to empower transnational corporations through a set of global investment rules designed to impose tight restrictions on what national governments can and cannot do in regulating their economies.... While corporations are to be granted new rights and powers under the MAI, they are to have no corresponding obligations and responsibilities related to jobs, workers, consumers or the environment" (Wisconsin Reports, 8/14/97, 2-3).

Consequences of the MAI are:

1. The MAI could codify a special set of rights for corporations as investors. Throughout the official draft text, corporations are seen as investment which means "every kind of asset owned or controlled by an investor" comes under the jurisdiction of the MAI.

2. The MAI attempts to expand the scope of corporate investor rights by providing a much broader definition of investor which means "every kind of asset owned or controlled--by an investor" comes under the jurisdiction of the MAI.

3. Investor rights would be applied to all political jurisdictions by all levels of government--local, state, and federal. It grants to corporations the right to sue governments and provides a binding investor-state dispute settlement mechanism for these purposes.

4. It guarantees transnational corporations political stability and security to develop their investment strategies in a country and therefore, if a country does not provide that environment, it could possibly be sued by the corporation.

5. Any country who contracts with MAI may not be able to withdraw from the MAI until five years after it has come into force. It is proposed that the MAI rules would continue to cover existing investments in that country for an additional 15 years. MAI investment rules would remain in force in a country for at least 20 years. (JV: A very comprehensive area which will be addressed in a future newsletter is multinational corporations.)

ECM --Euro

How do you take twelve to fourteen individual countries and create ONE out of them? The major change would have to be the replacement of individual currencies with one--the euro. Other changes would be the elimination of national laws in favor of a completely new set of laws, the creation of a new parliament, (The European Parliament which is already in place), and the replacement of the individual central banks with one central bank.

While a great deal more space could be devoted to the euro and the merger of the countries of Europe which have subscribed to the European Common Market, only a few comments will be made. First, the countries that are probably in the best position to merge their currencies include Germany, France, Belgium, Portugal, Spain, Finland, Ireland, Sweden, Italy, Denmark, and the United Kingdom. A number of those same countries still have a lot of work to do to prepare. (FT, 5/27/97, 4). Most recently the United Kingdom made it clear that it was highly unlikely that they would join the EMU by January 1, 1999 but that it is most likely they would be joining by 2002 (FT, 10/20/97, 1).

Second, in an article in The European, Klaus Friedrich, chief economist at Dresdner Bank in Frankfurt, said "Europe's capital markets and banks are going to experience a greater change than at any time in the past 200 years" ("Euro markets face big bank," (The European, 6/26-7/1/97). The article went on to say that the driving force is the Euro--a single currency that will arise out of many. Expected changes include:

* A 25% reduction in the number of banks in Europe [mergers

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and acquisitions]

* A doubling in size of the continental stock exchanges

* The emergence of an American-style corporate bond market

* A head-on battle among London, Paris, and Frankfurt to become the trading center of the new Europe.

The article, written by Adrian Hamilton, stated that "many European banks face merger, takeover or extinction. In the words of one United States banking chief executive: 'The capital markets is a big boy's game for big boys.'"

The merger of the various separate European countries into one will require the complete tearing down of restrictive regulations in each country so that they can be melted very quickly into one. In addition, the deregulation currently going on in the U.S. with the dismantling of the Glass-Steagall Act will also be needed in Europe to make it one nation. It is anticipated that the euro will create a bond market equivalent in size to the U.S. bond market (European, 6/26-7/1/97).

Most recently Daimler Benz announced it would begin trading in euros. China, on the other hand, feels that the euro will be a "soft and unstable currency in its early years and will keep most of its foreign exchange reserves in dollars until the European single currency ha[s] matured" (FT, 10/13/97, 20). The Swiss franc, which for the past year has been dropping against the U.S. dollar, expects foreign investment inflows into Swiss franc assets to increase substantially as a result of the European Monetary Union, irrespective of whether the euro is a strong or weak currency (FT, 9/19/97, 3). Some of Japan's largest companies such as Sony and Nissan, which are among the largest foreign direct investors in Europe are making preparations to introduce the euro into their operations at an early date (FT, 10/21/97, 2).

Interestingly enough, the Chicago Mercantile Exchange (CME) announced on October 8 that they will permit delivery for eligible currency futures to take place in either the relevant national currency or the euro during the transition to the European Monetary Union, which is due to begin in 1999. The U.S. Commodity Futures Trading Commission (CFTC), which regulates the U.S. futures industry, approved the exchanges planned actions. The CME is due to begin listing March 1999 currency futures contracts on October 14. (FT, 10/8/97, 22)

Now pension fund managers are trying to determine the effect of the euro on pension monies. One pension fund manager said the problems presented by EMU loomed as large as that of the millennium time-bomb in the computer world. The headaches besetting the industry, which has estimated assets of $1,348 bn involve regulatory, administrative, economic and publicity issues (FT, 10/21/97, 2).

In the wake of the crisis in Italy for EMU support, Prime Minister, Romano Prodi, resigned his position and has now been re- elected, confirming Italy's place in the EMU (FT, 10/15/97, 1).

There is no doubt in my mind that in order to encourage European unity, the euro will be "forced" upon people, whether they like it or not. As more and more companies announce their

plans to use the euro versus the lira, deutsche mark or pound, it will create the market for and increased stability of the euro.

One of the problems to be sorted out among the countries involved is the redistribution of central bank profits after monetary union. Under rules worked out a number of years ago, "the national banks will receive equity in the [new] European central bank in exchange for losing their right to issue their own currencies."

The problem with the exchange is that it will be calculated according to the size of each country's population and economy. In the case of Germany, it has issued 35% of Europe's bank notes in circulation, and will receive only 25% of the new bank's equity, a loss of 10%. Those countries that will benefit financially include Luxembourg, France, and Britain whereas the biggest losers will be Sweden, Germany, Austria, and Spain (European 7/3-9/97, 1).

Although Frankfurt will be the headquarters of the new European central bank which is to be called the European Investment Bank (EIB), there is a great deal of jockeying going on between France and Germany as to whether someone will be chosen from their country to head the EIB. The French candidate is Michael Camdessus who is the managing director of the International Monetary Fund. The Germans would like Wim Duisenberg, the Dutch central bank governor (FT, 5/27/97, 4).


Global Accounting

In order to keep track of a global financial marketplace, a new global accounting system will have to be created. The International Accounting Standards Committee (IASC), is spearheading new standards to be put into place by 1998 so that the companies listed on the world's leading stock markets will all use the same accounting methods. Part of the change in accounting rules will specify how derivatives will be reported. It is on this international stage that the world's leading regulators are also trying to find a solution to the second derivatives problem--their measurement. Sir Brian Carsberg, the secretary- general of the IASC and former U.K. regulatory chairman, is spearheading this new accord, which will be presented to the International Organization of Security Commissions (IOSCO). With IOSCO approval, the accord would in theory be acceptable in all of the world's leading markets (FT, 6/27/97, 2).

In preparation for a global set of accounting methods, a number of foreign companies are switching to U.S. accounting standards, Price Waterhouse and Coopers & Lybrand have merged to form the world's largest accounting firm in order to position for the 21st century. They are targeting a number of emerging countries such as Russia, China, Southeast Asia, India, and Latin America. This new global merger will place Price Waterhouse-Coopers & Lybrand in the number one position worldwide, just ahead of Andersen Worldwide (WT, 9/19/97, B10).

Global Stock Exchanges

I was told by a key individual whom I interviewed at the 1996 Annual Meeting of the International Organization of Security Commissions (IOSCO) that the bottom line to globalization

would be one stock exchange for the entire world. He said that

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how this would come about is that all of the stock exchanges in the Caribbean would merge and those in Central America would merge. Then these two areas would be merged together.

My first confirmation of what I was told a year ago came in the September 29, 1997 edition of Financial Times, which reported, "Efforts to integrate Central America's six tiny stock exchanges are taking hold, although the under development of national markets is slowing the pace." It goes on to describe the development of each exchange in Central America and then comments, "[T]he promotion of public ownership faces deep- rooted suspicion from Central America's business community, which is dominated by close-knit family groups reluctant to venture into uncharted territory or give up full control of their companies." Lastly, the article says that "[t]he Inter-American Development Bank [World Bank] is supporting efforts to modernise these markets."

In June, "[t]he Swedish and Danish stock exchanges announced their plans to merge their dealing systems to create an integrated equities trading market, the first cross-border link of its kind among European borses." Furthermore, it is anticipated that this could be "the first step towards the creation of a pan-Nordic market, embracing Oslo and Helsinki" (FT, 6/12/97, 15).

Global Custody

Custody encompasses two operations: the safekeeping of pension monies, and the purchase/sale and settlement of stocks, bonds and mutual funds in the account. The whole process becomes pretty complicated when the custodian is buying foreign stocks, bonds, and (American-based mutual funds, which offer foreign and international mutual funds.) As a result, there are a number of global financial laws covering the purchase and settlement part of the transaction. This multi- trillion-dollar industry ($40,000 bn) is dominated by companies like Morgan Stanley, Chase Manhattan (the biggest U.S. bank and largest global custodian as a result of their merger last year with Chemical Bank), Northern Trust, and Citibank in the United States; Midland Securities Services, London; Royal Trust, Canada; and Cedel Bank, Luxembourg (FT, 7/11/97, i-iv).

Global Settlements System

In June, the world's largest banks approved "the creation of a global settlements system to handle the $2,400 billion of payments that flow through the foreign exchange markets" daily. The Group of 20, a consortium of leading banks from Europe, North America and Japan, will set up the CLS Services, to be located in Great Britain, which will develop a real-time system for settling foreign exchange transactions. Other participants in the foreign exchange market will be invited to become shareholders. In addition, CLS will take over two rival institutions, Echo and Multinet. At some point in time, CLS aims to create a clearing house where both sides of a foreign exchange transaction--the buy and the sell--can be settled at the same time. Banks which comprise the Group of 20 include: Bank of America, Citibank, J.P. Morgan, Bankers Trust, and Chase Manhattan in the United States; Bank of Tokyo-Mitsubishi and Fuji Bank, Japan; Societe Generale, France; Deutsche Bank and Dresdner Bank, Germany; and Barclays Banks and National Westminster Bank, United Kingdom. The G-20 is responding to a demand by central banks that the private sector find a solution to problems posed by settlement risk in the foreign exchange markets. A global stock exchange needs a global settlements system. Here it is.

Interestingly enough, on my way home from the Group of Seven meeting in Lyon, I met a businessman named Pierre Francotte. He is Managing Director and Resident Counsel for Euroclear; and he works with a group out of London called the "Capital Markets Forum," which is part of the International Bar Association. The Capital Markets Forum is a group looking to "modernize national securities ownership, transfer and pledging laws," which are aspects of the global settlements system (Modernizing Securities Ownership, Transfer and Pledging Laws, Capital Markets Forum, 1996, p. 1). The group is looking to change U.S. laws in order to set up a system of "legal harmonization in the field of conflicts of laws, which determine the legal systems that apply to transfers of ownership and pledges of securities held ...through a web of intermediaries [to facilitate global financial transactions]" (letter from Francotte dated 7/26/96). In addition, he wrote that the Forum is seeking to pass a "new version of Article 8 of the [U.S.] Uniform Commercial Code...which is in line with the recommendations of the group of experts, [and] is in the process of being incorporated in the legal systems of the 50 states in the U.S. It has already been adopted by about 25 states, including Illinois, Pennsylvania, and Maryland" (Francotte, 7/26/96). He told me that by introducing model legislation directly to each state, the group could then facilitate the necessary change in U.S. law in just several years instead of the ten to fifteen years necessary to go through federal channels.

Global Customs Agreement

In a historic move, the World Customs Organization (WCO), the World Trade Organization (WTO), and the United Nations Conference on Trade and Development (UNCTAD) are looking to abolish border inspections. These reforms are scheduled to be in place by 2000, thus allowing time for developing countries, some of which derive 80% of their revenues from import/export duties, to be weaned from this income. These radical reforms are part of the massive 25,000+ page World Trade Organization document approved by the United States Senate in December, 1994. According to Peter Frohler, head of UNCTAD's trade infrastructure branch, companies worldwide will save of tens of billions of dollars a year. Maria Livanos Cattaui, secretary general of the International Chamber of Commerce (ICC), hailed the changes as a "major breakthrough for world business." Again, no borders.

Global Electronic Network for Insurance Companies

Several of the world's biggest insurance brokers, Marsh & McLennan, Aon, Sedgwick and Willis Corroon, have developed an electronic system that will allow insurance brokers and insurers to transfer documentation electronically between broker and insurer, thus eliminating time delays and paperwork. This system, developed by World Insurance Network and British Telecommunications, already has several large British-based companies as subscribers (FT, 7/2/97, 6).

Central Bank News

As discussed in the December 1996 and the combined March- June 1997 newsletters, central banks are not working on behalf of the country whose money they "manage." Here in the United

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States, the Federal Reserve Bank is not federal because it is

not part of the U.S. government---and it has no reserves---as its money is its own and not from the Treasury of the United States. The Federal Reserve is a private corporation and as such, works for the benefit of the owners, which include Rothschild Bank of England, Rothschild Bank of Berlin, Lazard Brothers Banks of Paris, Israel Moses Seiff Banks of Italy, Warburg Banks of Hamburg and Amsterdam, Lehman Brothers Bank of New York, Kuhn, Loeb Bank of New York, Chase Manhattan Bank, and Goldman, Sachs Bank. Whenever the Federal Reserve raises interest rates, the owners benefit, not the people of the United States. Higher interest rates become a burden to those who owe money as well as to those who would like to borrow money.


The global shake-down going on in all levels of industry, business, finance, government, banks, and law, is also occurring in the derivatives/futures and options markets. To quote Richard Sandors, second vice-chairman of the Chicago Board of Trade, "What is going on worldwide is a consolidation of the futures industry" (FT, 9/5/97). The Bank for International Settlements has pegged the underlying value from all types of derivatives, including listed futures and options, to be about $55,000 billion by the end of 1996 (FT, no date marked, iii). Is it any wonder that there would be a move to control this industry? (emphasis added)

The derivatives market, which is thought to be a way of protecting oneself from stock market volatility by purchasing a part or portion of the investment, is gearing up for the coming of a "global derivatives market." The March 8, 1994 "Backgrounder," issued by the Commodity Futures Trading Commission (CFTC), states, "The rapid globalization of today's futures and options marketplace has resulted in a significant growth in formal and informal regulatory and enforcement activities on a cooperative basis among financial market regulators in different countries. With cross-border information sharing forming the linchpin of effective surveillance of global markets linked by products, participants, and information technology, information-sharing arrangements, including Memoranda of Understanding (MOUs) between futures authorities are increasingly critical." Furthermore it states that the CFTC has "cooperated with a large number of foreign regulatory authorities through formal MOUs which include Canada, the United Kingdom, France, the Netherlands, Switzerland, Brazil, Spain, Australia, Singapore, Taiwan, Hong Kong, Japan" and most recently, Germany.

The CFTC regulates the activities of 255 commodity brokerage firms, 49,318 sales people, 9,007 floor brokers, 1,164 floor traders, 1,291 commodity pool operators, 2,514 commodity trading advisors, and 1,389 introducing brokers (CFTC, Annual Report, 1994). The commission oversees the activities of the following exchanges: the AMEX Commodities Corporation, the Chicago Board of Trade, the Chicago Mercantile Exchange, the Coffee, Sugar and Cocoa Exchange, the Commodity Exchange, Inc., the Kansas City Board of Trade, the Minneapolis Grain Exchange, the New York Cotton Exchange, the New York Futures Exchange, the New York Mercantile Exchange, and the Pacific Commodity Exchange, to name a few.

The changes that are occurring deal with the overhaul of the U.S. Commodity Exchange Act and the global expansion of the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), GLOBEX, these changes, along with those occurring in the London Metals Exchange (LME) and other global exchanges, eventually will lead to one major commodities exchange. This points to one global stock exchange.

U.S. Commodity Exchange Act

Both the House and Senate have their own versions of how to overhaul the U.S. Commodity Exchange Act in order to keep pace with the growing derivatives market. And both the House and Senate are calling for the deregulation of the U.S. derivatives market. Deregulation would ensure that the over- the-counter-derivatives market would be exempt from the U.S. Commodity Exchange Act, which regulates listed futures (WT, 3/17/97).

Globalization of the CBOT and the CME

In February 1997, the two exchanges agreed to combine their clearing operations to cut operating costs for the exchanges and trading firm members, a move they had considered for 15 years. Their merger would be based on London's future exchanges, which clear their transactions through the London Clearing House (LCH). Merton Miller, an economist on the CME, said that if the CME-BT combination went ahead, New York's commodity exchanges would have to be brought in. He said, "Ultimately this new clearing house could include 8 or 9 exchanges, including international ones like Paris's Matif" (FT, 2/14/97, 13).

In September, members of the CBOT approved a deal that would see them establish a brokerage for trading over-the- counter government securities in partnership with the U.S. arm of Prebon Yamane, the privately held brokerage group based in London. Pat Arbor, chairman of the CBOT, said that the approval would "secure another strategic plank for the future" (FT, 9/3/97,26). In October, the CBOT expanded its three-year-old electronic order and execution system to London, the first non- U.S. location to come on line. By the end of 1997, the exchange is expected to have 10-15 terminals working in the United Kingdom. In addition, "preliminary work" is being done on the potential expansion into continental Europe as well as Tokyo, Singapore, and Sydney (FT, 10/1/97, 17).

London Metal Exchange (LME)

In London, the London Metal Exchange is regarded as a model of integrated clearing as it clears four exchanges: The London Metal Exchange (LME), the London International Financial Futures and Options Exchange (Liffe), the International Petroleum Exchange (IPE), and Tradepoint, the electronic stock exchange. In October, two independent directors with no previous connection to the metal business were recruited by the LME. They are Lord Fraser, a former U.K. Minister of Energy who is also a director of the International Petroleum Exchange and Sir Tim Lankester, who served at the IMF, the World Bank and the UK Treasury. Two directors from the United States were also added: Art Miele of Phelps Dodge, the biggest U.S. copper producer, and John Pizzey of ALCOA, the world's biggest aluminum producer (FT, 10/8/97, 24).

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GLOBEX was birthed in 1992 as a result of a pioneering

concept between the Chicago Mercantile Exchange and Reuters, the British financial information group. GLOBEX has since been bypassed by London's Liffe and the Chicago Board of Trade, which opted to construct and control their own computer network. As a result of a number of exchanges leaving, GLOBEX has now provided its current partners with new and flexible terms which will provide more freedom to forge other alliances and to decide which products they want to on Globex.

Other Future Exchanges

Recently the Swedish and Finnish derivatives markets have linked their clearing through an agreement with the Oslo Stock Exchange, the Norwegian Futures and Options Clearing House, OM Stockholm, and OMLX, the London Securities and Derivatives Exchange for OM. Most recently the South African Futures Exchange, rated 26th in the world by volume, has abolished exchange controls and will introduce the free movement of capital within 18 months. The Vienna Borse is trading derivatives in Hungary and the Czech exchanges (FT, 6/27/97, 7).

In June, the Coffee, Sugar and Cocoa Exchanges and the New York Cotton Exchange said they have agreed to explore the possibility of a merger. They have plans to build a joint trading facility in lower Manhattan (FT, 6/20/97)


As reported in the December, 1996 and the March and June, 1997 dual issue, the Group of Seven which appear to orchestrate the global integration by directing and implementing global economic, environmental, social and military policy, continued in Denver to affirm their course of action. Their Communique said,

"The Denver Summit of the 8 [Russia was admitted as a partner participating in every area with the exception of finance], as major industrialized democracies, have discussed the steps necessary, both internationally and domestically, to shape the forces of integration to ensure prosperity and peace for our citizens and the entire world as we approach the 21st Century."

The agreements made and implemented are far too many to even enumerate and would require a news-letter of their own as a result of their depth and broadness. However, they strengthened a number of global organizations: the International Monetary Fund (IMF) was given very broad powers to "meet the new challenges in global capital markets" which would include the IMF being able to interact in the global marketplace. They welcomed the "World Bank's Strategic Compact to reduce poverty and forge new partnerships with the private sector and they "reaffirmed the crucial role of the United Nations in maintaining international peace and security and in fostering global partnership and sustainable development." (Denver Communique)

In addition, the economic integration which has been reported on by this newsletter was affirmed. In a press briefing given by the Secretary of the Treasury, Robert Rubin, I asked him the following questions:

JV: In light of the globalization process and your participation as a G-7 Finance Minister and with the Bank for International Settlements, what steps remain to bring the U.S. into full harmonization with regard to financial conglomerates in the U.S.? Has Glass-Steagall been effectively repealed with the merger and acquisition activity in the banks and insurance markets?

Rubin: The answer is that over the last--decade, I suppose, at an ever increasing rate, the regulators, the Office of the Controllers of the Currency and the Federal Reserve Board, have...allowed more and more non-bank activity by financial institutions--non-bank financial institutions. And the result is that the Steagall walls have eroded. Having said that, Glass- Steagall is still in effect. And so there is something very substantially short of a complete elimination of the walls between banking, insurance, brokerage, investment banking and other financial services. Legislation is now working its way through Congress to repeal Glass-Steagall to deal with the bank holding company act.

JV: Will that then complete financial harmony or globalization for the U.S. with regard to the other countries of the world?

Rubin: Well, for one thing, the financial modernization legislation has a long way to go. Secondly, even if this passes sometime this year or next year, there are a lot of other issues that exist if we're going to get a World Trade Organization Financial Services Agreement.


Given the above, the financial integration which global de- regulation, privatization, mergers, and acquisitions, is it any wonder that the stock market is at historic highs? If you take a look at what the various sectors have done such as communications and banking, they are up more than 30% year to date. Many other areas are up again. This is another unbelievable year.

While we do not have room to discuss gold, the reasons for the currency jitters in Thailand or the stock market in detail, a couple of comments need to be made. On October 24, the Swiss Government announced that they will be selling 50% of their gold reserves. Out of all of the countries of the world, Switzerland is the only country whose currency is backed by gold. This action, I will assume, is in order to bring Switzerland in line with the rest of the countries of the world, i.e. no tangible backing. This action levels the playing field. No countries' currency will be backed by gold. I have been stymied why the Swiss franc would be devalued against the U.S. dollar, as it has been in the last two years. I can only surmise as result of this action that the Swiss franc will increase in value---not because their currency is backed by gold, but because they have "come into line" with all the other countries.

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The U.S. stock market, as a result of the "Asian flu," needs to be addressed. If the October 1987 stock market crash signalled anything, it was the harmonization of the world's markets. Thailand and the recent global reaction to it confirm this. We are one. In addition, it appears that problems such as Mexico's currency crisis and Barings Bank, to name a few, have provided a golden opportunity to further financial integration by providing the IMF with greater power to intervene in the world's markets, a major shift in the functions it was originally granted. This, along with changes in domestic laws to conform to international law continue the stirring process.

Do I think we are going to have a CRASH versus a correction? As a result of my travels and research, I have undergone a sea- change in my understanding of life. I am embarrassed at my narrow thinking in some cases. What I have just written shows a very powerful global movement which is not going to be stopped by a correction. Will we have one? Yes. How severe? I don't have a crystal ball. Will the market come back? Yes. Why? Because of the power of globalization.

Will we have a CRASH? Possibly. I can tell you this, those who are at the top, whoever they may be, obviously do not want to stop the momentum they have created. I suspect that if there is a crash, it will be fast, sudden and awesome. No one will have time to prepare. Whatever kind of character a person has attained to that point will be what allows him or her to withstand the CRASH.


10/27/97 - As a result of the importance and timliness of a "late breaking" article in today's Washington Times, for your benefit, we are reporting it here.

"Jack Kemp wants a single currency for the United States and the 33 other nations of the Western Hemisphere." Kemp believes, "A hemispheric free-trade zone would allow goods and services to cross borders [more freely] from the tip of Chile to the top of Canada. It would expand growth." the idea is that it would compete with the European common Market's Euro. The December newsletter will address the benefits of expanding America's currency to the rest of the "Americas."


"In thee, O Lord, do I put my trust: let me never be put to confusion." Ps. 71:1