The Most Powerful Bank You've Never Heard Of

You know banks like Citibank, Bank of America, Wells Fargo, etc. You read about the World Bank and the International Monetary Fund (IMF), even if you're not quite sure what they do (not to worry--they're a little confused, too). And you're probably aware that the Federal Reserve is neither federal nor a reserve, but a consortium of privately owned banks. Chances are, though, that you've never even heard of what is arguably the most powerful financial institution on earth, the Bank for International Settlements (BIS).

The BIS is headquartered in Basel, Switzerland. It was founded in 1929, for the purpose of overseeing reparation payments owed by Germany as a result of the Treaty of Versailles that ended World War I. It's been with us ever since, and its mission has, to put it mildly, grown a bit.

A banker's bank, the BIS does no direct business with individuals, governments, or corporate entities. Instead, it deals solely with member nations' central banks (most of which are privately owned). There are 55 of them at present, and the list includes every central bank of consequence in the world.

All members are owners and have voting privileges, in proportion to the number of shares they have. (Private citizen ownership was originally allowed, and comprised about 14% of shares outstanding, but in 2001 all of those were bought out by the central banks.) We were unable to pin down the exact present share structure, but it can be assumed that the founding members have the most clout.

The founders were the central banks of Belgium, France, Germany, Italy, Japan and the U.K., all of which got an identical number of shares. The U.S. Federal Reserve was not an original shareholder; however, three American banks (J. P. Morgan, First Bank of New York, First Bank of Chicago) each got the same number, giving the U.S. three times the voting power from the outset.

Management's inner circle is of course the Board of Directors. There are six ex officio (i.e., permanent) members, the central bank governors of Belgium, France, Germany, Italy, and the U.K., plus the chairman of the Fed. These six appoint six others of their own nationality, and then there can be up to nine more elected members (there are five at the moment, representing Canada, Japan, the Netherlands, Sweden and Switzerland). Ben Bernanke has thus just replaced Alan Greenspan as the U.S.'s ex officio rep, and his appointed American sidekick is New York Bank President Timothy Geithner.

So, what does the BIS do these days? According to the bank's website, "BIS . . . fosters international monetary and financial cooperation and serves as a bank for central banks . . . by acting as: a forum for discussion and decision-making among central banks and within the international financial and supervisory community; a centre for economic and monetary research; a prime counterparty for central banks in their financial transactions; and agent or trustee in connection with international financial operations."

That is, it helps central banks construct and implement financial policy decisions, in concert with one another. And it acts as a third party in transactions, facilitating the flow of money and other financial instruments, including gold.

Putting it succinctly: "Promoting monetary and financial stability is one key objective of the BIS," although it would probably be more accurate to call that the key objective. The bank sees as its primary job the stabilization of world financial markets.

It accomplishes this through control of currencies. It currently holds 7% of the world's available foreign exchange funds, whose unit of account was switched in March of 2003 from the Swiss gold franc to Special Drawing Rights (SDR), an artificial fiat "money" with a value based on a basket of currencies (44% U.S. dollar, 34% euro, 11% Japanese yen, 11% pound sterling).

The bank also controls a huge amount of gold, which it both stores and lends out, giving it great leverage over the metal's price and the marketplace power that brings, since gold is still the only universal currency. BIS gold reserves were listed on its 2005 annual report (the most recent) as 712 tons. How that breaks down into member banks' deposits and the BIS personal stash is unknown.

By controlling foreign exchange currency, plus gold, the BIS can go a long way toward determining the economic conditions in any given country. Remember that the next time Ben Bernanke or European Central Bank President Jean-Claude Trichet announces an interest rate hike. You can bet it didn't happen without the concurrence of the BIS Board.

Obviously, this bank wields a lot of power. But are they good guys or bad guys? In their own estimation, unsurprisingly, they are the white hats. They work to prevent chaos and, as they put it, address "imbalances" in the increasingly interconnected global financial marketplace. They derail panics and currency meltdowns when they can.

While we at WWNK generally prefer that private interests do things that government would like to get its hands on (and screw up), we are also free-marketers, and therefore uneasy with any entity, public or private, that can tamper with the free market. Preventing a currency meltdown may be a good thing, or it may not. A devaluation may be just what a country's money needs. Not to mention that we can't ignore a simple corollary: anyone with the power to prevent a currency debacle can also cause one.

Another negative is that the BIS can cooperate with governments on transactions that said governments would rather keep out of the public view. For example, U.S. taxpayer monies can be passed through BIS to the IMF and from there anywhere. In essence, the BIS launders the money, since there is no specific accounting of where particular deposits came from and where they went.

This is what happened during the Brazilian panic of 1998, when the IMF, courtesy of American workers, bailed that country out. Not incidentally, our taxpayers were generally unaware that what they were mostly doing was subsidizing the large American banks (Citigroup, J. P. Morgan Chase and FleetBoston among them), which had made a lot of risky loans and didn't feel like paying a penalty for their mistakes.

Maybe we'd feel better about the BIS if it were more transparent, but most everything about it, including its bi-monthly member and board meetings, is shrouded in secrecy. And perhaps more worrisome is that the BIS is free from oversight. By rights granted under its agreement with the Swiss Federal Council, all of the bank's archives, documents and "any data media" are "inviolable at all times and in all places." Furthermore, officers and employees of BIS "enjoy immunity from criminal and administrative jurisdiction, save to the extent that such immunity is formally waived . . . even after such persons have ceased to be Officials of the Bank." Finally, no claims against BIS or its deposits may be enforced "without the prior agreement of the Bank."

In other words they can do whatever they want, without consequences. How's that for a leak-proof legal umbrella?

But in the end, how you feel about the BIS may come down to how you feel about a one-world currency. The bank was a major player promoting the adoption of the euro as Europe's common currency. There are rumors that its next project is persuading the U.S., Canada and Mexico to switch to a similar regional money, perhaps to be called the "amero," and it's logical to assume the bank's ultimate goal is a single world currency. That would simplify transactions and really solidify the bank's control of the planetary economy.

Will the day ever come when the earth is flooded with fiat "globos?" We sincerely hope not. And, as the recent transnational rush to turn paper into gold suggests, the market is beginning to agree with us.

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Posted 03-07-2006 6:29 PM by Doug Casey
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