TheCenterLane.com

© 2008 – 2019 John T. Burke, Jr.

Federal Reserve Bailout Records Provoke Limited Outrage

Comments Off on Federal Reserve Bailout Records Provoke Limited Outrage

On December 3, 2009 I wrote a piece entitled, “The Legacy of Mark Pittman”.  Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.

The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling in August of 2009 by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions (which sought loans at the Fed’s discount window) to compete for business.  The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis.  The Federal Reserve appealed Judge Preska’s decision, taking the matter before the United States Court of Appeals for the Second Circuit.  The Fed’s appeal was based on Exemption 4 of the Freedom of Information Act, which exempts trade secrets and confidential business information from mandatory disclosure.  The Second Circuit affirmed Judge Preska’s decision on the basis that the records sought were neither trade secrets nor confidential business information because Bloomberg requested only records generated by the Fed concerning loans that were actually made, rather than applications or confidential information provided by persons, firms or other organizations in attempt to obtain loans.  Although the Fed did not attempt to appeal the Second Circuit’s decision to the United States Supreme Court, a petition was filed with the Supreme Court by Clearing House Association LLC, a coalition of banks that received bailout funds.  The petition was denied by the Supreme Court on March 21.

Bob Ivry of Bloomberg News had this to say about the documents produced by the Fed as a result of the suit:

The 29,000 pages of documents, which the Fed released in pdf format on a CD-ROM, revealed that foreign banks accounted for at least 70 percent of the Fed’s lending at its October, 2008 peak of $110.7 billion.  Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the window in the 18 months after Lehman Brothers Holdings Inc. collapsed.

As government officials and news reporters continue to review the documents, a restrained degree of outrage is developing.  Ron Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy.  He is also a longtime adversary of the Federal Reserve, and author of the book, End The Fed.  A recent report by Peter Barnes of FoxBusiness.com said this about Congressman Paul:

.   .   .   he plans to hold hearings in May on disclosures that the Fed made billions — perhaps trillions — in secret emergency loans to almost every major bank in the U.S. and overseas during the financial crisis.

*   *   *

“I am, even with all my cynicism, still shocked at the amount this is and of course shocked, but not completely surprised, [that] much [of] this money went to help foreign banks,” said Rep. Ron Paul (R-TX),   .   .   .  “I don’t have [any] plan [for] legislation …  It will take awhile to dissect that out, to find out exactly who benefitted and why.”

In light of the fact that Congressman Paul is considering another run for the Presidency, we can expect some exciting hearings starring Ben Bernanke.

Senator Bernie Sanders of Vermont became an unlikely ally of Ron Paul in their battle to include an “Audit the Fed” provision in the financial reform bill.  Senator Sanders was among the many Americans who were stunned to learn that Arab Banking Corporation used a New York branch to get 73 loans from the Fed during the 18 months after the collapse of Lehman Brothers.  The infuriating factoid in this scenario is apparent in the following passage from the Bloomberg report by Bob Ivry and Donal Griffin:

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion — while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday.  In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Ivry and Griffin provided this reaction from Bernie Sanders:

“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” Senator Bernard Sanders of Vermont, an independent who caucuses with Democrats, wrote in a letter to Fed and U.S. officials.

The best critique of the Fed’s bailout antics came from Rolling Stone’s Matt Taibbi.  He began his report this way:

After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds.  And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size – a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

As Matt Taibbi began discussing what the documents produced by the Fed revealed, he shared this reaction from a staffer, tasked to review the records for Senator Sanders:

“Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont.  “Every one of these transactions is outrageous.”

In case you are wondering just how “outrageous” these transactions were, Mr. Taibbi provided an outrageously entertaining chronicle of a venture named “Waterfall TALF Opportunity”, whose principal investors were Christy Mack and Susan Karches.  Susan Karches is the widow of Peter Karches, former president of Morgan Stanley’s investment banking operations.  Christy Mack is the wife of John Mack, the chairman of Morgan Stanley.  Matt Taibbi described Christy Mack as “thin, blond and rich – a sort of still-awake Sunny von Bulow with hobbies”.  Here is how he described Waterfall TALF:

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility.  But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called “giving already stinking rich people gobs of money for no fucking reason at all.”  If you want to learn how the shadow budget works, follow along.  This is what welfare for the rich looks like.

The venture would have been more aptly-named, “TALF Exploitation Windfall Opportunity”.  Think about it:  the Mack-Karches entity was contrived for the specific purpose of cashing-in on a bailout program, which was ostensibly created for the purpose of preventing a consumer credit freeze.

I was anticipating that the documents withheld by the Federal Reserve were being suppressed because – if the public ever saw them – they would provoke an uncontrollable degree of public outrage.  So far, the amount of attention these revelations have received from the mainstream media has been surprisingly minimal.  When one compares the massive amounts squandered by the Fed on Crony Corporate Welfare Queens such as Christy Mack and Susan Karches ($220 million loaned at a fraction of a percentage point) along with the multibillion-dollar giveaways (e.g. $13 billion to Goldman Sachs by way of Maiden Lane III) the fighting over items in the 2012 budget seems trivial.

The Fed’s defense of its lending to foreign banks was explained on the New York Fed’s spiffy new Liberty Street blog:

Discount window lending to U.S. branches of foreign banks and dollar funding by branches to parent banks helped to mitigate the economic impact of the crisis in the United States and abroad by containing financial market disruptions, supporting loan availability for companies, and maintaining foreign investment flows into U.S. companies and assets.

Without the backstop liquidity provided by the discount window, foreign banks that faced large and fluctuating demand for dollar funding would have further driven up the level and volatility of money market interest rates, including the critical federal funds rate, the Eurodollar rate, and Libor (the London interbank offered rate).  Higher rates and volatility would have increased distress for U.S. financial firms and U.S. businesses that depend on money market funding.  These pressures would have been reflected in higher interest rates and reduced bank lending, bank credit lines, and commercial paper in the United States.  Moreover, further volatility in dollar funding markets could have disrupted the Federal Reserve’s ability to implement monetary policy, which requires stabilizing the federal funds rate at the policy target set by the Federal Open Market Committee.

In other words:  Failure by the Fed to provide loans to foreign banks would have made quantitative easing impossible.  There would have been no POMO auctions.  As a result, there would have been no supply of freshly printed-up money to be used by the proprietary trading desks of the primary dealers to ramp-up the stock market for those “late-day rallies”.  This process was described as the “POMO effect” in a 2009 paper by Precision Capital Management entitled, “A Grand Unified Theory of Market Manipulation”.

Thanks for the explanation, Mr. Dudley.


wordpress stats


Lev Is The Drug

Comments Off on Lev Is The Drug

January 14, 2010

The first day of hearings conducted by the Financial Crisis Inquiry Commission (FCIC) was as entertaining as I expected.  The stars of the show:  Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, “The Dimon Dog” of JP Morgan Chase and Brian Moynihan from Bank of America presented themselves as likeable guys.  However, in the case of Blankfein, whenever he wasn’t talking he would sit there with that squinting, perplexed look on his face that seemed to mime the question:  “WTF?”  A large segment of the viewing public has already been primed to view these gentlemen as “The Four Horsemen of The Financial Apocalypse”.  Nevertheless, there were four more Horsemen absent from the “stage” on Wednesday:  Messrs. Greenspan, Bernanke, Paulson and Geithner.  Beyond that, Brian Moynihan didn’t really belong there, since he was not such a significant “player” as the other panel members, in events of 2008.  In fact, history may yet view his predecessor, Ken Lewis, as more of a victim in this drama, due to the fact that he was apparently coerced by Hank Paulson and Ben Bernanke into buying Merrill Lynch with instructions to remain silent about Merrill’s shabby financial status.  I would have preferred to see Vikram Pandit of Citigroup in that seat.

As I watched the show, I tried to imagine what actors would be cast to play which characters on the panel in a movie about the financial crisis.  Mike Myers would be the obvious choice to portray Lloyd Blankfein.  Myers could simply don his Dr. Evil regalia and it would be an easy gig.  The Dimon Dog should be played by George Clooney because he came off as a “regular guy”, lacking the highly-polished, slick presentation one might expect from someone in that position.  Brian Moynihan could be portrayed by Robin Williams, in one of his rare, serious roles.  John Mack should be portrayed by Nicholas Cage, if only because Cage needs the money.

Although many reports have described their demeanor as “contrite”, the four members of the first panel gave largely self-serving presentations, characterizing their firms in the most favorable light.  Blankfein emphasized that Goldman Sachs still believes in marking its assets to market.  As expected, his theme of  “if we knew then what we knew now  . . .” got heavier rotation than a Donna Summer record at a party for Richard Simmons.  John Mack, who was more candid and perhaps the most contrite panel member, made a point of mentioning that some assets cannot be “marked to market” because there really is no market for them.  Excuse me   . . .  but isn’t that the definition of the term, “worthless”?

Throughout the session, the panel discussed the myriad causes that contributed to the onset of the financial crisis.  Despite that, nobody seemed interested in implicating the Federal Reserve’s monetary policy as a factor.  “Don’t bite the hand that feeds you” was the order of the day.  All four panelists described the primary cause of the crisis as excessive leverage.  They acted as a chorus, singing “Lev Is The Drug”.  Lloyd Blankfein repeatedly expressed pride in the fact that Goldman Sachs has always been leveraged to “only” a 23-to-1 ratio.  The Dimon Dog’s theme was something like:  “We did everything right  . . . except that we were overleveraged”.  Dimon went on to make the specious claim that overleveraging by consumers was a contributing element in causing the crisis.  Although many commentators whom I respect have made the same point, I just don’t buy it.  Why blame people who were led to believe that their homes would continue to print money for them until they died?  Dimon himself admitted at the hearing that no consideration was ever given to the possibility that home values would slump.  Worse yet, for a producer or purveyor of the so-called “financial weapons of mass-destruction” to implicate overleveraged consumers as sharing a role in precipitating this mess is simply absurd.

The second panel from Wednesday’s hearing was equally, if not more entertaining.  Michael Mayo of Calyon Securities seemed awfully proud of himself.  After all, he did a great job on his opening statement and he knew it.  Later on, he refocused his pride with an homage to his brother, who is currently serving in Iraq.  Nevertheless, the star witness from the second panel was Kyle Bass of Hayman Advisors, who gave the most impressive performance of the day.  Bass made a point of emphasizing (in so many words) that Lloyd Blankfein’s 23-to-1 leverage ratio was nearly 100 percent higher than what prudence should allow.  If you choose to watch the testimony of just one witness from Wednesday’s hearing, make sure it’s Kyle Bass.

I didn’t bother to watch the third panel for much longer than a few minutes.  The first two acts were tough to follow.  Shortly into the opening statement by Mark Zandy of Moody’s, I decided that I had seen enough for the day.  Besides, Thursday’s show would hold the promise of some excitement with the testimony of Sheila Bair of the FDIC.  I wondered whether someone might ask her:  “Any hints as to what banks are going to fail tomorrow?”  On the other hand, I had been expecting the testimony of Attorney General Eric Hold-harmless to help cure me of the insomnia caused by too much Cuban coffee.

The Commissioners themselves have done great work with all of the witnesses.  Phil Angelides has a great style, combining a pleasant affect with incisive questioning and good witness control.  Doug Holtz-Eakin and Brooksley Born have been batting 1000.  Heather Murren is more than a little easy on the eyes, bringing another element of “star quality” to the show.

Who knows?  This commission could really end up making a difference in effectuating financial reform.  They’re certainly headed in that direction.



wordpress visitor


More Fun Hearings

Comments Off on More Fun Hearings

January 11, 2010

In my last posting, I discussed the need for a 9/11-type of commission to investigate and provide an accounting of the Federal Reserve’s role in causing the financial crisis.  A more broad-based inquiry into the causes of the financial crisis is being conducted by the Financial Crisis Inquiry Commission, led by former California State Treasurer, Phil Angelides.  The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009.   The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry.  Like the Pecora Commission, the FCIC has subpoena power.

On Wednesday, January 13, the FCIC will hold its first public hearing which will include testimony from some interesting witnesses.  The witnesses will appear in panels, with three panels being heard on Wednesday and two more panels appearing on Thursday.  The witness list and schedule appear at The Huffington Post website.  Wednesday’s first panel is comprised of the following financial institution CEOs:  Lloyd Blankfein of Goldman Sachs (who unknowingly appeared as Dr. Evil on several humorous, internet-based Christmas cards), Jamie Dimon (a/k/a “The Dimon Dog”) of JP Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America.  Curiously, Vikram Pandit of Citigroup was not invited.

Frank Rich of The New York Times spoke highly of FCIC chairman Phil Angelides in his most recent column.  Nevertheless, as Mr. Rich pointed out, given the fact that the banking lobby has so much influence over both political parties, there is a serious question as to whether the FCIC will have as much impact on banking reform as did the Pecora Commission:

Though bad history shows every sign of repeating itself on Wall Street, it will take a near-miracle for Angelides to repeat Pecora’s triumph.  Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s.  The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009.  The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report.

More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private.  The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties.

A similar degree of skepticism was apparent in a recent article by Binyamin Appelbaum of The Washington Post.  Mr. Appelbaum also made note of the fact that the relatively small, $8 million budget — for an investigation that has until December 15 to prepare its report — will likely be much less than the amount spent by the banks under investigation.  Appelbaum pointed out that FCIC vice chairman, William Thomas, a retired Republican congressman from California, felt that the commission would benefit from its instructions to focus on understanding the crisis rather than providing policy recommendations.  Nevertheless, both Angelides and Thomas expressed concern about the December 15 deadline:

The tight timetable also makes it impossible to produce a comprehensive account of the crisis, both men said.  Instead, the commission will focus its work on particular topics, perhaps producing a series of case studies, Angelides said.

*   *   *

Both Angelides and Thomas acknowledged that the commission is off to a slow start, having waited more than a year since the peak of the crisis to hold its first hearing.  Thomas said that a lot of work already was happening behind the scenes and that the hearing next week could be compared to a rocket lifting off after a lengthy construction process.

Even as books and speeches about the crisis pile up, Thomas expressed confidence that the committee’s work could still make a difference.

“There are a lot of people who still haven’t learned the lessons,” he said.

One of those people who still has not learned his lesson is Treasury Secretary “Turbo” Tim Geithner, who is currently facing a chorus of calls for his resignation or firing.  Economist Randall Wray, in a piece entitled, “Fire Geithner Now!” shared my sentiment that Turbo Tim is not the only one who needs to go:

There is a growing consensus that it is time for President Obama to fire Treasury Secretary Timothy Geithner.  While he is at it, he needs to clean house by firing Larry Summers, by banning Robert Rubin from Washington, and by appointing a replacement for Chairman Bernanke.  It is time for a fresh start.

Geithner is facing renewed scrutiny due to his questionable actions while at the NYFed.  As reported on Bloomberg and in the NYT, secret emails show that the NYFed under Geithner’s command prohibited AIG from reporting that it was passing government bail-out funds directly to counterparties, including Goldman Sachs.

Beyond that, Professor Wray emphasized that Obama’s new economic team should be able to recognize the following four principles (which I have abbreviated):

1.  Banks do not face a liquidity crisis, rather they are massively insolvent.  Reported profits are due entirely to trading activities – which amount to nothing more than a game of Old Maid, with institutions selling bad assets to each other at inflated prices on a quid-pro-quo basis.  As such, they need to be shut down and resolved.  …

2.  Saving financial institutions does not save the economy.   …

3.  As such, all of the bail-outs and guarantees provided to financial institutions (over $20 trillion) need to be unwound.  Not because we cannot “afford” them but because they are dangerous.  Unfortunately, Congress has come to see all of these trillions of dollars committed to Wall Street as a barrier to spending more on Main street.  …

4.   Finally, we need an economic team that understands government finance.  The current team is hopelessly confused, led and misguided by Robert Rubin.  …

At The Business Insider website, Henry Blodget gave a four-minute, video presentation, citing five reasons why Geithner should resign.  The text version of this discussion appears at The Huffington Post.  Nevertheless, at The Business Insider’s Clusterstock blog, John Carney expressed his belief that Geithner would not quit or be forced to leave office until after the mid-term elections in November:

We would like to see Geithner go now.

*   *   *

But there’s little chance this will happen.  The Obama administration cannot afford to show weakness.  If it caved to Congressional critics of Geithner, lawmakers would be further emboldened to chip away at the president’s authority.  Senate Republicans would likely turn the confirmation hearing of Geithner’s replacement into a brawl — one that would not reflect well on the White House or Democrat Congressional leadership.

There’s also little political upside to getting rid of Geithner now.  It will not save Congressional Democrats any seats in the mid-term election.  Obama’s popularity ratings won’t rise. None of the administration’s priorities will be furthered by firing Geithner.

All of this changes following the midterm elections, when Democrats will likely lose seats in Congress.  At that point, the administration will be looking for a fall guy.  Geithner will make an attractive fall guy.

Although there may not be much hope that the hard work of the Financial Crisis Inquiry Commission will result in any significant financial reform legislation, at least we can look forward to the resignations of Turbo Tim and Larry Summers before the commission’s report is due on December 15.



wordpress visitor