Posts Tagged ‘new york fed’
An audit of the Federal Reserve has revealed that the privately owned Federal Reserve secretly doled out more than $16 trillion in zero interest loans to some of the largest financial institutions and corporations in the United States and throughout the world. The non-partisan, investigative arm of Congress also determined that the Federal Reserve acted illegally. In fact, according to the report, the Federal Reserve knew their financial transactions were illegal and provided conflict of interest waivers to its employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans. The report is evidence that reveals major securities fraud in the embezzlement of $16 trillion by the Federal Reserve. Securities fraud and embezzlement are both felony criminal offenses.
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted. Embezzlement is performed in a manner that is premeditated, systematic and/or methodical, with the explicit intent to conceal the activities from other individuals, usually because it is being done without their knowledge or consent. U.S. Code TITLE 18 > PART I > CHAPTER 31 – EMBEZZLEMENT AND THEFT § 644. Banker receiving unauthorized deposit of public money
Whoever, not being an authorized depositary of public moneys, knowingly receives from any disbursing officer, or collector of internal revenue, or other agent of the United States, any public money on deposit, or by way of loan or accommodation, with or without interest, or otherwise than in payment of a debt against the United States, or uses, transfers, converts, appropriates, or applies any portion of the public money for any purpose not prescribed by law is guilty of embezzlement and shall be fined under this title or not more than the amount so embezzled, whichever is greater, or imprisoned not more than ten years, or both; but if the amount embezzled does not exceed $1,000, he shall be fined not more than $1,000 or imprisoned not more than one year, or both.
$16 trillion is 10 times more than what the U.S. Congress authorized and Bush ($700 billion) and Obama ( $787 billion) signed off on. The Federal Reserve was only authorized by Congress to disburse $1.487 trillion in federal tax dollars in bailouts. The Federal Reserve embezzled another $14.5 trillion.
The Congressional report determined that the Fed secretly hide most of the embezzled money into their own banks. The rest the Fed unilaterally transfered trillions of dollars to foreign banks and corporations from South Korea to Scotland. Foreign banks and corporations which the Federal Reserve bankers had a personal financial interest or stake in.
The report reveals that the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in federal money from the Fed – conflict of interest. Moreover, JP Morgan Chase served as one of the clearing banks (money laundering banks) for the Fed’s emergency loans programs (aka – embezzlement schemes).
In another disturbing finding, the Government Accountability Office said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given federal funds. One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it would have exposed the Fed’s conflict of interest and major securities fraud in the embezzlement of $16 trillion.
The investigation also revealed that the Fed outsourced most of its embezzling to private contractors, many of which were rewarded with extremely low-interest and then-secret loans.
The Fed outsourced virtually all of the operations of their $16 trillion embezzlement scheme to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo. For their part the same firms also received trillions of dollars in Fed loans at near-zero interest rates. Morgan Stanley helped the Federal Reserve banker launder embezzled $trillions into AIG.
A more detailed Government Accountability Office investigation into corruption charges, securities fraud, embezzlement, money-laundering and conflicts of interest at the Fed was due on Oct. 18. The Sanders Report on the GAO Audit on Major Conflicts of Interest at the Federal Reserve
Did you know that the $14.5 trillion the Federal Reserve embezzled (US Congress only authorized $1.487 trillion) could pay the entire U.S. national debt – $14.346 trillion. To avert default the U.S. government need only to seize the assets of the Federal Reserve banks (the big six U.S. banks collectively hold about $9.399 trillion in assets) and get back the $trillions that the Federal Reserve illegally embezzled and money laundered to their foreign banks and corporations.
The U.S. government can recover $trillions from the Federal Reserve and their banks through asset forfeiture. Asset forfeiture is confiscation, by the State, of assets which are either (a) the alleged proceeds of crime or (b) the alleged instrumentalities of crime, and more recently, alleged terrorism. Proceeds of crime means any economic advantage derived from or obtained directly or indirectly from a criminal offense or criminal offenses. Crimes committed by the Federal Reserve banks against the United States and its people include; conflict of interest, securities fraud, embezzlement, fraud, money laundering, hoarding, profiteering, larceny, racketeering . . .
In 1982, a criminal forfeiture provision was enacted as part of the Racketeering Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961, which provided for the forfeiture of all property over which the RICO organization exercised an influence.
The Money Laundering Control Act of 1986 added new felony provisions at 18 U.S.C. § 1956 for the laundering of the proceeds of certain defined “specified unlawful activity,” as well as prohibiting structuring transactions under 31 U.S.C. § 5324 (with the intent to evade certain reporting requirements). The law also added civil and criminal forfeiture provisions at 18 U.S.C. §§ 981 and 982 for confiscating the property involved in money laundering.
According to the Legislative Guide to the United Nations Convention against Transnational Organized Crime and the Protocols Thereto, “Criminalizing the conduct from which substantial illicit profits are made does not adequately punish or deter organized criminal groups. Even if arrested and convicted, some of these offenders will be able to enjoy their illegal gains for their personal use and for maintaining the operations of their criminal enterprises. Despite some sanctions, the perception would still remain that crime pays. . . . Practical measures to keep offenders from profiting from their crimes are necessary. One of the most important ways to do this is to ensure that States have strong confiscation regimes”
Top 10 Banks in the United States
As of Mar. 31, 2010.
Source: Federal Reserve System, National Information Center.
According to United States Code, TITLE 12 CHAPTER 3 SUBCHAPTER IX § 341. Second. states that the U.S. Federal Reserve Banks can be dissolved today by “forfeiture of franchise for violation of law.” Securities fraud and embezzlement by the Federal Reserve Bank is cause for immediate forfeiture and imprisonment of the Federal Reserve and its bankers.
List of banks involved in the $16 trillion + securities fraud and embezzlement
The Federal Reserve Bank of New York provides an up to date list of “Primary Dealers” obligated to implement the Federal Reserve fraud and embezzlement scheme. http://www.newyorkfed.org/markets/pridealers_current.html
“Primary dealers serve as trading counterparties of the New York Fed in its implementation of (Fed) monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed‘s trading desk with market information and analysis (non-public stock market information – aka insider trading) helpful in the formulation and implementation of monetary policy (so that the Fed can profit from this insider information). Primary dealers are also required to participate in all auctions of U.S. government debt (acquiring wealth generated from the transactions of the illicit funds – aka money laundering for the Fed) and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders. (the New York Fed is stating who they are working for – on behalf of its foreign official account- holders)”
List of Primary Dealers (Fed’s money laundering banks. Listed in alphabetical order only.)
Bank of Nova Scotia, New York Agency (the third largest bank in Canada. Opened New York Agency in 1907)
BMO Capital Markets Corp. (the fourth largest Canadian bank)
BNP Paribas Securities Corp. (Paris, France)
Barclays Capital Inc. (London, United Kingdom)
Cantor Fitzgerald & Co. (United States)
Citigroup Global Markets Inc. (CIA drug money laundering bank, United States)
Credit Suisse Securities (USA) LLC (Zurich, Switzerland)
Daiwa Capital Markets America Inc. (Tokyo, Japan)
Deutsche Bank Securities Inc. (Frankfurt, Germany.)
Goldman, Sachs & Co. (United States)
HSBC Securities (USA) Inc. (founded in Hong Kong, headquarters London, United Kingdom)
Jefferies & Company, Inc. (United States)
J.P. Morgan Securities LLC (United States)
Merrill Lynch, Pierce, Fenner & Smith Incorporated (United States)
Mizuho Securities USA Inc. (Tokyo, Japan)
Morgan Stanley & Co. LLC (United States)
Nomura Securities International, Inc. (Tokyo, Japan)
RBC Capital Markets, LLC (a Canadian investment bank, part of Royal Bank of Canada)
RBS Securities Inc. (Royal Bank of Scotland Group)
SG Americas Securities, LLC (United States)
UBS Securities LLC. (Zürich & Basel, Switzerland. Rothschild controlled. The Rothschild family hold the popes purse strings from this bank – the keys of the Vatican is a predominate part of their logo.)
All of the above named banks (includes both U.S. and foreign banks) money launder the over $16 trillion (U.S) that the Federal Reserve embezzled. These banks money launder the Fed embezzled U.S. Tax Dollars in three steps:
1) the illicit funds are introduced into the financial system by “placement”,
2) the “Primary Dealers” carrying out complex financial transactions in order to camouflage the illicit funds (“layering”), and
3) they acquire wealth generated from the transactions (loans, mortgages, stock market trading) of the illicit funds (“integration”).
All listed banks are controlled by the European Central Bank (Rothschild family) which controls it all for the Vatican, which is headed by the Nazi German Pope. All are working to enslave the World under a New World Order, aka Fourth Reich, aka Fourth unHoly Roman Empire.
Read the entire article HERE.
By Neil Irwin
July 21, 2011
For instance, William C. Dudley, the president of the Federal Reserve Bank of New York who was a senior official there in 2008, owned stock of American International Group before the Fed bailed out the giant insurance firm. The GAO report did not mention him by name, but Sen. Bernie Sanders (I-Vt.), who spearheaded the audit, identified Dudley as the unnamed official described in the report.
Lawyers at the New York Fed allowed Dudley to continue owning the shares while working on issues relating to the bailout. They concluded that for him to sell the shares immediately after the central bank bailed out the firm would be more ethically problematic than simply holding onto them and selling at a later date.
Dudley “held shares in these companies as part of his personal portfolio that predated his service at the New York Fed,” a spokesman for the central bank said. “A waiver was granted allowing him to hold these shares based in part on the judgement that had he sold these shares immediately after the interventions it would have the appearance of a conflict.”
The GAO report did not condemn the Fed’s actions, it simply illuminated them. Dudley has subsequently sold all the shares on dates agreed to with the bank’s ethics officers, the spokesman said.
The GAO also recommended that the Fed make clearer and more rigorous its policies for hiring independent contractors to manage investment programs. During the crisis, the New York Fed hired outside firms to manage many of its special lending programs, such as one designed to backstop the market for short-term corporate loans, without holding a normal bidding process for the contracts.
The report also found that lines of authority between the Fed’s Board of Governors in Washington and the 12 regional Fed banks around the country were sometimes muddled during the crisis. For example, it was not always clear where authority resided on questions of what collateral would be adequate for an emergency loan.
The report was the latest to detail aspects of the Fed’s actions during the financial crisis that were shrouded in mystery at the time. Another provision in last year’s Dodd-Frank Wall Street regulatory overhaul, also instigated by Sanders, required the disclosure of what individual banks and other entities received loans from the Fed.
“As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world,” Sanders said in a statement. “This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else.”
The Fed’s general counsel, Scott Alvarez, said in a letter responding to the GAO’s audit that officials will “strongly consider” the recommendations.
Read the entire article HERE.
By Eamon Javers
Tuesday, 21 Jun 2011 | 7:30 PM ET
CNBC Washington, DC Correspondent
The New York Fed is refusing to tell investigators how many billions of dollars it shipped to Iraq during the early days of the US invasion there, the special inspector general for Iraq reconstruction told CNBC Tuesday.
The Fed’s lack of disclosure is making it difficult for the inspector general to follow the paper trail of billions of dollars that went missing in the chaotic rush to finance the Iraq occupation, and to determine how much of that money was stolen.
The New York Fed will not reveal details, the inspector general said, because the money initially came from an account at the Fed that was held on behalf of the people of Iraq and financed by cash from the Oil-for-Food program. Without authorization from the account holder, the Iraqi government itself, the inspector general’s office was told it can’t receive information about the account.
The problem is that critics of the Iraqi government believe highly placed officials there are among the people who may have made off with the money in the first place.
And some think that will make it highly unlikely the Iraqis will sign off on revealing the total dollar amount.
“My frustration is not with the New York Fed, it is with the Iraqis,” said Stuart Bowen Jr., the Special Inspector General for Iraq reconstruction (SIGIR). “They haven’t been sufficiently responsive.”
As for the New York Fed’s position of secrecy about the total amount transferred to Iraq, Bowen said, “We understand it in the sense that it’s a foreign account and the account holder, according to their own rules, must provide permission.”
A spokesman for the New York Fed issued a statement to CNBC Tuesday evening. “The New York Fed has cooperated closely with SIGIR during its investigations and will continue to do so, in accordance with our policies related to disclosing customer account information, which generally includes receiving the consent of the account holder,” the spokesman said.
The impasse comes as the inspector general continues a massive and years-long investigation into what happened to billions of dollars in cash that left the New York Fed and vanished during the US occupation.
It was one of the largest shipments of cash in history. And the inspector general says that if the money was stolen, that would represent the largest heist in history.
According to a 2007 investigative report by Donald L. Bartlett and James B. Steele in Vanity Fair magazine, the cash originated from a little-known Fed vault located at 100 Orchard Street in East Rutherford, NJ, the largest depository of American currency in the world.
On Tuesday, June 22, 2004, the duo reported, unmanned vehicles loaded a tractor-trailer truck with pallets of $100 bills — weighing 30 tons and worth $2.4 billion — and that truck headed out onto New Jersey Route 17 bound for Andrews Air Force Base outside of Washington, DC.
There, the money was transferred to a C-130 transport plane and flown to Baghdad.
The cash transfer on that one day was just one of several such shipments of currency to Iraq, and the inspector general is trying to determine just how much was sent, and how much was stolen once it arrived in Iraq.
“We don’t have access to the Federal Reserve account to know how much money actually came out of the Fed,” said Jason Venner, the inspector general’s chief auditor. “They won’t tell us.”
Venner said that the inspector general plans to make a formal request of the Iraqi government to release the account information during a meeting in Jordan next week of the International Advisory and Monitoring Board, the body that oversees development funds for Iraq.
Determining the total amount of money that has gone missing — and who was responsible for losing it — is much more than an academic question. Some Iraqi government officials have threatened to sue the United States over the missing money, arguing that the government had a fiduciary obligation to apply appropriate financial controls, and is therefore liable for any losses.
If that effort overcomes the many legal challenges it would face, the lost money would have to be replaced — at the US taxpayers’ expense.
Read the entire article HERE.
By Bradley Keoun and Craig Torres
Apr 1, 2011 10:53 AM PT
U.S. Federal Reserve Chairman Ben S. Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.
Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed’s “discount window” lending program, according to Fed documents released yesterday in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion.
The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record. The disclosures may stoke a reexamination of the risks posed to U.S. taxpayers by the central bank’s role in global financial markets.
“The caricature of the Fed is that it was shoveling money to big New York banks and a bunch of foreigners, and that is not conducive to its long-run reputation,” said Vincent Reinhart, the Fed’s director of monetary affairs from 2001 to 2007.
Separate data disclosed in December on temporary emergency- lending programs set up by the Fed also showed big foreign banks as borrowers. Six European banks were among the top 11 companies that sold the most debt overall — a combined $274.1 billion — to the Commercial Paper Funding Facility.
The discount window, which began lending in 1914, is the Fed’s primary program for providing cash to banks to help them avert a liquidity squeeze. In an April 2009 speech, Bernanke said that revealing the names of discount-window borrowers “might lead market participants to infer weakness.”
The Fed released the documents after court orders upheld FOIA requests filed by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. In all, the Fed released more than 29,000 pages of documents, covering the discount window and several Fed emergency-lending programs established during the crisis from August 2007 to March 2010.
“The American people are going to be outraged when they understand what has been going on,” U.S. Representative Ron Paul, a Texas Republican who is chairman of the House subcommittee that oversees the Fed, said in a Bloomberg Television interview.
“What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas?” said Paul, who has advocated abolishing the Fed. “We have problems here at home with people not being able to pay their mortgages, and they’re losing their homes.”
David Skidmore, a Fed spokesman, declined to comment. Fed officials have said all the discount window loans made during the worst financial crisis since the 1930s have been repaid with interest.
The Monetary Control Act of 1980 says that a U.S. branch or agency of a foreign bank that maintains reserves at a Fed bank may receive discount-window credit.
“Our job is to provide liquidity to keep the American economy going,” Richard W. Fisher, president of the Federal Reserve’s regional bank in Dallas, told reporters today. “The loans were all paid back and they were well-collateralized.”
Wachovia Corp. was the only U.S. bank among the top five discount-window borrowers as the crisis peaked.
The company, based in Charlotte, North Carolina, borrowed $29 billion from the discount window on Oct. 6, in the week after it almost collapsed, the data show. Wachovia agreed in principle to sell itself to Citigroup Inc. on Sept. 29, before announcing a definitive agreement to sell itself to Wells Fargo & Co. (WFC) on Oct. 3. The Wells Fargo deal closed at the end of 2008.
Wells Fargo spokeswoman Mary Eshet declined to comment on Wachovia’s discount-window borrowing.
Bank of Scotland Plc, which had $11 billion outstanding from the discount window on Oct. 29, 2008, was a unit of Edinburgh-based HBOS Plc, which announced its takeover by London-based Lloyds TSB Group Plc in September 2008.
The borrowings in 2008 didn’t involve Lloyds, which hadn’t completed its acquisition of HBOS at the time, said Sara Evans, a spokeswoman for the company, which is now called Lloyds Banking Group Plc. (LLOY)
“This is historic usage and on each occasion the borrowing was repaid at maturity,” Evans said. “The discount window has not been accessed by the group since.”
Other foreign discount-window borrowers on Oct. 29, 2008, included Societe Generale (GLE) SA, France’s second-biggest bank; and Norinchukin Bank, which finances and provides services to Japanese agricultural, fishing and forestry cooperatives. Paris- based Societe Generale borrowed $5 billion that day, and Tokyo- based Norinchukin borrowed $6 billion.
Jim Galvin, a spokesman for Societe Generale, declined to comment.
“We used it in concert with Japanese and U.S. authorities in the purpose of contributing to the stabilization of the market,” said Fumiaki Tanaka, a spokesman at Norinchukin.
Bank of China
Bank of China, the country’s oldest bank, was the second- largest borrower from the Fed’s discount window during a nine- day period in August 2007 as subprime-mortgage defaults first roiled broader markets. The Chinese bank’s New York branch borrowed $198 million on Aug. 17 of that month.
“It was just routine borrowing,” said Dale Zhu, head of the Bank of China New York branch’s treasury.
Two Deutsche Bank AG divisions borrowed $1 billion each, according to a document released yesterday.
Arab Banking Corp., then 29 percent-owned by the Libyan central bank, used its New York branch to get at least 73 loans from the Fed in the 18 months after Lehman Brothers Holdings Inc. collapsed. The largest single loan amount outstanding was $1.2 billion in July 2009, according to the Fed documents.
The foreign banks took advantage of Fed lending programs even as their host countries moved to prop them up or orchestrate takeovers.
Dexia received billions of euros in capital and funding guarantees from France, Belgium and Luxembourg during the credit crunch.
The Fed loans were “secured by high-quality U.S. dollar municipal securities,” and used only to fund U.S. loans, bonds and other financial assets, Ulrike Pommee, a spokeswoman for the company, said in an e-mail.
“The Fed played its role as central banker, providing liquidity to banks that needed it,” she said, adding that Dexia’s outstanding balance at the Fed has been reduced to zero. “This information is backward-looking.”
Depfa was taken over in October 2007 by Hypo Real Estate Holding AG, which in turn was seized by the German government in 2009.
“Since the end of May 2010, Depfa is not making use of the Federal Reserve Discount Window,” Oliver Gruss, a spokesman for the bank, said in an e-mailed statement. He declined to comment further.
Many foreign banks own large pools of dollar assets — bonds, securities and loans — funded by short-term borrowings in money markets. The system works when markets are calm, said Dino Kos, former executive vice president at the New York Fed in charge of open-market operations. In times of stress, banks can be subject to sudden liquidity squeezes, he said.
“They are playing with fire,” said Kos, a managing director at Hamiltonian Associates Ltd. in New York, an economic research firm. “When the market dries up, and they can’t roll over their funding — bingo, you have a liquidity crisis.”
The potential for dollar shortages remains. As the Greek fiscal crisis roiled financial markets last year, the Fed had to open swap lines with the European Central Bank, the Swiss National Bank, the Bank of England and two other central banks to make more dollars available around the world. That move was partially the result of U.S. money market funds shrinking their exposure to European bank commercial paper.
Bloomberg News is posting the Fed documents here for subscribers to the Bloomberg Professional Service as well as online at www.bloomberg.com.
Read the entire article HERE.
Jim Grant: “The Fed Is Now In The Business Of Manipulating The Stock Market…Should Confess It Has Sinned Grievously”
Tyler Durden on 01/28/2011 16:03 -0500
Jim Grant, who will never be accused of being a fan of the Criminal Reserve, and whose views on what will happen to asset prices in a printer-happy world are gradually being validated, appeared on Bloomberg TV, telling Margaret Brennan upfront that Bernanke owes the world an apology. Alas, after various revolutions around the world have been catalyzed by Bernanke’s policies, we have a feeling that ever more oppressed people will soon see the Printer in Chief as a patron saint of violent revolution, alas against crony regimes fully supported by the US (and hopefully the US will view it the same way when its time comes). That aside, Grant’s criticism of the Fed should really start to grate on the Chaircreature: “I think what would be very good for the Fed if there would be a confession, the Fed should confess that it has sinned grievously, and is in violation of every single precept of its founders and every single convention of classical central banking. Quantitative Easing is a symptom of the difficulties that the Fed has created for itself. The Fed is running a balance sheet which if it were the balance sheet attached to a bank in the private sector would probably move the FDIC to shut it down. The New York Branch of the Fed is leveraged more than 80 to 1. Meaning, that a loss of asset value of less than 1.5% would send it into receivership if it were a different kind of institution…The Fed is now in the business of manipulating the stock market.” Jim also has some very critical discussions on how the Fed never settles up on the $3.4 trillion in custodial debt on its books. As always, we can’t get enough as more and more mainstream figures turn to bashing that biggest abortion of modern capital markets.
Read the entire article and news clip HERE.
Thursday, April 1, 2010
The Fed has finally came clean. It now admits it bailed out Bear Stearns – taking on tens of billions of dollars of the bank’s bad loans – in order to smooth Bear Stearns’ takeover by JPMorgan Chase. The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed. The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout.
The losses from those deals still total tens of billions, and taxpayers are ultimately on the hook. But the public never knew. There was no congressional oversight. It was all done behind closed doors. And the New York Fed – then run by Tim Geithner – was very much in the center of the action.
This raises three issues.
First, only Congress is supposed to risk taxpayer dollars. The Fed is not part of the legislative branch. Its secret deals, announced almost two years after they were done, violate the democratic process, if not the Constitution itself. Thomas Jefferson put a stop to Alexander Hamilton’s idea of a powerful central bank out of fear it would be unaccountable to the public. The Fed has just proven Jefferson’s point.
Second, if the Fed can secretly bail out big banks, the problem of “moral hazard” – bankers taking irresponsible risks because they know they’ll be rescued – is far greater than anyone assumed after Congress and the Bush and Obama administrations bailed out the banks. Big banks will always be too big to fail because they know the Fed will secretly back them up if they get into trouble, even if Congress won’t do it openly.
Third, the announcement throws a monkey wrench into the financial reform bill now on Capitol Hill, which gives the Fed additional authority by, for example, creating a consumer protection bureau inside it. Only yesterday, Sen. Jim DeMint (R-S.C.) blasted the Dodd bill for expanding the Fed’s authority “even as it remains shrouded in secrecy.”
The Fed has a big problem. It acts in secret. That makes it an odd duck in a democracy. As long as it’s merely setting interest rates, its secrecy and political independence can be justified. But once it departs from that role and begins putting billions of dollars of taxpayer money at risk — choosing winners and losers in the capitalist system — its legitimacy is questionable.
That it chose to reveal the truth about its activities during a week when Congress is out of town, when much of official Washington and the Washington media have gone on vacation, and only after several federal courts have held that the Fed must release documents related to its bailout of Bear Stearns, suggests it would rather remain secret than become transparent.
Read the entire article HERE.
Original Bloomberg Article:
April 1 (Bloomberg) — After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout.
In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.
The Fed’s vehicle known as Maiden Lane LLC has securities backed by mortgages from lenders including Washington Mutual Inc. and Countrywide Financial Corp., loans that were made with limited borrower documentation. More than $1 billion of them are backed by “jumbo” mortgages written by Thornburg Mortgage Inc., which now carry the lowest investment-grade rating. Jumbo loans were larger than government-sponsored mortgage buyers such as Fannie Mae could finance — $417,000 at the time.
“The Fed absorbed that risk on its balance sheet and is now seen to be holding problematic, legacy assets,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who was the central bank’s monetary- affairs director from 2001 to 2007. “There is both an impairment to its balance sheet and its reputation.”
The Bear Stearns deal marked a turning point in the financial crisis for the Fed. By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the U.S. Treasury, said Marvin Goodfriend, a former Richmond Fed policy adviser who is now an economist at Carnegie Mellon University in Pittsburgh.
“Lack of clarity on the boundary between responsibilities of the Fed and of the Congress as much as anything else created panic in the fall of 2008,” Goodfriend said. “That created a situation in which what had been a serious recession became something near a Great Depression.”
Central bankers also created moral hazard, or a perception for investors that any financial firm bigger than Bear Stearns wouldn’t be allowed to fail, said David Kotok, chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey.
Policy makers’ resolve was tested months later by runs against the largest financial companies. Lehman Brothers Holdings Inc. collapsed into bankruptcy in September 2008. The ensuing panic caused the Fed to take even more emergency measures to push liquidity into markets and institutions. It rescued American International Group Inc. from collapse and allowed Goldman Sachs Group Inc. and Morgan Stanley to convert into bank holding companies, putting them under greater oversight by the central bank.
“Letting somebody fail early would have been a better choice,” Kotok said. “You would have ratcheted moral hazard lower and Lehman wouldn’t have been so severe.”
The Bear Stearns assets include bets against the credit of bond insurers such as MBIA Inc., Financial Security Assurance Holdings Ltd. and a unit of Ambac Financial Group, putting the Fed in the position of wagering companies will stop paying their debts.
The Fed disclosed that some of Maiden Lane’s assets were portions of commercial loans for hotels, including Short Hills Hilton LLC in New Jersey, Hilton Hawaiian Village LLC in Hawaii, and Hilton of Malaysia LLC, in addition to securities backed by residential mortgages.
More than a year after Washington Mutual, the largest U.S. savings and loan, was purchased by JPMorgan Chase in a distressed sale arranged by the Federal Deposit Insurance Corp., the home loans that helped bring down the Seattle-based thrift live on in the Maiden Lane portfolio.
For example, 94 percent of the mortgages in one security, called WAMU 06-A13 2XPPP, required limited documentation from borrowers, meaning the lender often didn’t ask customers for proof of their incomes. Almost 10 percent of the borrowers whose mortgages make up the security have been foreclosed on, and almost a quarter are more than two months late with payments, according to data compiled by Bloomberg.
The portfolio also includes $618.9 million of securities backed by Countrywide, mortgages now rated CCC, eight levels below investment grade. All the underlying loans are adjustable- rate mortgages, with about 88 percent requiring only limited borrower documentation, according to Bloomberg data. About 33.6 percent of the borrowers are at least 60 days late. Countrywide is now part of Charlotte, North Carolina-based Bank of America Corp.
Maiden Lane has $19.5 million of securities from a series of collateralized debt obligations called Tropic CDO that are backed by trust preferred securities of community banks and thrifts. CDOs are investment pools made up of a variety of assets that provide a flow of cash.
Trust preferred securities, or TruPS, have characteristics of debt and equity and their interest payments are tax- deductible.
The securities created by Bear Stearns are rated C, one level above default, by Moody’s Investors Service and Fitch Ratings.
CDO securities have tumbled in value as banks are failing at the fastest rate in 17 years, according to data compiled by Bloomberg. The average price of TruPS CDO debt of this rating is pennies on the dollar, according to Citigroup Inc.
“The trust of the taxpayer was abused,” said Janet Tavakoli, president of Chicago-based financial consulting firm Tavakoli Structured Finance Inc. CDOs rated CCC and lower “have a high likelihood of default,” she said.
Chairman Ben S. Bernanke defended the Bear Stearns deal as a rescue of the financial system. He said in a speech at the Kansas City Fed’s annual Jackson Hole, Wyoming conference in August 2008 that a sudden Bear Stearns failure would have caused a “vicious circle of forced selling” and increased volatility.
“The broader economy could hardly have remained immune from such severe financial disruptions,” Bernanke said in the speech. The Fed chief, who took office in 2006 and began his second term as chairman this year, also has repeatedly called for an overhaul of financial regulations that would allow authorities to take over a failing financial institution and oversee an orderly unwinding of its positions.
Bernanke said last year that nothing made him “more angry” than the AIG case, blaming the insurer for making “irresponsible bets” and a lack of regulatory oversight for the debacle. Officials “had no choice but to try and stabilize the system” by aiding the firm in September 2008, he said.
Yesterday’s release by the Fed, through its New York regional bank, also identified securities acquired in the bailout of AIG held in vehicles known as Maiden Lane II and III.
Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed.
Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades.
“The Federal Reserve recognizes the importance of transparency to its financial stability efforts and will continue to review disclosure practices with the goal of making additional information publicly available when possible,” the New York Fed said in yesterday’s statement.
Deal With Chase
The central bank said it reached agreement on “issues of confidentiality” for the assets with JPMorgan Chase, which bought Bear Stearns in 2008, and AIG. New York-based JPMorgan and AIG would incur the first losses on the portfolios.
Joe Evangelisti, a spokesman for JPMorgan, and Mark Herr, a spokesman for AIG, declined to comment.
In April 2008, Bloomberg News requested records under the federal Freedom of Information Act from the Fed’s Board of Governors related to JPMorgan’s acquisition of Bear Stearns. The central bank responded that records retained by the New York Fed “were proprietary records of the Reserve Bank, and not Board records subject” to the request, court records show.
Bloomberg filed suit in November 2008 in U.S. District Court in New York, challenging the Fed’s denial, as well as the denial of a separate request made in May 2008, seeking records of four other emergency lending programs.
The district court held that the Fed should release documents related to those four programs, and should search documents held by the New York regional bank to determine whether any of them should be considered records of the board of governors.
The U.S. Court of Appeals on March 19 upheld the district court’s ruling on the lending programs.
Representative Darrell Issa of California said in a statement that yesterday’s disclosure may “signal a new willingness to cooperate with Congress as we investigate how these bailout deals were structured and what the decision making process entailed.”
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