As we all know and remember, The Fed refused to discuss the details of how they were dispensing our money under the TARP program. They claimed it was necessary to maintain the secrecy because otherwise the institutions that were receiving the monies would have to face a public reaction of no confidence which in turn could cause customers and clients to lose faith in the institution and this reaction would make an already bad economic crisis worse. Remember that?
Well on April 1 as reported by 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 problem is this: The Fed is not authorized to BUY anything other than those securities that have the full faith and credit of The United States. In addition Ben Bernanke has repeatedly claimed that these deals would not cost anyone money. But the current value looks differently:
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. In other words, they have lost more than half of their value.
This was and remains a blatantly unlawful activity. The Fed has effectively usurped Article 1 Section 7 of The Constituion which reads in part: All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills. The Fed effectively appropriated taxpayer funds without authorization of Congress. At the time these facilities were put in place neither TARP or any other Congressional authorization existed for them to do so, and to date no bill has been put through Congress authorizing the expenditure of taxpayer funds, either through putting them at risk or via outright expense, for this purpose. Nor does it stop with a “mere” Constitutional violation – The Federal Reserve Act’s Sections 13 and 14 do not permit Fed asset purchases except, once again, for items carrying “full faith and credit” guarantees. Credit-default swaps and trash mortgages most certainly do not meet these qualifications.
Amending The Federal Reserve Act of 1913 (as Chris Dodd has proposed to prevent future lending bailouts) is not sufficient in that The Fed did not lend in this case, it purchased, and by buying what we now know were trash loans it violated the black letter of existing law. There is only one effective remedy for an institution that has proved that it will not abide the law: it must be stripped of all authority that has been in the past and can be in the future abused. This means that The Fed, if we are to keep it at all, must be relegated to a body that only practices and provides monetary policy – nothing more or less – and that all monetary operations must be performed openly, transparently, and within those constraints.
We cannot have a republic where an unelected body is left free to violate The Constitution with wild abandon and those acts are then allowed to stand.
As I have said many times in this blog, credit derivatives are weapons of mass destruction. “The need for disclosure in the swap markets is enormous, yet the will to act is missing because of a small cadre of special interests”, said Harold Bradley, who oversees almost $2 billion in assets as chief investment officer at Kauffman. “There is no incentive from the moneyed interests in either Washington or New York to change it,” Bradley told the Reuters Global Exchanges and Trading Summit in New York. “I believe we are in a cabal. There are five or six players only who are engaged and dominant in this marketplace and apparently they own the regulatory apparatus,” he said. “Everybody is afraid to regulate them.”
U.S. and European officials are trying to craft new rules to regulate the $450 trillion private derivatives market in broad efforts to avoid another financial crisis. Policy-makers generally agree that most standardized derivatives should be traded on exchanges or cleared through a clearinghouse, which would assume the risk of a default. Bradley said those efforts fall short. There needs to be a national market system for fixed income and credit with displayed prices and the posting of open interest and market positions, he said. Instead, he said regulators have found a boogeyman in high-frequency trading, which has taken the focus off the highly levered derivatives market. After falling in 2008, the nominal value of derivatives is now greater than ever at about $204.3 trillion, according to Ned Davis Research Inc.
In trying to downplay the seriousness of the situation and cover the fact that nothing substantial of any nature has been done to deal with the situation there is this from the Washington’s Blog:
Tim Geithner told the Today Show that:
It’s “deeply unfair” that some financial institutions that got taxpayer-paid bailouts are emerging in better shape from the recession than millions of ordinary Americans. Geithner also argued that President Barack Obama had no choice when confronted with a financial crisis. “As the president has said, we had to do some very unpopular things,” Geithner said. “People looked at what had happened.””It’s not fair. It’s deeply unfair,” he said. “He (Obama) had to decide whether he was going to act to fix it or stand back … and that would have been calamitous for the American economy.”
There are only a couple of minor inaccuracies in Geithner’s statements:
- Geithner’s entire approach is wrong, because the economy can’t recover until many of the “financial institutions that got taxpayer-paid bailouts [and] are emerging in better shape” are broken up
- The government has been anemic in addressing unemployment
Moreover, it is not like their approach fell on them and they couldn’t do anything about it. Geithner, Summers, Bernanke and the boys made a conscious decision to side with the oligarchy at the expense of the people. As Simon Johnson and James Kwak write:
[There was a] point at which the government had to decide if it would defend the financial oligarchy from populist outrage, or whether it would reform the financial system that brought us the financial crisis and severe recession. We do not think it was an easy choice. But ultimately Obama and his advisers chose to bet on the bankers they knew. The result has been even larger banks and an even more concentrated financial sector. Geithner also told the Today Show that he hopes skeptical voters will note legislation moving through Congress to bring reforms to the financial system.
He’s banking, of course, on the fact that many voters won’t realize that the legislation is a placebo containing no real medicine. Geithner ended the interview with this pearl of wisdom:
“What happened in our country should never happen again,” he said. “People were paid for taking enormous risks. It was a crazy way to run a financial system.” Geithner said, “It’s the government’s job … to do a better job of restraining that kind of risk-taking.” Indeed … too bad that Geithner and the boys are still encouraging that kind of risk-taking. Geithner was, of course, largely responsible for much of the failure of the government to restrain risk-taking in the first place.
As William Black points out:
Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth. Geithner was also complicit in Lehman’s accounting fraud . And pushed to pay AIG’s CDS counterparties at full value, and then to keep the deal secret. And as Robert Reich notes today, Geithner was “very much in the center of the action” regarding the secret bail out of Bear Stearns without Congressional approval.
I have stated many times that the next big shoe to drop is the CDS crisis in the commercial sector. One has to worry when the Fed calls an emergency closed door meeting as it did late last week. They NEVER have emergency meetings unless the sky is falling or in this case how they are going to foist another big bailout plan on the American people, because you can bet this meeting wasn’t about raising rates because the economy is doing that well. How many shakedowns are we going to tolerate?
Here’s Uncle Willie’s thought for the day: