One Helluva Open Window
Posted: April 2, 2011 Filed under: financial institutions, Global Financial Crisis | Tags: Ben Bernanke, FED 23 CommentsI’m a financial economist. I’ve worked for the Fed although not in that capacity. My grandfather worked for the FED 
doing the War Bonds thing for both World Wars and my exhusband worked for the Fed straight out of college. I’d like to think I have some familiarity with at least two of the districts. I also was schooled during the monetarist ascendancy so I was endowed with a certain amount of awe and respect for monetary policy. I don’t think–as a general rule–the FED’s current open market operations should be up for purview by politicians. I think it’s just fine and dandy that stuff comes out later because I certainly don’t want monetary policy neutralized or politicized. I would, however, like Ron Paul’s 3rd century world view of economics to be neutralized. However, I think all the adults in Washington, D.C. have moved. That would include the ones in the Board of Governor’s Building.
So, why am I saying all this? Well, I’m about to announce how absolutely appalled I was to find that the FED not only opened it’s discount window to our shadow banking industry and some commercial banks abroad, but it opened the windows, doors, and vaults to just about any bank or pseudo-bank on the planet that had the misfortune to be taken in by our financiers of greed and destruction. I know the Fed dabbles around the world. We’ve had to prop up Mexico and Citibank’s adventures from time-to-time which seemed way out of its jurisdiction even with the broadest interpretation of their charter. I know they “watch” our exchange rates while talking up the competitive exchange rate regime at times. Some how, this feels WAY different. I feel in need of a shower even reading about this.
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.
The FED’s always had an ‘usual and exigent circumstances’ clause that’s given a lot of leeway in times of financial crisis. Some how, I don’t even think Woodrow Wilson figured it would be used to lend money to a fishing-cooperative financier in Japan. You can also read Yves Smith at Naked Capitalism on exactly what went on at the Discount Window and with whom. She focuses on the ‘haircuts’. That would be the lousy deals made by the Fed to bail out a lot of lousy dealers. The numbers on how many of these borrowers were junk status awes.
The information was released yesterday and Bloomberg has provided a first cut on a small but juicy portion of it, the Primary Dealer Credit Facility. From a risk standpoint, the loans mace under this program violated the central bank guideline known as the Bagehot rule: “Lend freely, against good collateral, at penalty rates”. That is the prescription if the borrower is facing a bank run, meaning a liquidity crisis. The fact that 72% of the Fed’s loans on September 29 from the Primary Dealer Credit Facility were junk or equivalent (defaulted and unrated securities or equity) is further proof that many financial firms were facing a solvency, not a liquidity, crisis.
She also shows–in her words quelle suprise–which American Banks were the little failed piggies too. I’m going to throw one of the ‘haircuts’ or discounts a the front of this quote just to curl your toes a bit. I think we can effectively say that Wall Street trashed the value of nearly every firm in the country pretty effectively.
A 95% haircut on AAA rated ABS CDOs means the paper was effectively worthless.
This first cut by Bloomberg also shows that Morgan Stanley was the biggest user of the facility, receiving $61.3 billion of funds for securities “worth” $66.5 billion, 71.6% of which was junk or unrated. As eye-popping as those numbers are, the funds received are less than half the fall in Morgan Stanley’s liquidity pool in the two weeks after the Lehman failure, per Economics of Contempt. Merrill Lynch was second, getting $36.3 billion in funding for $39.1 billion of collateral, 83.4% of which was junk or unrated.
These are not the routine activities of central banks and central bankers. We basically bankrolled a bunch of businesses and financial outfits in a bunch of countries because they wanted in on the Wall Street greed and Wall Street failed them big time. I’m left wondering why all this money was thrown to the foreign gamblers while Americans were being foreclosed on, frankly. Let me also let you know that this is probably just the tip of the iceberg since there’s undoubtedly more documents that need to be discovered and analyzed. My hope is that when the congressional hearings on this get started, we have some real brain power behind the questions that need to be asked on this because questions do need to be asked about this. I’d like a few FED Governors around for the ride to see how many of them were on board with all of this or even knew of it. What we need right now are a few Ferdinand Pecoras.
I also wonder who masterminded all this? Paulson? Geithner? Bernanke? Were they that wedded to ensuring Wall Street didn’t look like a casino and American business didn’t look like a sham that they had to give away the house, the children, the pets, and the fatted calf? They basically threw every one’s kitchen sink overseas. Worse than that, they’ve really not solved the basic systemic problem and the banks are already niggling over the details of the few thinks done by Dodd-Frank. Feel used yet?
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Were they that wedded to ensuring Wall Street didn’t look like a casino and American business didn’t look like a sham that they had to give away the house…
Yes.
Yeah. I kinda meant that rhetorically. Sure exposes our house of cards economy doesn’t it? Everything ventured. Nothing made or gained.
ah. I kinda meant that rhetorically
Of course. I answered rhetorically.
Nothing made or gained.
well not by us certainly
I’m not surprised, and it’s time to rein in the Fed. I would get rid of the Fed and create a new central bank that’s more regulated and more open.
My guess is the Treasury Department railroaded this entire thing through. I’d like to hear Bernanke explain why he did it first. The literature shows that an independent central bank–free of politics–is the most effective. I’m betting that the Geithner/Paulson team more than got to Bernanke. I’d rather see them spend time putting Wall Street back in the box and getting Wall Street out of the Treasury.
WSJ.com – Obama Sets Stage to Launch Campaign
http://on.wsj.com/g8jyJa
I though he had already…now we’ll see him more animated. Seems his vacation at 1600 Ave. is over
He’s obviously going to be the nominee and the longer the GOP is on the stage competing alone, they’re doing his dirty work for him, exposing how awful and unelectable they are. He can just play golf for another year.
Every single one of the 12 GOP presidential wannabes want to defund planned parenthood. They make neanderthals look advanced.
I wonder if Jon Huntsman would want to defund planned parenthood. He seems less neanderthal than others.
Bernanke is supposedly an expert on the causes of the Great Depression. If the depression had something to do with Coolidge/Harding and their economic policies of no taxes (especially to the rich and corporations) and big fans of no regulations – why didn’t he see this one coming when it seems to me (totally ignorant on the economy) that Bush repeated the 1920’s and got the same results?
Bernanke and the FED do monetary policy. The Federal Government does fiscal policy which is taxes and spending. To my knowledge, Bernanke’s never had any input to Bush’s fiscal policy. He was in academia and on the FEDO BOG during that time. I doubt he knew all that Wall Street was pulling at the time although he must’ve had some idea of what the banks were about. The Great Depression was the result of a excessive speculation and bad monetary policy. Bernanke did the opposite–really opposite actually–on monetary policy. He let loose the money instead of sucked it back in. By the time he got into the FED chair position, the damage on both fronts was done. He may have argued with Greenspan or may have not on some things but mostly that would be inflation policy and little else. We’ll not know about that proably But, he can’t be blamed for the Dubya tax giveaways or the spending. That’s strictly the White House and the Hill that do that.
Good article. My understanding was Bernanke was a reluctant convert to isssuing regulations (HOEPA)on bad real estate loan originations. He signed the documents after the horse was out of the barn. That alone makes me wonder about Bernanke as a leader. He certainly is not near the person that Paul Volker is.
Greenspan ued to brag about his stable of 500 brightest and best economists. Each region has people writing papers available on their sites. Jackson Hole identified problems, but the presenters literally got shouted down.
I am reading the Financial Crisis Inquiry Commissian report which is excellet on describing what went on. The fraud was so pervasive in the Investment Bank area. Things started to go bad in 2006 and 2007. Yet they (regulaters) got caught with declarative statements days befor the Bear and Lehman collapse saying things were ok.
So, I think the determination by us is left to incompetence or corruption. I think further digging would lay a lot of this at the door of Chris Cox (SEC) who was a idologue and incompetent
That’s interesting! Not that it’s much of an excuse but I can’t imagine coming in beyond Greenspan and then bumping into the biggest financial crisis since The Great Depression and not being a little overwhelmed by the Washington set. I still think the Treasury and the White Houses of the last two administrations probably railroaded a lot through but the FED chair has leverage and ultimately could’ve done things differently.
.” The Great Depression was the result of a excessive speculation and bad monetary policy. Bernanke did the opposite–really opposite actually–on monetary policy. He let loose the money instead of sucked it back in.”
Yes, he did what he had to do. But the lead up to the crisis? In ’21 Harding felt “it was immoral to tax the wealthy. He repealed a surtax on the upper income bracket. The major benefits of the ’21 tax reductions were for wealthy individuals and large corporations.”
“Other tax cuts came in ’24, 26 and 28 under Coolidge. REpublicans controlled both houses of congress from ’18 to ’28.” Also, deregulations and “let the buyer beware” policies.
Did Bernanke speak out? Krugman did. Am I stupid, or did W. repeat what happened in the 20’s? If Bernanke is an expert why wasn’t he seeing what Krugman saw?
Sorry, I guess I should’ve been clearer that as a member of the Board of Governors of the Fed he can’t really speak out on fiscal policy. As long as he was on the Board (just member, not chair) he’s really allowed to do that because they can unduly influence monetary policy. It’s considered unethical. It’s not really appropriate because fiscal policy is federal government policy and the Fed is supposed to be a politically neutral monetary authority.
Dak – did you know that when Bernanke was dept chair at Princeton, he was the one who brought in Krugman?
Yup. They were old buds at MIT I believe.
Got to get caught up, been cooking Ropa Vieja all day. I love these finance post Dak, cause it helps me understand more. I am not a good “numbers” person and you have such a good way of explaining things. 😉
“Do I feel used yet?” Every day I look out my window and see someone else living in my house. The house that BoA would not modify to help us keep it. I am so sick of being pissed on by these people.
Well some little villages in Belgium didn’t get their clocks cleaned and some Libyan money man got paid. Isn’t that just ducky?
Just read this in my reader, it is a little OT:
How a big US bank laundered billions from Mexico’s murderous drug gangs | World news | The Observer
Thank you for sharing this article with us. This is a good example on how large sums of money corrupts people and corporations.
Empty Wheel of Fire Dog Lake has further comment on this at:
http://emptywheel.firedoglake.com/2011/04/03/how-allowing-money-laundering-keeps-our-bubblicious-finance-afloat/
Apparently this was reported on by Bloomberg last June