Tag: Ben Bernanke

With sequestration looming, many Americans are still struggling to recover from the the 2008 recession that cost them billions in lost savings and jobs but not the banks who were the chief perpetrators for the housing crash. As a matter of fact, American tax payers are still bailing out the “Too Big To Jail” banks $83 billion a year:

So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers? [..]

Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail. [..]

The top five banks — JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc [..] with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

It is outrageous that Americans are being bludgeoned with $85 billion in austerity cuts that will most likely halt any recovery while handing banking shareholders an $83 billion gift.

During his appearance before the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke was asked by freshman Sen. Elizabeth Warren about about the risks and fairness of having banks that are “too big to fail”

Warren quizzed Bernanke on that study. “I understand that we’re all trying to get to the end of too big to fail, but my question, Mr. Chairman, is until we do, should those biggest financial institutions be repaying the American taxpayer that $83 billion subsidy that they’re getting?”

Bernanke responded, “The subsidy is coming because of market expectations that the government would bail out these firms if they failed. Those expectations are incorrect.”

After some back and forth, Warren countered, “$83 billion says there really will be a bailout for the largest institutions.”

“That’s the expectation of markets. But that doesn’t mean we have to do it,” Bernanke responded.

Warren insisted that the large banks should pay for the subsidy. “Ordinary folks pay for homeowners’ insurance, ordinary folks pay for car insurance, and these big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe that the government would step in and bail them out. I’m just saying, if they’re getting it, why shouldn’t they pay for it?” she said.

“I think we should get rid of it,” Bernanke said. He said he agreed with her that government should address the problem of “too big to fail.”

Meanwhile, as Chris in Paris at AMERICAblog points out these banking executives are the forefront of the attack on the social safety net:

You may recall Goldman Sachs CEO Lloyd Blankfein, the guy who Obama has a strange bromance with, adjusted bonus payout dates in both the US and UK to avoid paying taxes. You know, as in the taxes that saved his entire lifestyle.

Even worse is Blankfein’s insistence on bashing programs that are critical to middle class Americans. It’s the Blankfeins of the world that want to take your Medicare and Social Security away.  God forbid we ran out of money and there weren’t any left to bail out the banks next time, right?

Then there’s my other favorite bankster, good old Jamie Dimon of JPMorgan. Dimon is the delightful fellow who ignored the warnings and ended up costing the bank, and our taxpayers, billions.

Since these banks really aren’t turning a profit without government welfare, what would JPMorgan look like without those handouts? For Dimon, banking rules that help protect taxpayers from bailing out the gambling banks are “un-American.”

The major bank chiefs have been quite vocal about trashing the social system, just as they trashed our economy. But when it comes to helping Americans, the banks have little interest beyond their next bailout.

Speaking of Jamie, our favorite vampire capitalist, “thoughtfully” explained why he’s richer than anyone else” in this exchange with Mike Mayo, an analyst at CLSA and Dimon critic:

Mayo: I think what I hear UBS saying in the presentation is that if I’m an affluent customer I’ll feel a lot better going to UBS if they have 13.5 (percent) capital ratio than another big bank with a 10 percent ratio. Do you agree with that?

Dimon: You would go to UBS and not JPMorgan?

Mayo: I didn’t say that. That’s their argument.

Dimon: That’s why I’m richer than you. [..]

FDL New Desk‘s DSWright found Dimon’s response arrogant but indicative of something even more offensive:

Dimon is right, he did get rich having low capital ratios – which is why his form of banking is dangerous. It’s the precise reason the banks could not protect themselves during the crisis, they were over-leveraged.

   “The real issue isn’t who is rich, but rather whose interests are being fairly served and whose aren’t. Dimon’s approach gives short shrift to both shareholders and taxpayers. Taxpayers still carry substantial risks for which they are not being compensated, a state that will only change when regulations are tightened, and hopefully vastly simplified.

   Shareholders do badly because the kind of bank Dimon runs is prone to loss and volatility, leading markets to set a low value on the bank’s earnings.”

Mathematician Albert Einstein said that doing the same thing over and over expecting different results was the definition of insanity. Continuing to bail out these banks on tax payer’s “dime” when there is no evidence that breaking them up would harm the economy is just insane.

MSNBC’s “The Last Word” guest host Ezra Klein translates Federal Reserve Chairman Ben Bernanke’s testimony before the Senate Banking Committee lecturing Congress that the austerity of sequestration is a really bad idea for the economy:

“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” Bernanke told his students, who included a number of right-wing Republican diehards, such as Senator Bob Corker, of Tennessee, and Patrick Toomey, of Pennsylvania. “Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run.”

Translated from Fed-speak, that meant that congressional Republicans have got things upside down. Bernanke has warned before about the dangers of excessive short-term spending cuts. But this was his most blunt assertion yet that Mitch McConnell, John Boehner, et al. should change course. “To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run,” Bernanke said. “Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”

Here is Ezra’s translation of Chairman Bernanke’s “Yoda Speak”:

U.S. Stocks Fall Sharply

by Nathaniel Popper, New York Times

The Dow Jones industrial average finished the day down 1.8 percent, or 243.36 points, to end at 13,102.53, its worst performance since June. The losses added to the big declines on Friday, and dropped leading indexes to their lowest levels since early September, before the Federal Reserve announced its latest monetary stimulus program.

Since the Standard & Poor’s 500 index hit this year’s high of 1,465.77 on Sept. 14, the benchmark index has fallen 3.6 percent. It finished Tuesday down 1.4 percent, or 20.71 points, to 1,413.11.

Share futures were falling even before the opening bell because of disappointing financial results from American companies. The chemical maker DuPont said Tuesday morning that its revenue was down 9 percent in the third quarter from a year ago, and that it would eliminate 1,500 jobs. The company’s stock ended down 9.1 percent.

Thomson Reuters said Tuesday that 63 percent of the companies that have reported earnings so far have given revenue figures for the third quarter that were lower than what analysts expected.

Stock Market Suffers Worst Day In Months On Bernanke Separation Anxiety

by Mark Gongloff, Huffington Post

The stock market is freaking out like Bill Paxton’s panicky marine in “Aliens,” yelling “Game over, man! Game over!” All because it’s afraid of losing Ben Bernanke.

Late in the trading day on Tuesday, the Dow Jones Industrial Average was down more than 200 points, on track for its worst one-day loss since June. What had it in such a tizzy? There were lots of good reasons — third-quarter corporate earnings have been kind of awful, and Europe’s endless debt crisis continues.

But the main catalyst, according to Wall Street‘s best and brightest, are a couple of New York Times stories today, one by the well-sourced Andrew Ross Sorkin, suggesting that Federal Reserve Chairman Ben Bernanke probably won’t sign up for another term when his second term as Fed Chairman ends in January 2014. Binyamin Appelbaum runs through a handful of the possible replacements in a Mitt Romney administration, and at least one of them — Stanford’s John Taylor — is known to be opposed to Bernanke’s easy-money policies.

Of course the idea that Bernanke might be leaving should shock nobody, really. After eight years of riding herd on the worst economic crisis since the Great Depression, all the while being accused of treason and threatened with old-fashioned Texas lynchings, did anybody really expect that Ben would want another four years of this?

Apparently so. The market indeed seems shocked and horrified by the idea that it will no longer be able to depend on what’s come to be known as the “Bernanke Put” — the implied promise that Bernanke won’t let the stock market fall too far before riding to the rescue with another helicopter-load of money.

Sounds like a combination of the continued recession at the bottom of the economic stratus is trickling up to the top, at last, and the poor dears on Wall St. are concerned that they’re losing their “sugar daddy”. Tell me again why they hate Obama?

Cross posted at our new beta site Voices on the Square and The Stars Hollow Gazette

Yes, another crash is coming. I can’t predict precisely when as that would be a fool’s errand, but much closer than you think. It will probably be after our President is reelected and will care very little what you or I think once he and his treasury push for criminal TBTF banks to bailed out once again. Doctor Doom: the nickname for economist Nouriel Roubini: one of the relatively few outside the mainstream(part of the Got It Right (pdf) project) who predicted the last crash thinks 2013 is a perfect storm for another one which will be even worse and it makes sense.

Despite on theoretical fiscal policy limits with regard to the US, Roubini is absolutely right on the political deadlock with the coming crisis. We wasted our last crisis and that’s something Conservatives have not done whether we’re talking about the stagflation crisis of the 70s or 9/11. There won’t be as many political options this time to prop up the underlying economy in 2013 because Democrats have failed to change the Senate rules because most of them secretly like the way things work or don’t work in Washington. Sadly, if Republicans take over both houses again, they will change the Senate rules as they threatening to do in 2005 and 2006.

Anyway some might still want to scoff at Roubini’s prediction, but that will come back to bite them in the ass. Not even Roubini can predict the exact moment it will happen, but if one knows anything about the history of financial crashes, since the 80s when the 1933 banking reforms passed by FDR started slowly being dismantled, they started happening once again in a 5-7 year time-frame(and even closer than that if you count global stock crashes which count now more than ever since our markets turned dark with OTC derivatives and Information Asymmetry all around); some worse than others as the 2008 bust was on par with 1929 but you get the idea.

• Black Monday (1987)
• Black Wednesday (1992)
• Asian financial crisis (1997)
• Mini-crash (1997)
• Dot-com bubble(2000)
• Economic effects arising from the September 11 attacks (2001)
• Stock market downturn of (2002)
• United States bear market of (2007)
• Global financial crisis (2008)
• European sovereign-debt crisis (2010)

Wages have not matched inflation, unemployment for those without work for more than six months is topping 40% while real unemployment (U-6) sits at 14.9%, the housing market continues to tumble. The cost of housing, food, health care, education, transportation has gone up while wages have gone in the other direction.

That is the reality of the US economy and it does not bode well for a sustainable recovery, not without a boost from the government. Nobel Economist Joseph E. Stiglitz writes that “the labor market is a shambles” and it’s not going to improve anytime soon without a boost from the government:

Let’s assume that job creation continues at the rate of 225,000 jobs a month. That is only about 100,000 beyond the number required to provide jobs for the average monthly number of new entrants into the labour force. At that pace, it would take 150 months to reach full employment – 13 years, some time around 2025. The independent Congressional Budget Office is more optimistic, forecasting the return of full employment by 2018. [..]

Before the crisis, 40 per cent of all investment was in property. We had a housing bubble that left a legacy of excess capacity. Continuing weakness in the property sector is reflected in high foreclosure rates and low home prices. [..]

Finally, US states and local governments are constrained, to a large extent, by having to balance their budgets. They depend heavily on property taxes, so both revenues and expenditures have plummeted. This is why there are a million fewer public employees than before the crisis. Government as a whole is being procyclical, not countercyclical. [..]

Unfortunately, little has been done about the underlying structural problems. Indeed, the downturn, during which wages have not kept pace with inflation, has in many ways made US inequality worse.

Today the American economy faces three big risks. First, a steeper European downturn, as a result of the excessive austerity and the euro crisis. Second, complacency that the economy will recover quickly without government support. Though every downturn comes to an end, that should not be of much comfort. Third, that we accept that an unemployment rate above 7 per cent is inevitable.

If my Cassandra forecast turns out to be wrong, stimulus can be cut. But if it turns out to be right, and we do too little, we will live to regret it.

We need Congress and the President to stop listening to “Washington Consensus” and the “main stream” economists that are preaching “austerity” that will only prolong the economic decline and increase poverty.

Poor Federal Reserve Chairman Ben Bernanke, he got dissed by Bloomberg News investigation of his $7.7 trillion give away, so he sends a six page complaint (pdf) to Congress. Bloomberg News responded to Ben’s whining with a blow by blow response:

Federal Reserve Chairman Ben S. Bernanke said in a letter to four senior lawmakers today that recent news articles about the central bank’s emergency lending programs contained “egregious errors.”

While Bernanke’s letter and an accompanying four-page staff memo posted on the Fed’s website didn’t mention any news organizations by name, Bloomberg News has published a series of articles this year examining the bailout. The latest, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress,” appeared Nov. 28.

“Bloomberg stands by its reporting,” said Matthew Winkler, editor-in-chief of Bloomberg News.

Yves Smith weighs in on the “food fight”:

First, it [the Fed] tries the sneaky device of complaining about all the bad press it is getting, and alludes in passing to the latest Bloomberg report (“one last week”). So are we dealing with the general or the specific? The attachment to the letter, which makes a series of specific claims of where the coverage allegedly was off beam, was rebutted with great speed and vigor by Bloomberg. So trying to have it both ways (attacking Bloomberg but trying to depict it as part of general critic wrongheadedness) backfired.

But what is even more striking is the tone and substance of the letter: overreaching words like “egregious,” the patently false claims that there is nothing new in the latest (and by implication, earlier) Bloomberg stories, that the disclosure issues are settled. If there was no new information given to Bloomberg, then why did the Fed fight so hard to prevent the release of information? The Fed has never been cooperative. Even with the Congressional Oversight Panel, the so called Sanders report coming out of Audit the Fed (and remember, the Fed succeeded in lobbying to narrow the scope of Audit the Fed), a new GAO report, the latest Bloomberg FOIA still pried loose more information. The Fed is clearly not interested in transparency, but keeps trying to claims that everything that anyone would want to know is public, and there really is nothing here to discuss any more. [..]

But the biggest lie in this fabric of Big Lies is that the banks were just suffering a wee liquidity crisis in the crisis, not a solvency crisis. If that was true, why did we need a TARP plus making failed credit default swap hedges good via the AIG rescue? In addition, Steve Waldman has described, long form, that bank equity is such an abstraction, in that there is a very high degree of uncertainty in the value of both assets and liabilities, that you need much bigger buffers of equity than anyone now has to properly deem a bank to be solvent […] The regulators determine whether a bank was insolvent. And since no regulator was willing to say a bank was insolvent (although Sheila Bair was clearly close to doing so with Citi), ipso facto, they were all solvent. Nice to have such accommodating people handing out grades.

The most laughable part of the Fed’s defense is the claim that Congress was fully informed about their actions. Really? Not according to Rep. Barnie Frank, former chairman of the House Financial Services Committee, who said “”We didn’t know the specifics.”

It is well past time for Congress to rein in the Fed. Anyone have a toga?

One of the architects of the audit of the Federal Reserve was former Rep. Alan Grayson (D-FL) who is running for his old house seat. He appeared with Keith Olbermann to discuss the Bloomberg report on the secret no strings, 0% interest $7.7 trillion had out to the banks that they also reaped another $13 billion in profits. As Rep. Grayson points out it is far worse than even the Bloomberg report.

So what does the Obama administration have to say about this? Apparently not a lot. The president is too busy raising campaign money from those who benefited most from this bailout. Obama’s minions on Twitter and in so-called “progressive” blogs have rushed in to defend him against any appearance that he sides with the banks. They ignore the history of the president’s part in the dilution of the Dodd/Frank regulations which has yet to take affect. So here is a brief refresher to keep this based in reality.

Way back at the beginning of Barack Obama’s administration and in the aftermath of the 2008 Wall St/Banking meltdown, financial reform had strong bipartisan support. The original Dodd-Frank Bill contained a provision for regular audits to the end the secrecy of the Federal Reserve. It was introduced in the House by Rep. Alan Grayson (D-FL) and Rep, Ron Paul (R-TX) with strong support from on the Senate side from Sen. Bernie Sanders (I-VT) and Sen. Jim DeMint (R-SC). However, the amendment was opposed by not only Wall St. and the Federal Reserve, it was also opposed by the Obama administration so strenuously that Obama threatened to veto the entire Dodd/Frank bill if the audit was included. That amendment failed and a second one was crafted for the one time audit which was just as adamantly opposed by Obama and company.

Deal Killer? White House Takes Aim At Fed Audit Provision

by Brian Beutler | May 4, 2010,

Possibly today, but if not today then soon, the Senate will decide whether or not to follow the House’s lead and adopt a provision requiring government auditors to open up the books at the Federal Reserve. The measure enjoys a great deal of popularity on both the left and the right, but is so fiercely opposed by powerful interests that it could nonetheless become a stumbling block in the way of financial regulatory legislation.

Right now Sen. Bernie Sanders (I-VT) is trying to round up 60 or more votes to overcome a likely filibuster and include an “audit the Fed” provision in the Senate’s bill. There are just a few small obstacles: the White House, major financial institutions, and the Fed itself. Their resistance is fierce–but the measure is so popular that killing it will be difficult for them and that, in their eyes, threatens to put a grenade at the center of efforts to to tighten the rules on Wall Street. [..]

That’s why, according to the Wall Street Journal they’ll “fight to stop it at all costs.” The White House is hoping to cut off “audit the Fed” in the Senate, so that they’ll have a stronger hand when House and Senate negotiators meet to iron out the differences between their regulatory reform bills. If the Senate bill does not include Sanders’ amendment, then the House will be in a weak position vis-a-vis the Senate and White House and the provision could be easily stripped.

If Sanders prevails, then the White House will be all but out of options and President Obama will likely be left with the choice of vetoing the legislation, or signing it and raising the ire of very powerful people. Stay tuned.

Sanders’ amendment for a one time only audit prevailed and was conducted this past year that has revealed a massive handout to banks. We now know why the Federal Reserve and the banks didn’t want this audit. The question now is what is going to be done to prevent the Federal Reserve from dong this again. It’s fairly obvious what the president’s policy is, he sides with Wall St and the banks, the 1%.

As if we didn’t know that they were all lying through their teeth on the extent of the bank bail out in late 2008, we’ve just never been sure of the price tag of all those lies. Now due to the dogged diligence of Bloomberg News, we have a better picture if what was handed out to the banks with no strings, $7.77 TRILLION. TARP, a mere $750 billion, was just 2% of that and who could forget the squawking from Congress that went on about that paltry sum.

Meantime the Federal Reserve has been fighting to keep the details of the largest bank bailout in US history buried from the public:

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse. [..]

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”

Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.

As expected, Obama’s Treasury Secretary, Timothy Geithner, one of the chief architects of this hand out, fought limiting the size of banks. David Dayen at FDL points this out from the article:

   On May 4, 2010, Geithner visited (former Sen. Ted) Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission.

   At the meeting with Kaufman, Geithner argued that the issue of limiting bank size (Kaufman and Brown were working on a simple bill to cap bank size) was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman.

Not only have the banks and the regulators lied, they continue to lie. From Yves Smith at naked capitalism:

I get really offended by the bogus accounting, such as the “banks paid back the TARP” or “the Fed lost no money on its lending facilities,” which this story annoyingly has to repeat out of adherence to journalistic convention. This is all three card Monte. So what if the banks paid back loans when the central bank has goosed asset prices vis super low interest rates? That’s a massive tax on savers. And we have the hidden subsidy of underpriced bank rescue insurance. Ed Kane estimates that’s worth $300 billion a year for US banks; Andrew Haldane of the Bank of England has pencilled the annual cost as exceeding the market cap of big banks (and that was in 2010, when their stock prices were higher than now).

The Fed is most assuredly going to have losses. It hoovered up a ton of Treasuries and MBS to shore up asset prices at time when interest rates were already low. The central bank intends to sell them when interest rates rise, to soak up liquidity. Buying when interest rates are low and selling when rates are high guarantees losses. As an old Wall Street saying goes, it’s easy to manipulate markets, but hard to make money from it.

This would not have happened if Glass-Steagall had still been in place. If these details had been known, they would have gone a long way into reinstitution of that law which, for most of the last century, separated customer deposits from the riskier practices of investment banking.

It is long past time that both Ben Bernanke and Timothy Geithner resign. If they don’t do so voluntarily, President Obama should demand they do. I won’t hold my breath.

BTW, so far this morning, not a peep from the traditional MSM about this revelation.

After Bank of America was downgraded by the ratings agencies and over the objections of the FDIC but with Federal Reserve Chairman Ben Bernanke’s blessing, the Bank of America transferred millions of dollars of its worst derivatives to its Merill Lynch unit where they would be insured:

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

So why is the FDIC concerned and the Federal Reserve giving its blessing? masaccio at FDL explains:

Of course, the Fed loves it. Bank holding companies can do no wrong as far as the Fed is concerned. The risk to taxpayers, and the moral hazard issues are utterly irrelevant to Ben Bernanke and his buddies. Of course, given the vast conflicts of interest at the Fed, this isn’t a surprise.

There are reasons to be worried about this. First, BAC moved the derivatives at the request of counterparties. The counterparties have a right under their derivative contracts to demand collateral from BAC, as they did after the company’s rating was reduced earlier this year. BAC estimates that would require an additional $3.3 billion in collateral. The downgrade was due to judgment by the ratings agencies that the government was less likely to bail out BAC if it got into trouble. Thus, the effect of the downgrade was to increase the direct risk to the FDIC, by forcing it in effect to guarantee the derivatives of Merrill Lynch. Nice opinion, ratings agencies. I wonder who paid them for it?

Second, if the FDIC has to liquidate BAC, it will have to borrow from the Treasury to pay depositors, and it will have to bill the largest banks for additional fees to pay off the Treasury loans to the extent of actual losses. We have no idea of the interlocking relations of these giants, so we have no idea whether the collapse of one would wreck others. Media reports say there are concerns about the relationships between European banks and US banks, so there is reason for concern about the relations among US giants. If one collapse could lead to others, where is the money coming from to repay the Treasury? []

Third, 82% of derivatives in notional amount are interest rate swaps. Interest rates are at historic lows. What happens when they go back up to normal levels? []

Fourth, BAC has a huge position in credit default swaps, with a notional value of $4.1 trillion. . . . . as we saw with AIG, when CDSs go sour, the counterparty has the right to demand collateral right up to the moment the entity fails. In this case, that collateral would be cash, and it would directly reduce the amount of cash in the Bank. That would be a disaster for the FDIC, which would have to pay off the depositor losses up to the insured limit.

As Yves Smith explains this has an air of criminal incompetence with the tax payers having to foot the bill in the end:

This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.

It is well past time to do something about regulation and oversight of the Federal Reserve.

Preferably some independent adult supervision

What was revealed in the audit was startling: $16,000,000,000,000.00 had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious – the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs.

To place $16 trillion into perspective, remember that GDP of the United States is only $14.12 trillion. The entire national debt of the United States government spanning its 200+ year history is “only” $14.5 trillion. The budget that is being debated so heavily in Congress and the Senate is “only” $3.5 trillion. Take all of the outrage and debate over the $1.5 trillion deficit into consideration, and swallow this Red pill: There was no debate about whether $16,000,000,000,000 would be given to failing banks and failing corporations around the world.

In late 2008, the TARP Bailout bill was passed and loans of $800 billion were given to failing banks and companies. That was a blatant lie considering the fact that Goldman Sachs alone received 814 billion dollars. As is turns out, the Federal Reserve donated $2.5 trillion to Citigroup, while Morgan Stanley received $2.04 trillion. The Royal Bank of Scotland and Deutsche Bank, a German bank, split about a trillion and numerous other banks received hefty chunks of the $16 trillion.

Angry? Check out page 131 of the GAO Audit to see the actual amounts that each institution received.

Senator Bernie Sanders released his report on Friday and appeared with Dylan Ratigan to discuss the problems and conflicts within the Fed.

October 19, 2011

WASHINGTON, Oct. 19 – A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks.

“The most powerful entity in the United States is riddled with conflicts of interest,” Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report. The study required by a Sanders Amendment to last year’s Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny.

The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves.  “Clearly it is unacceptable for so few people to wield so much unchecked power,” Sanders said. “Not only do they run the banks, they run the institutions that regulate the banks.”

Sanders said he will work with leading economists to develop legislation to restructure the Fed and bar the banking industry from picking Fed directors. “This is exactly the kind of outrageous behavior by the big banks and Wall Street that is infuriating so many Americans,” Sanders said.

The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose “reputational risks” to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates “an appearance of a conflict of interest,” the report added.

The 108-page report found that at least 18 specific current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis.

In the dry and understated language of auditors, the report noted that there are no restrictions in Fed rules on directors communicating concerns about their respective banks to the staff of the Federal Reserve. It also said many directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve.  The rules, which the Fed has kept secret, let directors tied to banks participate in decisions involving how much interest to charge financial institutions and how much credit to provide healthy banks and institutions in “hazardous” condition. Even when situations arise that run afoul of Fed’s conflict rules and waivers are granted, the GAO said the waivers are kept hidden from the public.

The report by the non-partisan research arm of Congress did not name but unambiguously described several individual cases involving Fed directors that created the appearance of a conflict of interest, including:

   

Stephen Friedman In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap Fed loans. During the same period, Friedman, chairman of the New York Fed, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed’s rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO.

   

Jeffrey Immelt The Federal Reserve Bank of New York consulted with General Electric on the creation of the Commercial Paper Funding Facility. The Fed later provided $16 billion in financing for GE under the emergency lending program while Immelt, GE’s CEO, served as a director on the board of the Federal Reserve Bank of New York.

   

Jamie Dimon The CEO of JP Morgan Chase served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed’s emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns.At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.

Lets not forget who President Obama chose to replace Rahm Emanuel, Bill Daley, son of legendary Chicago Mayor Richard J. Daley (D) and brother of the more recent Mayor Richard M. Daley (D). Oh, I forgot, Geithner is also the architect of Bill Clinton’s NAFTA Agreement that Obama promised to fix and Midwest Chairman of JPMorgan Chase.

Then there is our Treasury Secretary, Tim Geithner, a protégé of Lawrence Summers and Robert Rubin, who while president of the Federal Reserve Bank of New York, played a large role in directing the Federal Government’s spending on the late-2000s financial crisis, including allocation of $350 billion of funds from the Troubled Asset Relief Program enacted during the previous administration.

None of these people should be allowed anywhere near either the Federal Reserve or the Treasury. Most of them should be in jail.