Here’s Why the Fed’s $4.45 Trillion Balance Sheet Is Not Going to Shrink

By Pam Martens and Russ Martens: October 30, 2014 

Federal Reserve's FOMC Meeting in March 2014

Federal Reserve’s FOMC Meeting in March 2014

Back on June 25 of this year, Wall Street On Parade ran the following headline: “BOE’s Carney: Inflated Central Bank Balance Sheet the New Normal; Expect to Hear the Same Conclusion from the U.S. Fed.”

The day before our headline, Bank of England Governor, Mark Carney, had just explained to Parliament why their central bank’s balance sheet, bloated through quantitative easing, was not going to be shrinking anytime soon.

Carney: “…I would define – picking up on what my colleagues have said – pre-crisis position as a position that’s consistent with the normal course of liquidity requirements of the banking system…What has changed, to the good, in terms of the banking system here is that through regulation and supervision we have put much more responsibility on the banks themselves to hold liquidity to manage liquidity shocks. And, as a consequence of that, their demand for reserves can be expected to be higher. The further consequence of that is that the balance sheet of the Bank of England will be larger…”

Translation: We have no idea how to unwind this mess any better than the Americans do.

We commented in the article that: “There is a very real suspicion that Carney was simply laying the groundwork for Fed Chair Janet Yellen to begin to slip the same hints into her forthcoming speeches.”

Last month at Fed Chair Janet Yellen’s September 17 press conference, in response to a question from Ylan Mui of the Washington Post, Yellen said: “If we were only to shrink our balance sheet by ceasing reinvestments, it would probably take—to get back to levels of reserve balances that we had before the crisis—I’m not sure we will go that low, but we’ve said that we will try to shrink our balance sheet to the lowest levels consistent with the efficient and effective implementation of policy—it could take to the end of the decade to achieve those levels.”

The end of the decade is five years away.

Yesterday, the Fed, in its Federal Open Market Committee (FOMC) statement, said it was going to conclude QE3, its quantitative easing program that has been buying U.S. Treasury notes and bonds and mortgage-backed securities issued by Federal agencies, at the end of this month. However, its balance sheet was not going to shrink anytime soon because it was going to continue to reinvest the principal of both classes of securities as they matured or paid down.

U.S. Treasuries have a fixed maturity date. Mortgage-backed securities, however, despite having a stated maturity date, pay down principal when a mortgage-holder in the pool pays off their mortgage, refinances, or sells their home – thus extinguishing the mortgage.

The Fed said its policy of continuing reinvestment of maturing or paid down principal “should help maintain accommodative financial conditions.” 

As of October 22, according to a listing at the Federal Reserve Bank of New York, the Fed is holding $1.7 trillion of mortgage-backed securities (MBS) and $2.3 trillion of U.S. Treasury notes and bonds. (It holds other types of Federal debt as well.) While the pay down on the MBS is somewhat unpredictable, the maturity of Treasury notes and bonds is not.

Included among the Fed’s Treasury holdings are more than $475 billion (almost half a trillion dollars) of bonds maturing from 2036 to 2044 – 22 to 30 years from now.

Talk of QE-Infinity may not be so far fetched at all.

Why Does the U.S. Senate Need a Petition Drive to Hold Hearings on the Secret Goldman Sachs’ Tapes

By Pam Martens: October 29, 2014

Traders at the New York Fed Have Speed Dials to Wall Street's Biggest Firms

Traders at the New York Fed Have Speed Dials to Wall Street’s Biggest Firms

It appears that Senators Elizabeth Warren and Sherrod Brown believe they may have a battle on their hands getting their colleagues on the Senate Banking Committee to agree to hold hearings on the now notorious tape recordings secretly made by former New York Fed bank examiner, Carmen Segarra, showing a cozy relationship between the regulator and Goldman Sachs.

Petitions have sprung up all over the internet, with more than 129,000 signatures as of this morning, demanding that Congress hold hearings to investigate whether the Federal Reserve System, and specifically the New York Fed, function as merely sycophantic fronts for Wall Street or if they serve any meaningful regulatory role.

In addition to petitions at Credo, and Public Citizen, campaign sites for Senators Warren and Brown have also set up petitions, but those sites do not show how many signatures have been collected.

As of this morning, the Credo petition had 98,107 signatures out of a goal of 150,000. You can sign the petition here. The petition makes its case as follows:

“To Members of the U.S. Senate and House of Representatives:

“Regulators are supposed to protect Americans from wrongdoing on the part of big banks, not serve Wall Street’s interests. Congress must hold oversight hearings on the allegations of a deferential and broken regulatory culture at the Federal Reserve, as exposed in the recently released Goldman Sachs tapes…

“Based on 46 hours of secret audio recordings made by a former bank examiner who was fired for being too critical of the bank, it offers some of the first hard evidence of what we’ve known all along: Too many regulators serve the banks, not the people they are tasked with protecting…

“This story is not about Carmen Segarra – it is about an out-of-control banking sector that has seized control of our economy and our democracy. That’s why we need to back Senators Warren and Brown’s call for immediate hearings to investigate the Federal Reserve’s behavior.”

The battle to get fellow Senators to back the hearings even prompted Senator Warren to write an OpEd for the Boston Globe, titled “Primer for the Goldman Sachs Secret Tapes.”

As we have written on multiple occasions at Wall Street On Parade, so many Senators serving on Wall Street oversight committees or subcommittees are so afraid of losing Wall Street’s campaign financing spigot that they don’t even show up for hearings that might produce negative findings about Wall Street. If they showed up, they would be expected to ask tough questions and that might offend their big donors – so they just don’t show up.

On June 20, 2012, we reported on a hearing before the Senate Banking Committee’s Subcommittee on Securities, Insurance, and Investment that was going to examine if the American people are getting a fair shake in the way Wall Street handles Initial Public Offerings (IPOs) of stocks. Out of an 18 member subcommittee, one Senator, Jack Reed, showed up for the hearing.

The lack of prosecutions by the U.S. Justice Department, the deference shown to Wall Street by both Congress and the regulators, has darkened the public mood – as evidenced by the comments appended to the petition sites.

At Public Citizen’s petition to move hearings on the New York Fed forward, one commenter notes: “This ‘corporations are individuals’ nonsense has opened the door for this type of abuse. We need Elizabeth Warren and a 1000 more like her to get this country working for the people who live here.” Another says: “Hearings first. Special prosecutor next.” Another commenter gets quickly to the bottom line: “The regulators aren’t timid, but eyeing a future lucrative Wall Street job if they pander well.”

On October 1, Senator Warren was interviewed by NPR’s Steve Inskeep, who asked her how the tapes show the relationship between the New York Fed and Goldman Sachs is too “cozy.” Warren responds:

“Oh, golly. So, look — listen, though, to those tapes. For me, there were two things that jumped out. The first was just a basic lack of truthful reporting: Supervisors are actually telling examiners not to report accurately the damning things they heard from bank executives during meetings. I mean, wow. If there’s not even an accurate record of what’s going on, then the regulators can’t hope to do their jobs.

“And the second thing: Look at how the Fed emphasized talk instead of action. You know, the regulators seemed to think that it was a victory just to raise an issue, even if they took absolutely no action to address the issue. And that’s the kind of approach that allowed banks to take on massive risks before the financial crisis. You know, think about that: The regulators seemed to think that fussing at banks behind closed doors was their toughest sanction.

“Does anyone believe that Goldman Sachs is gonna give up a deal that would yield millions of dollars because someone fussed at them behind closed doors?”

Yesterday, Senator Brown told Bloomberg News that: “I’m willing to say there’ll be a hearing.” Senators Warren and Brown both sit on the Senate Banking Committee along with Wall Street’s good pal Senator Chuck Schumer. It remains to be seen whether Senate Banking will find the courage to hold the hearing or if it will be punted over to the body chaired by Senator Brown, the Financial Institutions and Consumer Protection Subcommittee.

Wall Street Journal: Wealth Inequality Is Your Own Dumb Fault

By Pam Martens: October 28, 2014

Wall Street Bull Statue in Lower ManhattanYesterday the Wall Street Journal gave prominence to the following headline on page one of its newspaper with the story jumping to page A2: “Bad Market Timing Fueled Wealth Gap.” Through the use of the word “fueled” in that headline, the reader is conditioned to believe that market timing is a significant cause of wealth inequality in the United States – a completely bogus idea for which there exists mountains of research to the contrary.

The online version of the article includes a video interview with the author, Josh Zumbrun, and this caption appears under the video: “Millions of Americans bought high and sold low, which caused them to unknowingly widen economic inequality. WSJ’s Josh Zumbrun explains on MoneyBeat with Paul Vigna.”

The crux of this thesis is built in the first three paragraphs of the article as follows:

“Millions of Americans inadvertently made a classic investment mistake that contributed to today’s widening economic inequality: They bought high and sold low.

“Late in the stock-market booms of the 1990s and 2000s, more U.S. families clambered into stocks as indexes surged. Then, once markets tumbled, many households sold and took losses.

“Those that held on during the most recent collapses reaped the benefits as stocks nearly tripled between 2009 and today.”

Only much later in the article does the author offer up this bit of clarification:

“Wealth inequality in the U.S. has many causes, some of which precede the recent booms and busts, and the new research doesn’t quantify exactly how much the stock-market timing contributed to it.”

“Doesn’t quantify exactly how much”? But your front page headline said market timing “fueled” the wealth gap. The Wall Street Journal couldn’t possibly be engaging in propaganda could it?

The absurdity that buying high and selling low fueled wealth inequality in the United States is firmly established in the data from decades of the Federal Reserve’s Survey of Consumer Finances (SCF) indicating that the vast majority of American households don’t even own stocks. According to the 2007 SCF, the year before the 2008 financial crash, only 17.9 percent of American households owned stocks.

The Federal Reserve’s 2007 SCF has this to say on the subject:

“The share of families with any such stock holdings declined 2.8 percentage points from 2004 to 2007, to 17.9 percent, thereby continuing a decline observed over the previous three-year period.”

By 2010, the SCF reports that the number of households holding stocks had declined to 15.1 percent – a measly difference of 2.8 percent, which certainly is insufficient to make a case that large numbers of people had sold at the bottom and fueled wealth inequality. In fact, the 2.8 percent ownership shrinkage is the identical percentage decline that happened between 2004 and 2007, according to the Federal Reserve. From September 2004 to September 2007, the Wilshire 5000 index – a broad based index of stock performance – rose 41.7 percent.

In other words, during periods of significant stock price increases and stock price decreases, there was an identical percentage decline of 2.8 percent in households’ ownership of stocks.

Much more relevant to a correlation between stock ownership and widening wealth inequality is the asset stripping nature of 401(k) plans – part of Wall Street’s institutionalized wealth transfer system.

On April 23, 2013, Frontline producer Martin Smith exposed the following with charts and graphs and interviews: If you work for 50 years and receive the typical long-term return of 7 percent on your 401(k) plan and your fees are 2 percent, almost two-thirds of your account will go to Wall Street. The program was titled The Retirement Gamble.

As we wrote at the time, “This is not so much a gamble as a certainty: under a 2 percent 401(k) fee structure, almost two-thirds of your working life will go toward paying obscene compensation to Wall Street; a little over one-third will benefit your family – and that’s before paying taxes on withdrawals to Uncle Sam.” (You can read our detailed dissection of the program and the math here.)

The same Wall Street banks that are enabled by Congress to asset strip 401(k)s are the very same banks that asset-stripped the equity in the little guys’ homes through illegal foreclosures and mortgage fraud and then were allowed to decide on their own how much to pay their victims.

According to Senator Elizabeth Warren in a Senate hearing on April 11, 2013, at least 3,949,896 families suffered the following types of foreclosure or mortgage frauds at the hands of Wall Street banks: members of the military who were protected under Federal Law had their homes illegally foreclosed; families who were current on their payments had their homes illegally foreclosed; people who were performing all of their requirements under a loan modification were illegally foreclosed.

The Wall Street Journal piece focuses on just wealth inequality but that can’t be addressed properly without looking at what has simultaneously caused unprecedented income inequality in our nation. No one has done a better job in delivering a well documented and easy to digest analysis of this topic than Robert Reich in his film, “Inequality for All.”

The film explains that after World War II, and for decades thereafter, the income of the middle class climbed steadily. Then, in the late 70s, the upward march abruptly stopped. For the next three decades, adjusted for inflation, middle class incomes stagnated.

To meet growing expenses, women left the home and joined the workforce. Then the middle class began to work longer hours. Still unable to meet the growing living costs, the middle class took on ever greater levels of debt – especially home equity loans, as their one major asset grew in value.

A companion problem was that the number of people represented by unions fell from one-third of all workers to a stunning 7 percent. The ability of workers to negotiate for higher wages, and set a higher standard for all wage earners, was crushed with the decimation of unions.

Additionally, perhaps most importantly, is the parallel between the income inequality that existed just before the two most epic stocks market crashes in our nation’s history: the crash of 1929 and 2008. In the year before each of those crashes, income inequality had reached an historic peak. Why did this only occur at those two moments in our history? Because, in 1929, Wall Street banks were allowed to collect deposits from savers and use the money to make wild speculations on Wall Street. From 1933 to 1999, that activity was curtailed by the Glass-Steagall Act. The Clinton administration repealed the Glass-Steagall Act in 1999, allowing trillions of savers deposits to be concentrated in a handful of the largest Wall Street banks – which pay miniscule interest to the depositors while reaping outsized gains in risky market speculations.

If the bets payoff, the banks keep the winnings and pay obscene salaries and bonuses to their executives and traders. If the bets fail spectacularly, the taxpayers bail out the bank.  This is our heads they win, tails you lose current system. To attempt to dress all of this up as bad market timing on the part of the little guy is about as low as it gets.

Income Inequality Graph from Robert Reich's Film, "Inequality for All"

Income Inequality Graph from Robert Reich’s Film, “Inequality for All”


Hillary Clinton’s Continuity Government Versus Elizabeth Warren’s Voice for Change

By Pam Martens and Russ Martens: October 27, 2014 

Senator Elizabeth Warren During a July 8, 2014 Senate Hearing

Senator Elizabeth Warren During a July 8, 2014 Senate Hearing

The contrast between Wall Street’s continuity government in Washington under another Clinton in the White House and the charismatic populist voice of Senator Elizabeth Warren as she stumps for Democrats in the midterms, is awakening millions of Americans to the idea that there may be choices after all in the 2016 presidential election.

Columnist Eugene Robinson said it best last Monday in the Washington Post, writing that Senator Warren’s “swing through Colorado, Minnesota and Iowa to rally the faithful displayed something no other potential contender for the 2016 presidential nomination, including Hillary Clinton, seems able to present: a message.”

What Robinson really means is “a message of hope” – that Wall Street’s wealth transfer system, institutionalized under a protection racket by members of Congress who keep their seats using Wall Street’s campaign dough, could come under serious challenge with Warren in the White House.

In a Wall Street Journal article last Friday, Peter Nicholas reports that Ben Cohen, co-founder of Ben and Jerry’s ice cream and a large donor to Democrats, summed up Hillary as follows: “I see Hillary as part of the middle-of-the-road mainstream government that is essentially in bed with these corporations.”

Where would such an idea come from? The Center for Responsive Politics reports that four of the top six donors to Hillary’s failed bid to capture the Democratic nod for the Presidency in 2008 were employees, family members or PACs of major Wall Street firms: JPMorgan Chase, Goldman Sachs, Citigroup and Morgan Stanley.

When the Democrats gave the nod to Barack Obama instead, JPMorgan Chase, Goldman Sachs and Citigroup show up among his top seven donors for his 2008 campaign, according to the Center for Responsive Politics. (As indicated above, the corporations do not give directly; it’s their PACS, employees or family members of employees.)

The idea that Wall Street is running a continuity government in Washington stems from the fact that it was President Bill Clinton who repealed the Glass-Steagall Act, a goal Wall Street and its legions of lobbyists had advanced for decades. This breathtaking deregulation of Wall Street did not happen under a Republican presidency but under one styling itself as progressive. The repeal allowed commercial banks holding insured deposits to merge with investment banks, brokerage firms and insurance companies to become vast gambling casinos, looters of the little guy, and to crash the economy in 1929 style fashion just nine years after Clinton signed the repeal legislation in 1999.

The Wall Street sycophants in the Bill Clinton administration who pushed through the repeal of this legislation that had protected the country for seven decades included Treasury Secretary, Robert Rubin, and the man who would step into the Treasury post, Lawrence Summers, after Rubin headed for Citigroup to collect $120 million in compensation over the next eight years. Both men turned up as advisors to Obama once he took his seat in the Oval Office.

Last year, Obama attempted to push through the nomination of Summers, then on the payroll of Citigroup as a consultant, to become the Chairman of the Federal Reserve Board of Governors. It took heavy backlash from members of his own party to advance Janet Yellen’s nomination over Summers.

With the exception of retiring Senator Carl Levin, Senator Warren uniquely demonstrates a comprehensive knowledge of how Wall Street firms like Citigroup maintain their stranglehold on the levers of power in Washington. On March 13 of this year, when former Citigroup executive Stanley Fischer appeared before the Senate Banking Committee for his confirmation hearing to become Vice Chairman of the Federal Reserve, the following exchange occurred:

Senator Warren: “Now, I’m concerned that the mega banks not only have the capacity to tilt the financial system, but that they also have the capacity to tilt the political system. You know, we’ve learned that as big banks get bigger and bigger their lobbying power and influence in Washington also tend to grow. That means big banks can often delay, water down or even kill important regulations. So, size can have ripple effects everywhere and for that reason I think it’s a mistake to talk about size without considering how it affects the ability of government to enforce meaningful regulation.

“A century ago when Teddy Roosevelt and others worked to break up the giant trusts, this was a big concern – not just the economic impact of size but the political impact that came with size as well. So, Dr. Fischer, you have a great deal of experience as an observer and as a participant in the financial system, is this a point that you’ve thought about and do you think it’s possible for large Wall Street banks to amass too much political power?”

Fischer responded that he wasn’t convinced that banking supermarkets actually achieve any economies of scale.

Senator Warren continued: “Many big banks are well represented in Washington but the connection between Citigroup and Democratic administrations really sticks out. Three of the last four Democratic Treasury Secretaries have Citigroup ties; the fourth was offered but turned down the CEO position at Citigroup. Former Directors of the National Economic Council and the Office of Management and Budget at the White House and our current U.S. Trade Representative also have Citigroup ties. You once served as President of Citigroup International and are now in line to be number two at the Federal Reserve…”

Fischer said he thought his Citigroup experience would help him at the Fed.

Senator Warren concluded: “I also think it’s dangerous if our government falls under the grip of a tight knit group connected to one institution. Former colleagues get access through calls and meetings; economic policy can be dominated by group think; other qualified and innovative people can be crowded out of top government positions.”

Senator Warren has just defined Wall Street’s continuity government in Washington. That makes her dangerous to the status quo on Wall Street and a desperately needed voice of change in the Oval Office.

New York Fed’s Conference Evokes Thoughts of Violence Against Wall Street

By Pam Martens and Russ Martens: October 23, 2014

Occupy Wall Street Protesters Outside the New York Fed, September 17, 2012

Occupy Wall Street Protesters Outside the New York Fed, September 17, 2012

What the New York Fed attempted to pull off this past Monday with its full-day conference for the execs of wayward Wall Street banks was a public relations stunt to switch the national debate from its culture to Wall Street’s culture. Styled as a “Workshop on Reforming Culture and Behavior in the Financial Services Industry,” the event came less than a month after ProPublica and public radio’s “This American Life” released internal tape recordings made by a former New York Fed bank examiner, Carmen Segarra, revealing a regulator with no bark or bite.

ProPublica’s Jake Bernstein wrote that the tapes and a confidential report by an outside consultant demonstrated the New York Fed’s “history of deference to banks.”

But there is far more to this story. Wall Street banking executives, who elect two-thirds of the Board of Directors of the New York Fed and have frequently served on its Board, have structured the institution to be its sycophant. Consider the fact that Jamie Dimon, CEO of JPMorgan Chase, sat on the Board of the New York Fed from 2007 through 2012 as the regulator failed to follow through on three separate staff recommendations that JPMorgan’s Chief Investment Office undergo a thorough investigation, as reported this week by the Federal Reserve System’s Inspector General.

JPMorgan’s Chief Investment Office in 2012 finally owned up to losing $6.2 billion of bank depositors’ money in wild bets on exotic derivatives in London.

A Wall Street regulator, like the New York Fed, which has staff positions called “relationship managers” that are considered senior to, and can bully and intimidate, their bank examiner colleagues, is in no position to be lecturing Wall Street on its culture. Indeed, the culture on Wall Street of “it’s legal if you can get away with it,” grew out of its cozy, crony relationships with its regulators like the New York Fed, an enshrined revolving door at the SEC, self-regulatory bodies delivering hand slaps and its own private justice system to keep its secrets shielded from the public’s view.

To suggest that a one-day conference and a few speeches are going to make a dent in a structure intentionally created to deliver heads we win, tails you lose on behalf of Wall Street interests is deeply insulting – especially coming from the New York Fed, the target of future Senate hearings on its own culture.

The seriousness with which disciplinary lectures by the New York Fed are taken by the big Wall Street players is evidenced by those who snubbed Monday’s conference – namely, the CEOs of the serial miscreants. Not in attendance, according to the participant list released by the New York Fed were: JPMorgan CEO, Jamie Dimon; Citigroup CEO Michael Corbat; and Goldman Sachs CEO Lloyd Blankfein.

William Dudley, President of the New York Fed, whose wife receives $190,000 a year in deferred compensation from JPMorgan where she was previously employed as a Vice President, sized up the loathsome regard that Wall Street now holds in the public mind as follows:

“Since 2008, fines imposed on the nation’s largest banks have far exceeded $100 billion. The pattern of bad behavior did not end with the financial crisis, but continued despite the considerable public sector intervention that was necessary to stabilize the financial system. As a consequence, the financial industry has largely lost the public trust. To illustrate, a 2012 Harris poll found that 42 percent of people responded either ‘somewhat’ or ‘a lot’ to the statement that Wall Street ‘harms the country’; furthermore, 68 percent disagreed with the statement: ‘In general, people on Wall Street are as honest and moral as other people.’ ”

Further cementing that public distrust, the media was barred from attending Monday’s conference at the New York Fed. Press members who nonetheless reported on the event evoked a recurring theme of violent acts to deal with incorrigible actors.

Aaron Elstein at Crain’s New York used an analogy comparing the Fed to the 15th century Vatican which dealt with a problem it was having by calling a big conference and burning alive the outlier and casting his remains into the Rhine.

This thought about the conference constituted the first paragraph of Bartlett Naylor’s reporting at Huffington Post: “The Roman army responded to desertion by randomly executing a tenth of those soldiers remaining. They called it decimation, derived from the word ‘tenth.’ This discipline, of course, prompted all soldiers to police against desertion so as to save their own skins.”

Jon Hilsenrath at the Wall Street Journal was thinking along similar lines. Hilsenrath reflected on the book, Manias, Panics, and Crashes, which carries a chapter by University of Chicago Professor Robert Aliber in its revised sixth edition. Hilsenrath quotes as follows from the book: “At the time of the South Sea Bubble, (Lord) Molesworth, then a member of the (British) House of Commons, suggested that parliament should declare the directors of the South Sea Company guilty of parricide and subject them to the ancient Roman punishment of that transgression – to be sewn into sacks, each with a monkey and a snake, and drowned.”

Business media is not the only source pondering violence against Wall Street scoundrels. This summer, venture capitalist, Nick Hanauer, worried aloud to his fellow plutocrats in Politico Magazine about when public anger might spill over into pitchforks. Hanauer writes:

“What everyone wants to believe is that when things reach a tipping point and go from being merely crappy for the masses to dangerous and socially destabilizing, that we’re somehow going to know about that shift ahead of time. Any student of history knows that’s not the way it happens. Revolutions, like bankruptcies, come gradually, and then suddenly. One day, somebody sets himself on fire, then thousands of people are in the streets, and before you know it, the country is burning. And then there’s no time for us to get to the airport and jump on our Gulfstream Vs and fly to New Zealand. That’s the way it always happens. If inequality keeps rising as it has been, eventually it will happen. We will not be able to predict when, and it will be terrible—for everybody. But especially for us.”

There are currently a stunning 8,477 comments under the article. The following two, listed together, capture the current divide between Main Street and Wall Street:

Betsarama: “Thank you! Exactly. My father had a saying with regard to how much he charged and what his company earned, and that was ‘Enough.’ People loved him for his intelligence, simplicity and hard work. That’s American. Being filthy stinking rich — what is there to admire?”

Crapulous Mass responds: “One of the beauties to being filthy stinking rich is really not having to care what others think of you.”

This might well explain why Dimon, Corbat and Blankfein snubbed the lectures on Monday.