By Pam Martens and Russ Martens: October 6, 2015
Will the American people ever get an honest writing of the 2008-2009 Wall Street collapse? If you think it is to be found in the new book released on Monday by former Fed Chairman Ben Bernanke (which we seriously doubt you are thinking) you will be disappointed.
What you will find in Bernanke’s book are photos of his grandparents, a photo of the Time Magazine cover with himself named “Man of the Year,” a photo of Bernanke with the masterminds of the repeal of the investor protection act known as Glass-Steagall (Robert Rubin, Alan Greenspan, Larry Summers), a photo of the grand double staircase in the Federal Reserve building, and so forth.
What you will not find is an honest accounting of how the Fed allowed Citigroup to grow into a financial Frankenstein and then quietly and secretly shoveled trillions of dollars into the firm to keep it afloat.
You won’t find any of that because on March 3, 2009, former Fed Chairman Ben Bernanke testified under questioning from Senator Bernie Sanders that “the Federal Reserve lends to healthy firms on a collateralized basis…” In reality, Citigroup was a financial basket-case at that point. Its stock closed that day at $1.22. It would take a court battle launched by Bloomberg News and legislation pushed by Senator Bernie Sanders to unearth from the Fed the fact that it had funneled over $16 trillion in cumulative loans to save the financial system. Citigroup was the largest recipient of those loans, with a take of over $2.5 trillion cumulatively, on top of $45 billion in TARP funds and over $306 billion in asset guarantees.
Bernanke’s account in his new book, The Courage to Act: A Memoir of a Crisis and Its Aftermath, attempts to resuscitate the bogus scenario that it was the collapse of Lehman and AIG that set the crisis in motion, not mega banks weakened by lax regulation by the Fed and the repeal of the Glass-Steagall Act, a decision supported by the Fed. (Lehman Brothers, an investment bank, and AIG, an insurance company, were not overseen by the Federal Reserve at that time.)
Sheila Bair, head of the FDIC during the crisis, has already revealed that Citigroup was far from a healthy institution when the Fed was secretly shoveling $2.5 trillion in cumulative loans into the firm, many at below 1 percent interest rates. Bair wrote in her own book, Bull by the Horns, the following:
“By November , the supposedly solvent Citi was back on the ropes, in need of another government handout. The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007. Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking. It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate. It had loaded up on exotic CDOs and auction-rate securities. It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits. If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”
The Fed had also stood by and allowed Citigroup to hold massive amounts of Structured Investment Vehicles (SIVs) off its balance sheet in the Cayman Islands. Bair wrote in her book: “For reasons that still today remain a mystery to me, they were allowed by their regulators – the Fed and the OCC – to keep the investments off balance sheet…” Citigroup was not required to hold capital or reserve against those assets to absorb losses.
Bair exposes the likely reason that Citigroup was bailed out – it would have been a major embarrassment to the U.S. in foreign markets if Citigroup had failed because Citigroup held only $125 billion in U.S. deposits with the vast majority of its deposits being owned by foreigners – much of that without insurance on the deposits. The low base of U.S. deposits was in spite of Citigroup listing $2 trillion in assets on its balance sheet and $1 trillion off balance sheet.
Digging through archived Fed data, we previously reported that Bernanke and the Fed had gotten a heads up about Citigroup’s condition as early as August 2007. That was more than a full year before the failure of Lehman and the bailout of AIG. On August 20, 2007, the Fed quietly took an unprecedented action. It gave Citigroup an exemption that would allow it to funnel up to $25 billion from its FDIC insured depository bank to mortgage-backed securities speculators at its broker-dealer unit. The Fed notes in this letter that the bank “is well capitalized.” (Federal Reserve Exemption to Citigroup to Loan to Its Broker-Dealer, August 20, 2007)
Bernanke does concede this in his book: “I did agree with Sheila [Sheila Bair] that Citi was being saved from the consequences of its own poor decisions.” He also quotes a revealing email he received from Bair about the condition of Citigroup. Bair wrote: “Can’t get the info we need. The place is in disarray. How can we guarantee anything if citi can’t even identify the assets.”
In the video linked below, Senator Bernie Sanders gets to the core of the hubris at the Fed. (Sanders is now running for President on a platform that includes the restoration of the Glass-Steagall Act.) Sanders wants to know the names of the banks that received over $2 trillion from the Fed in loans. (That number would grow to $16 trillion when the Fed was forced to cough up an honest accounting by the courts, legislation and an investigation by the General Accountability Office.) Sanders also asks Bernanke how it can be that the Fed is loaning money to the big banks at almost zero percent while they continue to charge credit card customers – the very taxpayers who lent them their money — as much as 25 or 30 percent interest.
Finally, Sanders asks Bernanke: “Do you think that repeal of Glass-Steagall was a tragic mistake.” Bernanke responds, “No, I don’t think so.”