By Pam Martens and Russ Martens: September 10, 2018 ~
There seems to be a growing amount of concern these days about another epic financial crash on Wall Street. That, in itself, is a concern. After all, we’ve had only two great crashes in the past 89 years: one from 1929 to 1933 and one from 2008 to 2009. Why is another crash on the tip of so many tongues today?
Last week JPMorgan Chase released a lengthy research report in which its analyst Marko Kolanovic suggested that in the event of another major Wall Street crisis, the Fed should not only have its emergency powers restored to buy up toxic debt with abandon from Wall Street but that the Fed might also have to buy up stocks – an unprecedented action for the U.S. central bank – or at least unprecedented as far as the public knows.
The outrage of that suggestion rests in the fact that the biggest Wall Street banks, including JPMorgan Chase, have been artificially boosting “market” demand for their stocks by spending hundreds of billions of dollars collectively to buy back their own bank stocks instead of using those funds to make loans to worthy businesses — the core purpose of a bank to help grow jobs and the economy. Now JPMorgan Chase suggests that the Fed should be the buyer of last resort when the market decides to reassess the real value of those bank shares.
Yesterday, as if on cue, the three masterminds of the unprecedented 2007 to 2010 Wall Street bailout that included the funneling of a secret $16.1 trillion in cumulative, almost zero interest rate loans to the miscreant banks of Wall Street and their foreign peers, had the temerity and hubris to whine in a New York Times OpEd that “Congress has taken away some of the tools that were crucial to us during the 2008 panic. It’s time to bring them back.”
Former Federal Reserve Chairman Ben Bernanke, former New York Fed Bank President/U.S. Treasury Secretary Tim Geithner, and former U.S. Treasury Secretary Hank Paulson – all up to their ears in the financial crisis bailout — also write the following in the OpEd:
“Although we and other financial regulators did not foresee the crisis, we moved aggressively to stop it. Acting in its traditional role as lender of last resort, the Federal Reserve provided massive quantities of short-term loans to financial institutions facing runs, while cutting interest rates nearly to zero.”
At the urging of Senator Bernie Sanders, an amendment was inserted into the Dodd-Frank financial reform legislation of 2010 which authorized the Government Accountability Office (GAO) to perform an audit of the Fed’s crisis lending programs. That report was released by the GAO in 2011. It completely disputes the assertion by Bernanke, Geithner and Paulson that the Fed was acting “in its traditional role as lender of last resort.” The report states the following:
“The scale and nature of this assistance amounted to an unprecedented expansion of the Federal Reserve System’s traditional role as lender-of-last-resort to depository institutions.”
The GAO report notes that the Federal Reserve Bank of New York was tapped to administer most of the Fed’s lending programs while CEOs of some of the largest banks on Wall Street had sat on its Board of Directors for years. As Wall Street On Parade previously reported, Sanford (Sandy) Weill, while Chairman and/or CEO of Citigroup, sat on the New York Fed’s Board as the bank was amassing tens of billions of dollars in toxic off-balance-sheet debt that would eventually blow up in Structured Investment Vehicles (SIVs). The Fed is not allowed to make loans to insolvent institutions and yet the GAO report found that Citigroup was the largest recipient of the Fed’s secret emergency lending programs, receiving a cumulative $2.5 trillion.
Citigroup also received customized relief from the Fed. On August 20, 2007, the Federal Reserve granted Citigroup an exemption that would allow it to funnel up to $25 billion from its FDIC insured depository bank to speculators at its broker-dealer unit. The Fed states in its authorization letter that the bank “is well capitalized.” But that’s not how Sheila Bair, former head of the Federal Deposit Insurance Corporation during the crash, described Citigroup’s situation in her book Bull by the Horns. Bair writes:
“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.”
As Citigroup entered its death spiral, Geithner was hobnobbing with Citigroup execs. His appointment calendar shows that he held 29 breakfasts, lunches, dinners and other meetings with Citigroup executives. On January 25, 2007, Geithner not only hosted Weill to lunch at the New York Fed, but Geithner brought his teenage daughter to the lunch. Geithner’s appointment calendar shows Elise Geithner, his daughter, sharing his chauffeured car to work with her father and then joining him at lunch with Sandy Weill. This was not Take Your Daughters and Sons to Work Day. A few months later, on May 17, 2007, Geithner joined Weill for breakfast at the expensive Four Seasons.
According to the New York Times, Geithner even entertained a job offer from Weill to become Citigroup’s CEO in late 2007 as its multi-billion dollar losses mounted. Geithner turned down the offer and became instead U.S. Treasury Secretary in 2009, where he was a strong advocate to keep Citigroup afloat.
We’ll never know how much hobnobbing Bernanke was doing with the big Wall Street banks because he refuses to release the details of 84 secret meetings during the crisis and while he was Fed chair, the majority of which occurred during the business day.
As for Paulson, he received a massive windfall on his sale of his $480 million in Goldman Sachs’ stock when he left Goldman as CEO to become U.S. Treasury Secretary in 2006, getting out ahead of the details of Goldman’s role in the subprime crisis.
The ability of the Fed to make trillions of dollars in secret loans to dodgy banks was reined in under Section 1101 of the Dodd-Frank financial reform legislation of 2010. It mandates that the Fed cannot lend funds to a bank that is insolvent. It also bars the Federal Reserve from keeping its actions secret from Congress. The legislation states in part:
“The [Federal Reserve] Board shall provide to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives, (i) not later than 7 days after the Board authorizes any loan or other financial assistance under this paragraph, a report that includes (I) the justification for the exercise of authority to provide such assistance; (II) the identity of the recipients of such assistance; (III) the date and amount of the assistance, and form in which the assistance was provided; and (IV) the material terms of the assistance, including — (aa) duration; (bb) collateral pledged and the value thereof; (cc) all interest, fees, and other revenue or items of value to be received in exchange for the assistance; (dd) any requirements imposed on the recipient with respect to employee compensation, distribution of dividends, or any other corporate decision in exchange for the assistance; and (ee) the expected costs to the taxpayers of such assistance…”
That reference to “employee compensation” grew out of the fact that Wall Street had taken massive amounts of bailout money, then paid millions of dollars in bonuses to executives.
The Fed’s $16.1 trillion to the serially-charged Wall Street banks stood in stark contrast to the paltry funds offered to homeowners who were victims of the resulting economic implosion. In January 2017 the GAO released a study showing that as of October 31, 2016, the Federal government “had disbursed $22.6 billion (60 percent) of the $37.51 billion Troubled Asset Relief Program (TARP) funds” that were earmarked for helping distressed homeowners.
The New York Times really needs to rethink allowing its OpEd page to be used as a lobby forum for Wall Street’s worst instincts.