Panic at the Federal Reserve 2007: Robert Rubin Calls at 5 P.M.

By Pam Martens and Russ Martens: March 5, 2014

Former Fed Chair Ben Bernanke: What Did He Know and When Did He Know It

Based on the appointment calendars of Former Fed Chairman Ben Bernanke obtained under a Freedom of Information Act request filed by Wall Street On Parade, and the newly released Fed transcripts and documents from the financial crisis era, we are able to reconstruct the August 2007 panic that gripped the Fed Chairman, notwithstanding the dozens of headlines now proclaiming the Fed remained in the dark about the seriousness of the crisis.

It started with a call to Bernanke from Citigroup’s Robert Rubin at 5 p.m. on August 8, 2007. By the next morning, it appeared that the Fed Chairman had gone into a high state of alert.

At 11:00 a.m. the next morning (August 9, 2007) Bernanke met with Lewis Ranieri, the granddaddy of mortgage backed securities and a pioneer in the securitization market. Fed Governor Randall Kroszner and Sandy Braunstein, the Fed’s Director of the Division of Consumer and Community Affairs also attended this meeting.

Immediately after a lunch break, Bernanke hauled in a wide swath of the hedge fund world. It is noteworthy that the Fed Chair chose to meet alone with these men with no other Fed Governors or Fed staff present. This raises the question, was Bernanke attempting to restrict information at the Fed as to just how dangerous the crisis had become?

The hedge fund meeting included Ray Dalio of Bridgewater Associates whose newsletter had just the month before warned of the crazy leverage in the system. Aleksander Weiler, formerly of Tremont Capital and then at Weyerhaeuser Asset Management was also in attendance as were hedge fund money managers Stephen McMenamin and David Storrs.

It’s not every day that the head of the U.S. central bank sits down alone with a group of hedge fund managers. At this point, Tim Geithner was President of the New York Fed where Bill Dudley, now President of the New York Fed, was running the open market operations and in daily touch with the biggest money center banks. Why did Bernanke not rely on the intelligence they were providing? Why did he want to hear first hand from the people in the trenches?

Rubin’s 5 p.m. call to Bernanke on August 8 came just three business days after CNBC’s Jim Cramer had gone ballistic over the out of touch, “know nothing” Fed.

In what began as a calm exchange with Erin Burnett, Cramer began to scream:

Cramer: “…Bernanke is being an academic; it is no time to be an academic. It is time to get on the Bear Stearns call. Listen. Open the darn Fed window. He has no idea how bad it is out there! He has no idea! HE HAS NO IDEA! I have talked to the heads of almost every single one of these firms in the last 72 hours and he has no idea what it’s like out there! NONE! And Bill Poole has no idea what it’s like out there! My people have been in this game for 25 years. And they are losing their jobs and these firms are going to go out of business and he’s nuts, they’re nuts! THEY KNOW NOTHING!”

Burnett: “Cramer…” [Cramer cuts her off.]

“I have not seen it like this since I went five bid for half a million shares of Citigroup and I got hit in 1990. This is a different kind of market and the Fed is asleep…”

It is noteworthy that Cramer mentions Citigroup in the above exchange. What he is saying is that he put in a trade ticket to buy 500,000 shares of Citibank (Citigroup didn’t exist in 1990) at a price of $5 a share and the order was filled at that low price. By Thursday, March 5, 2009, Cramer would have been able to put in a bid at a buck for 500,000 shares of Citi and gotten filled. The stock traded as low as 97 cents that day and closed at $1.02.

Between Rubin’s call and Cramer’s scream, it does seem that Bernanke decided to get personally involved in intelligence gathering. From the day of the meeting with the hedge funds and Ranieri, August 9, 2007, Bernanke conducted one to 3 anonymous conference calls every day to the end of the month, a total of 34 conference calls. That quantity of conference calls where the participants are anonymous in Fed records was unprecedented for Bernanke until August of 2007.

There is no question that Bernanke understood that Citigroup posed a serious threat to the financial system because of what the Fed did next. According to the Fed’s Greenbook Part II for that period (an analysis of real-time economic developments), the following actions were taken:

“On August 9 and 10, the [New York Fed] Trading Desk provided significant levels of balances to the banking sector, and on August 10, the Federal Reserve announced that it would ‘provide reserves as necessary through open market operations to promote trading in the federal funds market’ and noted that ‘the discount window is available as a source of funding.’  On August 17, the FOMC issued a statement noting that financial market conditions had deteriorated and that ‘tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward.’ That day, the Federal Reserve temporarily reduced the primary credit rate 50 basis points and announced changes in practices to allow the provision of term primary credit to large as well as small depository institutions.  Later, the Federal Reserve clarified the acceptability of some ABCP [asset-backed commercial paper] as collateral for discount window borrowing, and, to help ease pressures in the bill market, the Trading Desk announced a temporary reduction—from 100 basis points to 50 basis points—in the minimum fee for borrowing securities from the SOMA Securities Lending Facility.”

As the above statement clarifies, this is the launch of the Fed as the buyer of last resort for the toxic sludge held on and off the Wall Street banks’ balance sheets and threatening their solvency.

Three days after the August 17 statement from the Fed, it quietly took another 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,” a statement that has been called into serious question in hindsight. (Federal Reserve Exemption to Citigroup to Loan to Its Broker-Dealer, August 20, 2007)

Bernanke was right to put his personal ear to the ground in August 2007 and stop relying on intel from the New York Fed. According to the transcript from the September 2007 Federal Open Market Committee meeting, Bill Dudley was astonishingly uninformed as to the leverage, synthetic products, off balance sheet threats, and counter-party linkages that would explode into trillions of dollars in economic losses, telling the Fed Governors on September 18, 2007 that a key question was: “… how did the problems in the subprime mortgage area—with losses that probably will ultimately turn out to be in a range of $100 billion to $200 billion—lead to such broad market distress?”


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