By Pam Martens and Russ Martens: May 10, 2016
On May 1, William Dudley, the President of the New York Fed delivered a speech to the Atlanta Fed’s 2016 Financial Markets Conference. Dudley, who was previously hauled before Congress to examine his Wall Street cronyism, spent two-thirds of his talk meandering around the academic nuances of liquidity in a stressed market and then zeroed in for the kill. Dudley wants to extend the powers of the Federal Reserve as the lender of last resort beyond just banks to (wait for it) include broker-dealer stock trading operations. Under that scenario, Bernie Madoff’s market-making operation (that was also a fraud according to the Madoff Trustee Irving Picard) might have been borrowing from the Fed during the crisis of 2008. Maybe Madoff could have even borrowed enough from the Fed to still be operating.
Dudley’s exact words from the speech posted at the New York Fed’s web site were as follows:
“Now that all major securities firms in the U.S. are part of bank holding companies and are subject to enhanced prudential standards as well as capital and liquidity stress tests, providing these firms with access to the Discount Window might be worth exploring. To me, this is a more reasonable proposition now than it was prior to the crisis when the major dealers weren’t subject to those safeguards.”
Dudley’s push to further deform Wall Street is outrageous on multiple levels. First, it should be remembered that the strongest advocates of the public interest like Senators Elizabeth Warren and Bernie Sanders are pressing Congress to remove the safety net completely from securities firms by forcing them to be split off from banks holding insured deposits that are backstopped by the taxpayer. They want to restore the Glass-Steagall Act that protected this country for 66 years until its repeal in 1999. That legislation would completely bar stock-trading firms known as broker-dealers from being owned or affiliated with banks holding insured deposits.
Why is restoring the Glass-Steagall Act so clearly necessary today? In 2012, only through the curiosity of reporters at the Wall Street Journal and Bloomberg News was it revealed that JPMorgan Chase, the largest bank in the U.S., was using its insured deposits to make high risk gambles in exotic derivatives in London. The insured bank’s eventual losses were at least $6.2 billion. When the Senate’s Permanent Subcommittee on Investigations released its in-depth report on what became infamously known as the London Whale scandal, Senator Carl Levin who chaired the Subcommittee at the time said that JPMorgan Chase “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.”
So much for Dudley’s nutty idea of safeguards being in place today. As for Dudley’s notion that the stress tests are some form of magic elixir to protect the financial system, the U.S. Treasury’s Office of Financial Research (OFR) just this past March released a study demonstrating why the Fed’s stress tests are measuring the wrong metrics. The problem, according to the OFR (as well as common sense) is not what would happen if a major counterparty to one bank failed but what would happen if that counterparty also happened to be the major counterparty to lots of other banks, exactly what happened in 2008. This is still very much the problem on Wall Street. Four major banks (JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs) hold tens of trillions of dollars each in derivatives and their counterparties that hold the opposite side of that risk are also highly concentrated.
One of the “securities firms” that might be giving Dudley some sleepless nights, thus his need to avoid sleeping pills and extend the Discount Window safety net around its sprawling hulk, is Morgan Stanley. That investment bank and brokerage firm became a bank holding company during the crisis in 2008. Its insured deposits are small compared to the other major Wall Street banks, however, it plays in the big leagues in terms of derivatives exposure. According to the Office of the Comptroller of the Currency, as of December 31, 2015 Morgan Stanley’s bank holding company held $28.8 trillion in derivatives.
Goldman Sachs is also a lightweight as a commercial bank. But as we reported last month, as of December 31, 2015 it was holding $41 trillion in derivatives at its insured bank, representing a stunning 516 percent of its risk-based capital. (The New York Fed has previously given the appearance of running interference for Goldman Sachs – which is where Dudley spent two decades prior to joining the New York Fed in 2007.)
And, finally, it was the New York Fed that was secretly sluicing trillions of dollars in cumulative loans to “securities firms” during the 2007 to 2009 financial crisis. On March 3 of last year, Senator Elizabeth Warren dropped this bombshell in a Senate Banking Committee hearing on how the Federal Reserve operates:
“During the financial crisis, Congress bailed out the big banks with hundreds of billions of dollars in taxpayer money; and that’s a lot of money. But the biggest money for the biggest banks was never voted on by Congress. Instead, between 2007 and 2009, the Fed provided over $13 trillion in emergency lending to just a handful of large financial institutions. That’s nearly 20 times the amount authorized in the TARP bailout.
“Now, let’s be clear, those Fed loans were a bailout too. Nearly all the money went to too-big-to-fail institutions. For example, in one emergency lending program, the Fed put out $9 trillion and over two-thirds of the money went to just three institutions: Citigroup, Morgan Stanley and Merrill Lynch.
“Those loans were made available at rock bottom interest rates – in many cases under 1 percent. And the loans could be continuously rolled over so they were effectively available for an average of about two years.”
The Fed fought a multi-year court battle to keep this information secret from the public. Only through the perseverance of Bloomberg News in winning this court battle did the public finally obtain the truth about what, in hindsight, looks like a central bank that went rogue on behalf of its crony relationships on Wall Street.