The Untold Story of 9/11: Bailing Out Alan Greenspan’s Legacy

By Pam Martens and Russ Martens: September 11, 2016

Alan Greenspan, Former Fed Chairman, Testifying to the House Oversight Committee on How He Got It Wrong, October 23, 2008

Alan Greenspan, Former Fed Chairman, Testifying to the House Oversight Committee on How He Got It Wrong, October 23, 2008

Today marks the 15th Anniversary of the tragic events of September 11, 2001 and yet the American public remains in the dark about critical details of hundreds of billions of dollars of financial dealings by the Federal Reserve in the days, weeks and months that followed 9/11.

What has also been lost in the official 9/11 Commission Report, Congressional hearings and academic studies, is how Wall Street, on the day the planes slammed into the World Trade Towers, was on the cusp of being exposed by the New York State Attorney General, Eliot Spitzer, as the orchestrator of a fraud of unprecedented proportion against the investing public. That investigation was stalled for more than six months. It would have been politically incorrect to do perp walks outside Wall Street’s biggest investment banks as families mourned the loss of their loved ones; as U.S. savings bonds were renamed Patriot Bonds to rally patriotism around the country; and Congress paid homage to the heroes at the big banks, the stock exchanges and the Federal Reserve for getting the system back up and running in less than a week.

The loony policies of laissez-faire capitalism of Fed Chair Alan Greenspan, who worshiped at the feet of Ayn Rand, were also bailed out by the events of  9/11. Members of the Senate Banking Committee praised him on September 20, 2001 for his performance. Amazingly, at this hearing, just nine days after the attack, not one Senator asked Greenspan how much money the Fed had spent or to whom it went. The percolating collapse of Wall Street was held off for seven more years until 2008 when it finally became impossible to deny that Greenspan’s brand of financial deregulation and the repeal of the Glass-Steagall Act he had pushed for, had left Wall Street in ruins – without any assault from the skies.

Here’s where Wall Street and the U.S. economy stood on September 10, 2001, the day before an attack in lower Manhattan provided the excuse for the Federal Reserve to flood Wall Street with unquestioned amounts of cash: The Nasdaq stock market, filled with the stocks of rigged analyst research from the iconic firms on Wall Street (the target of Spitzer’s investigation), had imploded, losing 66 percent of its pumped up value and wiping out $4 trillion in wealth. While it wasn’t yet known at the time, being only officially acknowledged long after 9/11, the U.S. economy had contracted for two consecutive quarters and was looking at another negative quarter of growth.

Thus, it was quite advantageous for Alan Greenspan’s legacy as Chair of the Federal Reserve and what might have been an even worse economic slump that the Fed was given carte blanche to funnel hundreds of billions of dollars to Wall Street after 9/11 with the Federal government pumping billions more in fiscal stimulus.

According to a report from the New York Fed, an “unprecedented” amount of liquidity was pumped into the system. The Congressional Research Service quantifies the “unprecedented” amount as “$100 billion per day” over a three-day period beginning on 9/11. But the idea that the bailout lasted only a few days or weeks is misguided. The consolidated annual reports of the Federal Reserve Banks show that the Fed’s balance sheet grew from $609.9 billion at the end of 2000 to $654.9 billion at the end of 2001 to $730.9 billion at the end of 2002 and $771.5 billion as of December 31, 2003.

According to the 2001 Annual Report of the Chicago Fed, one unnamed bank was so grateful for the largess flowing from the Fed that it sent “a thousand packages of LifeSavers candy to each of the 45 Fed offices.”

A report prepared by Stacy Panigay Coleman for the Federal Reserve’s Division of Reserve Bank Operations and Payment Systems indicated that the flood of money took various forms on and after 9/11:

A handful of the largest, again unnamed, Wall Street banks were dramatically overdrafting their accounts at the Fed, resulting in daylight overdrafts peaking at “$150 billion on September 14, their highest level ever and more than 60 percent higher than usual….” According to other annual reports at regional Fed banks, fees were waived by the Fed for these massive overdrafts.

Coleman reports that “discount window loans rose from around $200 million to about $45 billion on September 12.”

Gail Makinen, Coordinator Specialist in the Economic Policy, Government and Finance Division of the Congressional Research Service delivered a 60-page report on other flows of money as a result of 9/11. Makinen found that New York City received the following in Federal aid as of the date of her report in September 2002:

“$11.2 billion appropriated in September 2001 for debris removal and direct aid to affected individuals and businesses [again, the businesses go unnamed]; just over $5 billion in economic development incentives was approved in March 2002; and another $5.5 billion for a variety of infrastructure projects for New York City was approved in August 2002.”

Greenspan’s weak economy received another form of bailout. Makinen writes:

“Although legislation initially introduced was directed at workers adversely affected by 9/11, the legislation that ultimately passed dealt with the economy-wide recession. It extended unemployment compensation (UC) benefits 13 weeks for those who had exhausted their basic benefits, and for UC exhaustees in ‘high-unemployment states,’ it provided 13 weeks of benefits beyond the initial 13-week extension.”

The Congressional Research Service also noted that “overtime wages of police and firefighters raised national income by $0.8 billion” in the third quarter of 2001.

Then there was the bailout of the airlines. Makinen reports:

“At the time of 9/11, the industry was already in financial trouble due to the recession. 9/11 severely compounded the industry’s financial problem. Even though the federal government quickly responded with an aid package that gave the airlines access to up to $15 billion (consisting of $5 billion in short-term assistance and $10 billion in loan guarantees), it is by no means certain that the industry will not have to undergo a major reorganization typified by U.S. Airways filing for Chapter 11 bankruptcy and United suggesting that it may take a similar course of action.”

The Fed’s rapid cuts in the Federal Funds Rate and Discount Rate after 9/11 was worth hundreds of billions of dollars more to the big Wall Street banks by lowering their borrowing costs. On September 17, before the stock market opened for the first time since the 9/11 attack, the Fed announced it was cutting both the Fed Funds Rate and the Discount Rate by 50 basis points (half of one percent). Two weeks later, on October 2, the Fed slashed both the Fed Funds and Discount Rates by another 50 basis points. Stunningly, on November 6, one month later, it again cut both rates by 50 basis points, bringing the Fed Funds Rate to 2 percent and the Discount Rate to 1-1/2 percent. On December 11, both rates were cut again but this time by just 25 basis points. The Fed Funds Rate was now trading at the lowest level in 40 years.

The Fed then went on pause until November of the following year, when it again slashed 50 basis points from both the Fed Funds Rate and the Discount Rate. At this point, the Fed Funds were at 1-1/4 percent while the Discount Rate was a miniscule ¾ percent.

When President George W. Bush submitted his budget in January 2002, it carried this often repeated misstatement of fact: “The terrorist attacks pushed a weak economy over the edge into an outright contraction.” That was the official narrative – which served to soften Greenspan’s gross bungling of his job as Fed Chair.

Using 9/11 as a handy source of blame would go up in smoke on March 26, 2002 when the National Bureau of Economic Research announced that the U.S. economy had entered a recession in March 2001, six months before the attacks. The Commerce Department weighed in on July 29, 2002 with data showing that GDP had contracted in the first, second and third quarters of 2001. Rather than pushing a “weak economy over the edge into an outright contraction,” it is highly likely that the unprecedented amounts of money infused by the Federal Reserve and the government after 9/11 actually bailed out a seriously contracting economy.

The Chicago Fed’s 2001 Annual Report contains further information on the enormous amount of money flowing from the Fed. The report notes the following regarding the actions immediately after 9/11:

“The Fed begins to flood the financial system with record levels of liquidity by executing repurchase agreements. These overnight loans collateralized with government securities are used routinely in open market operations, but seldom top a few billion dollars each day. On Wednesday [September 12], the Fed injects $38 billion, more than double the previous record. Thursday [September 13], the Fed shatters that mark with $70 billion. The next day, the Fed injects even more — $81 billion. [Which banks were at the other end of these trades with the Fed? The public, to this day, has no idea.]

“In addition, the Fed does not offset the float generated by check-processing delays. Typically, if check deliveries are delayed, the Fed ‘soaks up’ the float through open market operations. The Fed opts to let the float remain, providing additional liquidity. The result is $23 billion in float on September 12 and a daily average of $28 billion in float for the week ending September 19.”

The Chicago Fed’s report also indicates that an additional “$90 billion in liquidity” was added by the Fed setting up 30-day dollar swap agreements with the European Central Bank, the Bank of Canada and the Bank of England.

Then there was the stimulus added to the economy through the creation of the juggernaut known as the Department of Homeland Security. According to a Government Accountability Office report in 2011, that Federal agency in 2011 was  “the third-largest federal department, with more than 200,000 employees and an annual budget of more than $50 billion.”

The Fed was not the only Wall Street regulator to be given a free pass during and after 9/11. The Chair of the SEC at the time, Harvey Pitt, a long time lawyer to Wall Street banks, testified before the Senate Banking Committee on September 20, 2001 that the SEC had, for the first time, “invoked the emergency powers that you bestowed upon us.” According to testimony from U.S. Treasury Secretary Paul O’Neill at the same hearing, the emergency relief the SEC invoked “included providing relief under Rule 10b–18 which provides a safe harbor from liability for manipulation in connection with purchases by an issuer of its own stock. The relief gives issuers greater latitude to provide buy side liquidity this week.”

Typically, corporations are not allowed to buy back their own stock during the opening minutes of trading on the stock exchanges. It is likely that requirement was waived when the market reopened on September 17, 2001 according to O’Neill’s statement at the Senate Banking hearing.

On April 14, 2002 – seven long months after 9/11 – the public finally found out what Eliot Spitzer knew about how the public had been hosed by the iconic investment banks on Wall Street. Spitzer released an affidavit he had filed with the New York State Supreme Court which indicated that his investigation had commenced in June of 2001.

The New Yorker’s John Cassidy perfectly described the mess that Greenspan and the Bill Clinton administration had ushered in by getting Congress to repeal the Glass-Steagall Act, which had separated banks holding insured deposits from the trading and underwriting firms on Wall Street:

“Long-standing restrictions on the financial industry were relaxed, allowing firms of all kinds to join together. Union Bank of Switzerland acquired PaineWebber; Salomon merged with Smith Barney, which was owned by Travelers Group, which then merged with Citicorp. These deals, and many more like them, blurred the traditional line between retail brokerages, such as Merrill Lynch and Dean Witter, which catered principally to the investing public, and investment banks, like Morgan Stanley and Goldman Sachs, which dealt primarily with corporations. The new all-purpose financial supermarkets that resulted from the merger wave, such as Citigroup, J. P. Morgan Chase, and Morgan Stanley Dean Witter, were, in the words of Paul Volcker, a former chairman of the Federal Reserve Board, ‘bundles of conflicts of interests.’ ”

Spitzer’s office would later uncover thousands of emails at Salomon Smith Barney, the investment bank and retail brokerage arm of Wall Street banking behemoth, Citigroup, showing that in 2000 and 2001, prior to 9/11, retail brokers at Salomon Smith Barney were livid at Jack Grubman, the telecommunications analyst that had issued buy ratings on startups that repeatedly crashed and burned. One broker wrote in an email that Grubman was “an investment bank whore.” One email from Grubman explained the corrupt scheme in simple terms: “Most of our banking clients are going to zero and you know I wanted to downgrade them months ago but got huge pushback from banking.”

At some of the biggest banks on Wall Street, research analysts were telling the public to buy, buy, buy while secretly emailing their colleagues that the companies were “crap,” “junk” or a “piece of sh*t,” as illustrated by the emails released by Spitzer.

In April 2003, 10 of the banks investigated settled charges for $1.4 billion – marking the beginning of an era of massive fines and little meaningful change on Wall Street. The heads of the divisions that oversaw this massive fraud were never prosecuted. PBS reported the slaps on the wrist as follows:

“Two of the most well known analysts, who came to symbolize the conflicts of interest of the 1990s bull market, were fined and banned for life from the securities industry. Henry Blodget of Merrill Lynch was ordered to pay $4 million in fines and Jack Grubman of Salomon Smith Barney was ordered to pay $15 million as part of the terms of the settlement. In addition, Sanford I. Weill, CEO of Citigroup, was banned from talking to his firm’s analysts about their research outside of the presence of company lawyers.”

Weill walked away from Citigroup with compensation that had made him a billionaire. Grubman paid $15 million in fines but his compensation at Citigroup’s Salomon Smith Barney had “exceeded $67.5 million, including his multi-million dollar severance package” according to the SEC. (Note that on Wall Street one gets a severance package for fraud.) Blodget went on to found the financial news web site, “Business Insider,” which was sold last year for $343 million, a nice share of which Blodget will keep.

How did the shareholders in Citigroup and Merrill Lynch make out? Citigroup is currently trading (despite a 1-for-10 stock split attempting to dress up its price) at 10 percent of where it was trading on this date a decade ago. Merrill Lynch succumbed into the arms of Bank of America during the Wall Street crash of 2008, taking Bank of America shareholders on what the Wall Street Journal rightly called the “$50 Billion Deal from Hell.” The Journal notes further that the CEO of Merrill, John Thain, had “furnished his office with an $87,000 rug, arranged $25 million goodbye packages for his own hires, and handed out billions of dollars in last-minute bonuses to his staff before the acquisition closed.”

Where did Wall Street learn about how to funnel billions without going to jail? At the knee of the Federal Reserve, of course.

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