By Pam Martens and Russ Martens: October 4, 2019 ~
Yesterday, the House Financial Services Committee released its hearing schedule for October. There is not a peep about holding a hearing on the unprecedented hundreds of billions of dollars that the Federal Reserve Bank of New York is pumping into unnamed banks on Wall Street at a time when there is no public acknowledgement of any kind of financial crisis taking place.
Congressional committees should have been instantly on top of the Fed’s actions when they first started on September 17 because the Fed had gone completely rogue from 2007 to 2010 in funneling an unfathomable $29 trillion in revolving loans to Wall Street and global banks without authority or even awareness from Congress. The Fed also fought a multi-year court battle with the media in an effort to keep its giant money funnel a secret.
According to Section 1101 of the Dodd-Frank financial reform legislation of 2010, both the House Financial Services Committee and the Senate Banking Committee are to be briefed on any emergency loans made by the Fed, including the names of the banks doing the borrowing. The section reads:
“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…”
According to multiple sources we queried, the New York Fed has not made the names of these banks doing the borrowing available to either the Senate or House committees. And if there is pushback from the Committees, the public is not hearing about it. It was this exact kind of complacency and lack of leadership on the part of Congress in the early days of the financial crisis in 2007 that gave the Fed the guts to press a button and electronically create trillions of dollars to bail out the worst actors on Wall Street as they used large chunks of that money to reward themselves with tens of millions of dollars in bonuses and pay billions of dollars of the bailout money to lawyers to block their being prosecuted for fraud.
Journalists also failed to properly alert the public to the impending crisis – even when warning bells were loudly clanging.
More than a full year before the worst of the crisis, on August 23, 2007 the New York Times ran the headline “4 Major Banks Tap Fed for Financing.” The correct headline should have been: “Largest Banks in U.S. Take Unprecedented Step of Borrowing from the Fed’s Discount Window.” The article should have appeared on the front page but instead was buried on page C10 of the New York print edition.
Throughout the Fed’s history, a bank that is forced to borrow at the discount window because it can’t get loans elsewhere is seen as being in deep distress. That’s why banks don’t do it. The Times did acknowledge the stigma in the eighth paragraph, writing:
“ ‘Going to the discount window is like someone on the Upper East Side being seen in a Wal-Mart,’ said Charles R. Geisst, a financial historian at Manhattan College. ‘The T-shirts may be cheap, but why would you?’ ”
Geisst added: “ ‘The banks are circling the wagons. Somebody’s got a problem.’ ”
That was perhaps an underwhelming analogy for the situation. Being frugal when shopping for t-shirts is worlds apart from being on the cusp of the greatest banking crisis since the Great Depression.
The four mega banks that borrowed $500 million each at the Fed’s discount window were Citigroup, Bank of America, JPMorgan and Wachovia. Deutsche Bank, Germany’s biggest bank, whose U.S. unit still has a heavy footprint on Wall Street, had tapped the window the prior Friday for an undisclosed amount.
Making the media’s coverage of the early days of the financial crash look even more questionable, the day before the New York Times’ print edition ran the story, the wire service Reuters reported the action with this now infamous quote:
“ ‘The psychology is, if a bank needs to borrow from the discount window, and they think there’s a stigma attached to it, they can say, Citi has done it, too,’ said Robert Albertson, chief strategist at Sandler O’Neill in New York.”
In other words, the general public and even a top Wall Street strategist was under the impression that Citigroup was the strongest of the strong among the Wall Street mega banks at that point in time. In fact, its shakiness was a key source of the unwillingness of banks to lend to one another and why they had to rely on the Fed as a lender of last resort — because they did not know who had exposure to Citigroup. Before the crisis was over, Citigroup would have secretly tapped over $2.5 trillion in revolving loans from the Fed according to the Government Accountability Office (GAO) audit that was released in July 2011.
Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC) at the time, wrote this in her subsequent memoir (see Sheila Bair’s Book Gores Citigroup’s Bull):
“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.”
New York Times’ writers like Andrew Ross Sorkin and Paul Krugman have for years been pushing the narrative that it was not universal banks like Citigroup (where risky securities and derivatives trading are under the same bank holding company roof as the Federally-insured commercial bank) that caused the financial crash of 2008 but rather the investment bank Lehman Brothers and the insurer AIG. In reality, Lehman and AIG were symptoms while Citigroup was the disease. The underlying agenda of Sorkin and Krugman appears to be to thwart Elizabeth Warren’s multi-year efforts to restore the Glass-Steagall Act which prevented these kinds of mergers.
Under the Glass-Steagall legislation of 1933, the U.S. financial system remained safe for 66 years until its repeal in 1999. It took just nine years after the repeal for the U.S. financial system to blow up in a replay of 1929, a time when there had also been no separation between securities speculation and deposit taking.
There are only two ways to look at what is happening today. It starts with basic math. As of June 30 of this year, the four largest commercial banks held more than $5.45 trillion in deposits. The breakdown is as follows: JPMorgan Chase has $1.6 trillion; Bank of America clocks in at $1.44 trillion; Wells Fargo has $1.35 trillion; and Citibank is home to just over $1 trillion.
With $5.45 trillion in deposits, why isn’t there enough liquidity to make loans in the billions. Either the big banks are backing away because of something they see on the horizon or something very troubling has happened to their liquidity.
The New York Fed has trimmed its daily $100 billion in loan offers to just $75 billion per day. This morning, just $38.55 billion of the $75 billion in overnight loans offered by the Fed was taken. But when the New York Fed offered $60 billion in 14-day loans on September 26, there were bids to borrow all of that plus $12.75 billion more or a total of $72.75 billion. (The New York Fed only loaned out the $60 billion.) In other words, one or more banks needed longer-term financing that they could not get elsewhere. As of today, the Fed has made 14-day loans on three different occasions with a total of $139 billion being borrowed by financial institutions that remain anonymous to the American people.
And it is not confidence building that Wall Street players are pointing the finger at JPMorgan Chase, the largest bank in the U.S. with three felony counts which just last month had its precious metals desk named a criminal enterprise and three of its traders criminally charged under the RICO statute that is typically reserved for organized crime.
On October 1, Reuters’ David Henry reported the following:
“Publicly-filed data shows JPMorgan reduced the cash it has on deposit at the Federal Reserve, from which it might have lent, by $158 billion in the year through June, a 57% decline.”
Why isn’t Congress curious about why the country’s largest bank needs to get its hands in a six-month period on $158 billion when it’s supposed to already have $1.6 trillion in deposits and a “fortress balance sheet,” according to its Chairman and CEO, Jamie Dimon.
If Senator Carl Levin were still in Congress and still Chair of the Senate Permanent Subcommittee on Investigations, there would certainly be hearings on this matter happening right now. It was Levin who led the investigation into how JPMorgan Chase had used its depositors’ money to make wild gambles in derivatives in London and lose $6.2 billion in the process. (See our reporting on the London Whale scandal here.)
According to the New York Fed’s annual reports for 2017 and 2018, at the end of 2017 it was holding $1.2 trillion in deposits for its depository institutions, which would have included JPMorgan Chase. But at the end of 2018 that amount had dropped by $314.8 billion or 26 percent.
Compare that drop at the New York Fed to what occurred in the same time frame at the San Francisco Fed. That Fed regional bank had $287.6 billion in deposits at the end of 2017 versus $250.4 billion at the end of 2018, a decline of just $37.2 billion or 12.9 percent.
Thus the question arises, why did the New York Fed allow JPMorgan to withdraw so much liquidity from the system? To help answer that question, Institutional Investor has a must-read article out on the crony operations between Wall Street’s banks and the New York Fed.