By Pam Martens and Russ Martens: November 22, 2019 ~
As you may have noticed by now, Wall Street On Parade is not buying the narrative that the $3 trillion that the New York Fed has pumped out to the trading houses on Wall Street since September 17 is part of routine open market operations that the Fed is legally allowed to do. We are also not buying the idea that if the same banks that backed away from lending during the financial crisis are doing so again today, this is not a matter that deserves an airing before the Senate Banking and House Financial Services Committees.
Thus far, not one hearing has been held to examine why the New York Fed, for the first time since the financial crisis, has once again become the lender of last resort to Wall Street. Keep in mind that the $3 trillion in super cheap loans has not gone to commercial banks to assist the overall economy; the hundreds of billions of dollars each week are going to the Fed’s “primary dealers” which are the trading houses on Wall Street.
Hopefully, Congress is going to rise from its stupor on this subject in early December. The House Financial Services Committee, under the able leadership of Maxine Waters and a very talented roster of Committee members, will hold two hearings in the first week of December that might drill down to what is really going on in the arena of shrinking liquidity for loans by Wall Street banks while the stock market sets new highs. The House Financial Services Committee will hold the following two hearings:
December 4 at 10:00 a.m. – “Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity, and Accountability of Depository Institutions?”
December 5 at 10:00 a.m. – “Promoting Financial Stability? Reviewing the Administration’s Deregulatory Approach to Financial Stability.”
The House Financial Services Committee has not yet announced its witness list for the hearings.
On December 5, the Senate Banking Committee will hold a hearing titled “Oversight of Financial Regulators,” and a key member of the Federal Reserve will be testifying and answering questions – Randal Quarles, Vice Chairman for Supervision of the mega bank holding companies on Wall Street. Also appearing that day will be Jelena McWilliams, Chair of the Federal Deposit Insurance Corporation (FDIC) and Rodney Hood, Chair of the National Credit Union Association.
As background for these upcoming hearings, we thought it would be useful to take a look at the disturbing timeline that preceded this unprecedented $3 trillion (and counting) windfall to Wall Street at a time when Fed Chairman Powell insists that “The core of the financial sector appears resilient, with leverage low and funding risk limited relative to the levels of recent decades,” as he testified to Congress on November 13.
September 4, 2018: JPMorgan Chase sent a research report to its clients which includes this statement from Marko Kolanovic, a Senior Analyst at the bank:
“It remains to be seen how governments and central banks will respond in the scenario of a great liquidity crisis. If the standard interest rate cutting and bond purchases do not suffice, central banks may more explicitly target asset prices (e.g., equities). This may be controversial in light of the potential impact of central bank actions in driving inequality between asset owners and labor.”
September 7, 2018: The former Fed Chairman Ben Bernanke, former Treasury Secretary/Ex-CEO of Goldman Sachs Hank Paulson, and former New York Fed President Tim Geithner (who failed upward to become Treasury Secretary) wrote a jointly-penned OpEd for the New York Times titled “What We Need to Fight the Next Financial Crisis.” The trio who had served during the financial crisis were effectively urging a repeal of provisions in the Dodd-Frank financial reform legislation that were meant to stop the Fed from rewarding another crime spree on Wall Street with an unlimited money spigot from the Fed. They wrote:
“Even if a financial crisis is now less likely, one will occur eventually. To contain the damage, the Treasury and financial regulators need adequate firefighting tools…But in its post-crisis reforms, Congress also took away some of the most powerful tools used by the FDIC, the Fed and the Treasury. Among these changes, the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds. These powers were critical in stopping the 2008 panic.”
Those powers were also great at propping up billionaires’ investments in Wall Street banks like Citigroup, Morgan Stanley, Merrill Lynch and Goldman Sachs. These banks together received over $7.3 trillion in secret bailout funds from the Fed – money which flowed from the New York Fed from December 2007 through at least July of 2010 – without any knowledge or approval from Congress.
September 8, 2018: The Federal Reserve Bank of Boston holds day two of its 62nd Economic Conference. The former Chief Economist of the International Monetary Fund (IMF), Olivier Blanchard, endorses the Fed being able to buy up stocks in the open market during a financial crisis. According to reporting at the Dow Jones news outlet, MarketWatch, Blanchard said that the Fed could double its balance sheet and “nothing terrible would happen.” The best policy would be to buy stocks which “could do the trick and could work even better than buying long bonds.”
April 16, 2019: Bernanke, Paulson and Geithner released a paperback book titled: Firefighting: The Financial Crisis and Its Lessons. The book provided cover for the three to launch a national speaking tour to promote Wall Street’s repeal agenda. In the book they write:
“After the crisis, Tim and Ben hoped to preserve the new powers we had used to stabilize the system and secure additional authority for first responders to wind down systemically dangerous institutions in an orderly fashion in future crises. The Obama administration also proposed even stronger guarantee powers for the FDIC, to reduce the likelihood of a Lehman-type failure and reduce the need for the Fed to orchestrate one-off rescues of individual firms like Bear and AIG. But the TARP authority expired, and the final congressional version of Dodd-Frank curtailed rather than expanded the government’s firefighting tools. The FDIC’s broad guarantee authority, so effective during the crisis, was eliminated, as was the ability of the Fed to lend to individual nonbank financial firms under its 13(3) emergency powers. The Fed retained the ability under 13(3) to lend to broad classes of institutions as it had done for primary dealers, and to support important funding markets, as it had done for commercial paper, but with less discretion and less ability to take risk than before. For example, Congress limited the Fed’s discretion to judge when its loans are secured to its satisfaction, making it harder for the central bank to accept risky collateral in a future emergency. There was simply no political support for anything that could have been construed as enabling future bailouts.”
Read that second to last sentence one more time. These three former “public servants” appear to be arguing that it’s okay for the Fed to “accept risky collateral” in order to bail out incompetently managed Wall Street banks that had purchased assets that were so risky that they weren’t acceptable to any other financial institution as collateral for a loan – thus necessitating that the Fed provide cash for trash.
This is exactly what the New York Fed did during the financial crisis under its Primary Dealer Credit Facility (PDCF). The New York Fed doled out $8.9 trillion in loans in that program, often accepting stocks and junk bonds as collateral at a time when prices on both were collapsing. According to an audit conducted by the Government Accountability Office and released to the public in July of 2011, 63 percent of the $8.9 trillion in loans from the PDCF went to just three Wall Street banks: Citigroup, Morgan Stanley and Merrill Lynch. (See Table 8 in the GAO report.)
And this is what the former Chair of the FDIC, Sheila Bair, had to say about Citigroup in her book, Bull by the Horns:
“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.”
This is what Bernanke, Paulson and Geithner want to return to – a federally insured bank loading up on toxic assets, content in the knowledge that its federal regulators will hand it another $2.5 trillion to resuscitate itself when it collapses.
April 28, 2019: Bernanke, Paulson and Geithner appear on CNN to boost their pitch for giving the Fed broad powers to bail out Wall Street. Paulson makes this pitch:
“And I think the biggest reason they’re angry is in America, if we work hard and we succeed, people expect there to be rewards and when you fail, they expect you to fail and they don’t expect the government to come in and rescue. And we weren’t trying to rescue Wall Street. You know, you had to, to deal with this — there is so much concentration to deal with a problem, we had to go to the source and what we did is we put a tourniquet to stop the bleeding but, you know, because if we hadn’t done that, if we hadn’t stopped the collapse, many, many Americans would have been hurt…”
A “tourniquet” would have been a few billion dollars. When you secretly shower $29 trillion on Wall Street that’s not a tourniquet, that’s replacing every organ in the body. And to suggest that their efforts avoided “many, many Americans” from being hurt, is an insult to the 8.7 million Americans who lost their jobs and the 10 million American homes that were lost to foreclosure from 2006 to 2014.
The financial crisis produced the longest recession in the post World War II era; 2.5 million businesses closed down and income and wealth inequality have grown to the highest rate since the Great Depression. The crisis also produced the slogan, “Banks got bailed out, we got sold out” by the Occupy Wall Street Movement. Unless a much broader segment of the American people engage this time around, we’re going to have a repeat of the banks getting bailed out and the American people getting sold out.