By Pam Martens and Russ Martens: March 13, 2020 ~
The Federal Reserve Board of Governors has acknowledged to Wall Street On Parade that it has 233 documents that might shed some light on why JPMorgan Chase was allowed by the Fed to draw down $158 billion of the reserves it held at the Fed last year, creating a liquidity crisis in the overnight loan market according to sources on Wall Street. After taking four months to respond to what should have been a 20-business day turnaround on our Freedom of Information Act request, the Federal Reserve denied our FOIA in its entirety. (Our earlier request to the New York Fed resulted in the same kind of stonewalling. See The New York Fed Is Keeping JPMorgan’s Secrets Close to Its Chest.)
The Wall Street liquidity crisis forced the Federal Reserve, beginning on September 17 of last year, to begin making tens of billions of dollars in loans each business day to the trading houses on Wall Street. It calls these firms its “primary dealers” since they also engage in open market operations with the Fed and are under contract with the government to make purchases of Treasury securities during Treasury auctions, a dangerous symbiotic relationship to say the least. This was the first time since the financial crisis of 2008 that the Fed had made these so-called repo loans to the trading houses on Wall Street.
On September 17, the word “coronavirus” was unknown to most people around the world. The spread of the virus in China did not begin to make news until January of this year. Thus, the roots of the liquidity crisis on Wall Street cannot be assigned to the coronavirus, although we have every expectation that Wall Street and its minions will make every effort to do so as the history of this crisis is written – no doubt with the aid of Andrew Ross Sorkin and Paul Krugman of the New York Times.
The first coronavirus case in the U.S. to be confirmed by the Centers for Disease Control and Prevention (CDC) was reported by CNN on January 22 of this year. It had been confirmed by the CDC on January 21. But the Fed’s repo loan money spigot by that time had already pumped out $6 trillion in cumulative repo loans to the trading houses on Wall Street. And the dollar amounts of its emergency loans kept rising, as evidenced by the ongoing official statements that the New York Fed published on its website.
On October 4, the Fed announced that it was extending what was supposed to be a short-term, temporary loan program into November, as we reported that Wall Street mega banks had announced 68,000 in job cuts. Again, that was long before any coronavirus problem.
On October 23, 2019, before there was any hint of a coronavirus problem anywhere in the world, the New York Fed announced a massive expansion of its loans to Wall Street. It said it would be funneling up to $120 billion a day in cheap overnight loans to Wall Street trading firms, a daily increase of $45 billion from its previously announced $75 billion a day. In addition, it said it would increase its twice-weekly 14-day term loans to Wall Street from $35 billion to $45 billion. That would bring the weekly offerings up to a potential $690 billion a week. We noted at the time that if the Wall Street firms were getting these loans rolled over and over, as they did during the Fed’s bailout in 2008, they are effectively permanent loans at unprecedented low interest rates for firms that are far from AAA credits. To derive a windfall from these loans, all the trading firms would have to do is borrow from the Fed at 1.50 percent and make margin loans to stock traders at 7 or 8 percent.
We knew from the New York Fed’s unprecedented $29 trillion money spigot to the Wall Street trading firms during the 2008 financial crisis that this was going to eventually turn into a full scale bailout of the latest bubble on Wall Street, just as it had in 2008. And because the mainstream media was ignoring the story, we took it upon ourselves to chronicle the Fed’s repo loan activities in more than five dozen articles which we have archived for our readers here.
The Fed’s money spigot became a gusher this week. On Wednesday, the New York Fed announced that it would be making up to $270 billion, in just one day, available to Wall Street on Thursday. But before Thursday was over, the Fed upped its largess to such a staggering figure that even we were speechless. It said that between Thursday and today, it would offer $1.5 trillion in a combination of 3-month and one-month loans – on top of its other ongoing loan programs.
The stunning sum of $1.5 trillion exceeds the $1.433 trillion the Fed had outstanding in emergency loans to Wall Street trading firms and banks at the peak of the crisis in 2008, according to the audit performed by the Government Accountability Office.
Strangely, however, after tapping $198.1 billion from the Fed’s other loan offerings in the morning yesterday, Wall Street firms only tapped $78.4 billion from the giant $500 billion 3-month loan made available by the Fed in the afternoon. Wall Street seemed to interpret that as a sign that those trading firms that are in trouble didn’t have enough government-backed collateral to post for the Fed loans and the stock market closed at the lows of the day, with the Dow Jones Industrial Average selling off by 2,352 points.
This morning, only $17 billion of the $500 billion offered by the Fed in its 3-month loan was tapped and $24.1 billion of the $500 billion in the one-month loan. When Wall Street thumbs its nose at almost free money, something really strange is going on.
Two problems that readily come to mind among Wall Street trading firms are that both JPMorgan Chase and Goldman Sachs are under criminal investigations by the U.S. Department of Justice. JPMorgan Chase is under a criminal probe for allowing its precious metals trading desk to be turned into a criminal racketeering enterprise, according to the U.S. Department of Justice. Multiple indictments of traders have been handed down with the bank itself now being probed. The bank already has an unprecedented three criminal felony counts, to which it pleaded guilty, notched in its belt. Two occurred in 2014 for its role in the Bernie Madoff Ponzi scheme – it allowed insane levels of money laundering to occur in the business account it held for Madoff. The third felony came in 2015 for its role in rigging foreign exchange trading. This is clearly a serial, recidivist offender and yet the Board of JPMorgan Chase has retained the same Chairman and CEO, Jamie Dimon, throughout this wave of crimes.
Goldman Sachs is under a criminal probe by both the U.S. Department of Justice and Malaysian authorities for its role in a pay-to-play and embezzlement scheme known as 1MDB.
Two other big problems are that Deutche Bank, Germany’s largest lender which has a big footprint on Wall Street as a derivatives counterparty to the largest Wall Street banks, has been bleeding its common equity capital like a snow cone in July. Its stock closed down 15.05 percent yesterday, to an all-time low of $5.53, leaving it with just $11.4 billion in common equity capital – a preposterous sum to be supporting tens of trillions of dollars (notional, face amount) in derivatives.
Stock futures are currently showing a 1,000+ point move up when the stock market opens this morning. Some of that optimism may be as a result of German Chancellor Angela Merkel holding a press conference and pledging monetary help to ailing companies as a result of the coronavirus pandemic. Whether Germans will support a major bank bailout, however, remains to be seen, especially to a bank that has repeatedly been charged with money laundering and market manipulations, as Deutsche Bank has been.
Another problem for Wall Street is Citigroup. Like Deutsche Bank, it is a major derivative counterparty and has also been bleeding away its common equity capital. It closed down 14.83 percent yesterday at $43.26, giving its stock a year-to-date decline of 47 percent. That leaves Citigroup with just $90.77 billion to support a derivatives book of $49 trillion in notional derivatives.
While all of these deteriorating fundamentals have been occurring at the Wall Street banks without any commensurate decline in their risk profiles, the same Federal Reserve that is denying the public’s right to know what is going on has been the regulator of these bank holding companies. This is exactly what happened in the lead up to the 2008 financial crash on Wall Street. The Fed kept its blinders on and refused to crack down on the spiraling derivative problems.
This is what Sheila Bair, the former head of the Federal Deposit Insurance Corporation (FDIC) wrote in her book, “Bull by the Horns” regarding Citigroup’s role in the 2008 financial crisis:
“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.”
The crisis today is that far more banks than just Citigroup look like they have serious problems.