By Pam Martens and Russ Martens: December 28, 2020 ~
Following the financial crisis of 2007 to 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010. At the time, Democrats controlled both houses of Congress and could have put teeth into the law, had they chosen to do so. The Act did not reform Wall Street nor did it protect American consumers from the looting practices of the Wall Street banks.
Dodd-Frank allowed Wall Street’s private justice system to continue, where both customers and employees must waive their rights to bring claims in a court of law; it allowed Wall Street banks to continue using depositors’ money to make wild gambles in derivatives; it permitted Wall Street banks to continue buying triple-A credit ratings from the ratings agencies for dodgy securitized products; it allowed the very same banks that blew themselves up during the crisis to continue to operate their own Dark Pools and trade the shares of their own banks in darkness, as well as trade the stocks on which they had just issued “buy” ratings to the public. We could go on and on, but you get the point: Dodd-Frank was a grand show that accomplished next to nothing in the way of meaningful structural reform of Wall Street.
Now Americans are learning that the Dodd-Frank Act did one other very dangerous thing: it legally authorized the U.S. Treasury Secretary to take the Federal Reserve hostage during a financial crisis. Section 1101 of the Act provides that the Federal Reserve Board, “may not establish any program or facility under this paragraph without the prior approval of the Secretary of the Treasury.” The referenced paragraph pertains to the Fed’s ability to enact emergency lending facilities during a financial crisis.
Federal Reserve Chairman Jerome Powell’s testimony to the Senate Banking Committee on December 1 indicates that he is very much aware of who’s now in charge of calling the shots on emergency loans by the Fed in a time of crisis. Powell testified as follows:
“Our actions taken together have helped unlock almost $2 trillion of funding to support businesses, large and small, non-profits and state and local governments since April. This in turn has helped keep organizations from shuttering and has put employers in a better position to keep workers on and to hire them back as the economy continues to recover. These programs serve as a backstop to key credit markets and have helped restore the flow of credit from private lenders through normal channels. We’ve deployed these lending powers to an unprecedented extent. Our emergency lending powers require the approval of the Treasury and are available only in very unusual circumstances, such as those we find ourselves in.” (Italics emphasis added.)
As the Fed’s emergency loan programs were running full throttle in 2009, the very same man who had created them in the first place, Timothy Geithner, President of the New York Fed, was now serving as President Obama’s Treasury Secretary. Instead of being assailed for his lax oversight of the Wall Street banks that allowed them to become financial basket cases, Geithner was promoted to Treasury Secretary by Obama and Congress put him in further control of the Fed’s emergency loan programs under the language in the Dodd-Frank Act.
Before Geithner became Treasury Secretary, Hank Paulson held the post under George W. Bush. Paulson had, immediately prior to becoming Treasury Secretary, served as Chairman and CEO of Goldman Sachs. The man who took over the Presidency of the New York Fed and its crisis era emergency loan programs after Geithner was William Dudley – who had (wait for it) previously worked for Goldman Sachs for two decades. (They don’t call it Government Sachs for nothing.)
Today, we have a Treasury Secretary, Steve Mnuchin, who spent 17 years as a Goldman Sachs banker; co-founded the hedge fund Dune Capital Management; then got a sweet deal from the FDIC to buy the failed bank, IndyMac, together with the infamous hedge fund tycoons John Paulson and George Soros, renamed it OneWest and proceeded to become rich on the deal while foreclosing on tens of thousands of struggling families during the financial crisis, including active military members. (Also, according to Senator Ron Wyden, Mnuchin lied about his assets during his confirmation hearing.)
Is Mnuchin really the person Americans want overseeing emergency loan programs at the Fed, an institution that can legally create trillions of dollars electronically out of thin air. Mnuchin has already demonstrated that he’s unfit for this job by demanding in a November 19 letter to Fed Chair Jerome Powell that the Fed stop making emergency loans by December 31 under certain emergency loan programs, including the Main Street Loan Facility that benefits small and medium size businesses and the Municipal Liquidity Facility that supports local and state governments. Mnuchin is fine with the Fed continuing the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, and the Money Market Mutual Fund Liquidity Facility, all of which benefit Wall Street. Mnuchin is also fine with the Fed continuing its Paycheck Protection Program Liquidity Facility, which reimburses banks for the Small Business Administration loans they make (which are already guaranteed by the SBA). That Fed program has quietly sluiced more than $3 billion to mega Wall Street bank Citigroup.
At his press conference on December 16, Powell acknowledged in his opening statement that “the current economic downturn is the most severe of our lifetimes.” Clearly, this is not the time to be curtailing programs that help Main Street and local governments. Democrats have said that Mnuchin is politically motivated, attempting to hurt the economic progress of the incoming Biden administration. There is also the buzz on Wall Street that Mnuchin might want to help his hedge fund pals pick up more distressed assets by letting the economy sour, then get rich when things turn around as Mnuchin did with OneWest.
The Congress of 2010 thought it would be smart to put an overseer in charge of the Fed’s emergency lending powers because it was becoming clear that the Fed had provided obscene amounts of money to resuscitate insolvent financial institutions – something its charter does not allow it to do. Those suspicions were confirmed in July 2011 when a government audit of the Fed’s emergency lending programs during the financial crisis showed that more than $2.5 trillion in cumulative loans had gone to the insolvent Citigroup and more than $1.9 trillion in cumulative loans had gone to Merrill Lynch, which was also in serious financial trouble. And instead of being a temporary backstop in an emergency, the Fed’s emergency loans had lasted more than two and one-half years, from December 2007 through at least the middle of 2010.
The government audit did not include all of the Fed’s largesse during the financial crisis. When the Fed’s full roster of emergency loans were tallied up by the academics at the Levy Economics Institute, the total came to more than $29 trillion in cumulative loans. Only a court battle against the Fed by the media and an amendment to the Dodd-Frank Act by Senator Bernie Sanders that demanded a government audit of the Fed’s emergency loans brought this hubris into the sunshine.
Levy Economics Institute explains that they include the cumulative tally of loans because it tells us “how much the Fed had to intervene over the life of the facility in order to settle markets.” When it takes $29 trillion over a period of two and one-half years to calm markets in the U.S., it should have been patently clear to Congress that there was a systemic structural problem that needed to be seriously addressed. Instead, unlike the Congress of 1933 that instituted the Glass-Steagall Act following the Great Crash of 1929-1932, the 2010 Congress gave only lip service to the American people.
The Glass-Steagall Act banned deposit-taking banks from merging or being owned by Wall Street’s market-speculating investment banks. Glass-Steagall protected the U.S. financial system for the next 66 years until its repeal under the Wall Street-friendly Bill Clinton administration in 1999. Today, the same Wall Street banks that played a key role in the market manipulations that led to the 1929 crash (JPMorgan and National City Bank’s successor institution, Citigroup) are once again allowed to own deposit-taking banks, thanks to a Congress that is incentivized by political campaign windfalls from Wall Street banks and their law firms.
Yes, the Fed does need an overseer for its emergency loan facilities. But making that overseer the U.S. Treasury Secretary is simply creating a Wall Street duopoly with no accountability to the American people.