By Pam Martens and Russ Martens: April 12, 2021 ~
The CBS “investigative” program, 60 Minutes, gave Wall Street a pass again last night.
This time around 60 Minutes’ host Scott Pelley interviewed Federal Reserve Chairman Jerome Powell. The Fed, and by extension, Powell, are in charge of supervising the holding companies of the mega banks on Wall Street, including those involved just two weeks ago in loaning out their balance sheets to the tune of tens of billions of dollars to a hedge fund run by a man previously charged with insider trading and stock price manipulations. The man is Sung Kook (Bill) Hwang and the hedge fund is Archegos Capital Management. (Fed-supervised mega banks loaning out their balance sheets to hedge funds for nefarious purposes was previously exposed in 2014 in an in-depth report and hearing by the U.S. Senate’s Permanent Subcommittee on Investigations. The practice has clearly metastasized since that time.)
The 60 Minutes interview comes just two weeks after Archegos blew itself up, along with generating billions of dollars in losses at the mega banks that allowed it to take on obscene levels of leverage in a replay of the financial crisis of 2008 – something that the Fed has continuously assured Americans could not happen again under its oversight.
Rather than dig deep into the insidious rot of the Fed as a lapdog regulator, Pelley devoted just a brief and shallow part of the interview to the topic of what happened at Archegos. The exchange went as follows:
Pelley: “A private hedge fund called Archegos collapsed last month after borrowing billions from banks to make risky bets on stocks. Now the banks are out billions of dollars. How concerned are you that the financial system is blundering into the same kind of opaque, risky bets that led to the Great Recession in 2008?
Powell: “This is an event that we’re monitoring very carefully and working with regulators here and around the world to understand carefully. And I would say a couple things. First, this incident doesn’t really raise questions about the stability of the financial system or of those institutions, which are mostly foreign banks.
“What’s concerning about it though is — and surprisingly, frankly, is that a single customer, client, of one of these large firms could result in such substantial losses to these large firms in a business that is generally thought to present relatively well understood risks. So that is surprising and concerning. And, you know, we’re going to understand that and get to the bottom of it. What we try to do is make sure that the banks understand the risks that they’re running and have systems in place to manage them. This would appear to be a significant shortfall– a failure on that front. And so that’s something we’re looking at.”
Let’s first focus on the preposterous statement by Powell, which goes unchallenged by Pelley, that “…this incident doesn’t really raise questions about the stability of the financial system or of those institutions, which are mostly foreign banks.”
In reality, this incident goes to the very heart of the stability of the financial system in the U.S. It was the blowup of two of Bear Stearns’ overleveraged hedge funds that took down the whole firm in March of 2008 and signaled the bigger rot in the U.S. financial system that would implode much of Wall Street by September of that same year, taking the U.S. economy with it and requiring a $29 trillion bailout by the Fed to resuscitate the casino banks.
Secondly, the recent Archegos blowup is decidedly not about “mostly foreign banks.” That Powell would attempt to misinform the American people on this point strongly suggests this interview was a propaganda effort on the part of the Fed. Two of the banks intimately involved in the Archegos blowup are Goldman Sachs and Morgan Stanley. Both of these firms are U.S. firms and are supervised by the Fed; both of these firms are allowed to own federally-insured banks while also engaging in trillions of dollars of high-risk derivatives.
And, the hedge fund that was involved was created here in the United States and the leverage was provided here in the United States, in complete violation of the Fed’s own Regulation T, which limits initial margin loans to 50 percent of the value of the stock being purchased – not the six to one leverage (or more) that the banks provided to Archegos.
We know that there are plenty more highly-leveraged hedge funds out there being financed by U.S. banks because we are looking at SEC filings made by other U.S. hedge funds showing stock portfolios totaling hundreds of billions of dollars each. For example, Susquehanna International’s most recent filing with the Securities and Exchange Commission shows that it had a stock portfolio with a market value of $612 billion as of December 31, 2020. Citadel Advisors’ latest filing for December 31, 2020 shows a stock portfolio valued at $384.6 billion. And that’s just two out of hundreds out there that are engaging in highly leveraged transactions with federally-insured banks on Wall Street.
A quick snapshot of just how seismic this problem is was revealed in the most recent quarterly report by the Office of the Comptroller of the Currency. It shows that just one federally-insured bank on Wall Street, JPMorgan Chase, had exposure to $2.65 trillion in notional equity (stock) derivatives as of December 31, 2020. (Notional means face amount.)
Later in the 60 Minutes interview, Powell provides more misleading information to Americans on the Fed’s most recent bailout of Wall Street. The exchange went as follows:
Pelley: “And you believe the system, because of the oversight of the Fed, has the wherewithal to stand a significant shock to the markets?”
Powell: “Well, I think we saw that actually. Yes, I do believe that. We never say that the mission is accomplished. But I would say that if you look at how the banking system and the financial system — most parts of the financial system made it through quite a stress test last year when we lost, you know, 25 percent of GDP and 30 million jobs in the space of a couple of months.
“Now, some parts of the financial system had to be bailed out again. These were really though non-bank places like money market funds and things like that, where we had to step in again and provide liquidity. But ultimately, the work that we did in Dodd-Frank and in Basel to strengthen the banking system over the last decade, I think it showed up pretty well in what was a pretty good stress test.”
In fact, the bailout of Wall Street banks began on September 17, 2019 – months before there was a reported case of COVID-19 anywhere in the world. By September 27, 2019, the Fed was offering $100 billion a day in emergency loans to Wall Street. By October 7, 2019, again months before any outbreak of COVID-19, the Fed had expanded its emergency overnight loans to announcing $310 billion in longer-term emergency loans as Wall Street announced over 68,000 in job cuts. By October 24, 2019 the Fed had upped its Wall Street bailout to $690 billion a week. And on and on it went prior to any COVID-19 pandemic, which didn’t come until 2020.
We anticipated that the Fed would be engaging in this type of coverup of the facts so we created an archive of the more than 100 articles we wrote documenting this pre-pandemic bailout by the Fed. You can read them in timeline order here, with documentation direct from the Fed itself.
Congress, which was asleep at the switch in the leadup to the epic financial collapse of 2008 and lulled into complacency by the lunatic musings of Fed Chair Alan Greenspan, can now listen to the false assurances of Fed Chair Jerome Powell – or it can perform its duty to the American people and rein in this out-of-control casino that has attached itself like a blood-sucking leech to federally-insured banks that are backstopped by the U.S. taxpayer.
This is also a good time to recall what Sandy Weill told John Reed was his motivation for wanting to combine his Wall Street trading houses with Reed’s national bank, Citibank in 1998. (It was this combination that forced Congress to repeal the 66-year old Glass-Steagall Act in 1999 that barred stock-speculating firms from merging with federally-insured banks.) Weill told Reed that his motivation for the deal was: “We could be so rich,” according to Reed in an interview with Bill Moyers. (See Wall Street’s Casino Banks, Taking Deposits from Savers, in 1929 and Today.)