By Pam Martens and Russ Martens: April 13, 2022 ~
Jerome Powell, Chair Pro Tempore (Awaiting Senate Confirmation for a Second Term) of the Federal Reserve Board
On March 31, the Federal Reserve finally released a trove of secret transaction data revealing which Wall Street trading houses had to borrow hundreds of billions of dollars from a panoply of Fed bailout programs. One of those bailout programs was the Fed’s Money Market Mutual Fund Liquidity Facility (MMLF) which bought paper residing in the money market funds of large Wall Street firms that no one else on the street wanted to buy – or at least at a price that would prevent staggering losses for the funds, which are supposed to trade at a stable $1 per share price.
We have begun to unravel the cryptic details of the MMLF, although the Boston Fed which administered the program for the Federal Reserve used a bag of tricks to make that process as difficult as possible for journalists. For example, instead of simply providing the name of the Asset-Backed Commercial Paper and other instruments that had to be bailed out, the Boston Fed used CUSIP numbers. One had to know how to look up the CUSIP numbers in SEC filings to figure out the name of the toxic paper that was in trouble.
Another sneaky device deployed by the Boston Fed in numerous cases was to fail to show the name of the Wall Street firm that owned the named money market fund in its transaction spreadsheet – thus making it necessary to research who owned that money market fund and then manually add that name to the data in order to calculate which firms borrowed the largest sums of money. (We will provide charts showing that information in the future.)
The numbers we have crunched to date show that the MMLF made loans totaling $162.9 billion. Of that, $70.35 billion or 43 percent went to bail out Asset-Backed Commercial Paper (ABCP); $57.27 billion went to bail out Certificates of Deposits, much of which was issued by foreign banks; $25.6 billion was needed to bail out Commercial Paper; $9.7 billion bailed out municipal notes like those issued by the Metropolitan Transportation Authority (MTA); and a meager $45 million was used to bail out Variable Rate Demand Notes (VRDNs).
One of the money market funds that borrowed large sums under the facility was ironically called the Morgan Stanley Institutional Liquidity Funds. Clearly, the fund didn’t have the liquidity it advertised when it needed it most.
On the very first day that the MMLF began making loans, March 23, 2020, three Morgan Stanley money market funds borrowed a total of $555.9 million against collateral designated with CUSIP number 2254EAF16. According to SEC filings, that CUSIP belongs to commercial paper issued by the giant Swiss global bank, Credit Suisse. From January 2, 2020 through March 23, 2020, the publicly-traded stock of Credit Suisse had collapsed by 50 percent.
On April 2, 2020, two Morgan Stanley money market funds borrowed a combined $750 million against collateral designated with CUSIP 22549LT54. Mysteriously, that CUSIP does not show up in SEC filings. We reached out to the Boston Fed to give us the full name of that instrument and it failed to do so. We’re going to make the assumption that any CUSIP beginning with 2254 and residing in a money market fund is Credit Suisse paper since that is the only name we have found to be associated with the prefix 2254 in SEC filings.
Also on April 2, 2020, Morgan Stanley money market funds borrowed $600 million against CUSIP 83050PFQ7, which turns out to be a Certificate of Deposit issued by a Swedish financial institution called Skandinaviska Enskilda Banken AB, known as SEB on the street. On Feb 10, 2020, SEB’s stock price was $100.30. By March 16, 2020 – seven days before the Fed made its first loans from the MMLF, SEB’s share price had fallen to $64.82 – a loss of 35 percent in just a little more than a month.
On April 6, 2020, Morgan Stanley money market funds borrowed an additional $449.6 million against a different Certificate of Deposit from SEB.
Goldman Sachs’ money market funds also had to borrow against illiquid Credit Suisse paper. In addition, Goldman Sachs’ money market funds had big problems with Asset-Backed Commercial Paper from an outfit called Versailles Commercial Paper LLC. On March 25, 2020 two Goldman Sachs money market funds borrowed a combined $705.4 million against paper issued by Versailles.
Large sums of Versailles’ Asset-Backed Commercial Paper also had to be bailed out of money market funds owned by UBS, Federated, JPMorgan and Northern Trust, according to the transaction data released by the Fed.
Versailles Commercial Paper LLC is an asset-backed commercial paper (ABCP) conduit administered by Natixis Financial Products LLC (Natixis). Natixis is a French corporate and investment bank.
UBS not only had trouble with Asset-Backed Commercial Paper from Versailles but it was also tripped up with commercial paper issued by a unit of the Dutch bank ABN Amro. On March 25, 2020, the UBS Prime Master Fund and Prime CNAV Master Fund borrowed a combined $693.4 million against that paper.
Asset-Backed Commercial Paper causing big problems for money market funds at Wells Fargo was issued by Columbia Funding Co. In July 2020, the credit-rating agency, Moody’s, described Columbia Funding Co. as follows: “a fully supported ABCP program sponsored by Nearwater Liquid Markets, LLC and administered by Deutsche Bank Trust Company Americas.” Deutsche Bank is the large global German bank whose share price was also plunging in March 2020.
The big takeaway from all of this is that despite the crisis in money market funds during the Wall Street crash of 2008, federal regulators appear to have done very little to reform what Wall Street is allowed to stuff into money market funds – which are peddled to investors as safe and liquid. This might explain why the Boston Fed has adopted a mantle of silence about what went on in its MMLF bailout fund and why it has made journalists run an obstacle course to get at the facts.
And when we say journalists, we’re referring to the authors of this article. We can find no mainstream media outlet that is reporting on this story. Americans should seriously question why this news blackout on the Fed’s bailout programs continues.
And, finally, the statutory law that governs the Fed’s emergency loan programs is Section 13(3) of the Federal Reserve Act. It requires that these emergency Fed loans be short-term in nature, secured with good collateral, and available to a broad base of financial institutions. None of that occurred here: (1) Many of these loans lasted for as long as 9 months; (2) how good could the collateral have been if no one wanted to buy it except for a Fed bailout program; and (3) in terms of the approximate 5,000 banks that exist in the U.S., affiliates of only a small fraction of those banks were eligible to participate.
