By Pam Martens and Russ Martens: April 5, 2023
Millions of Americans are beginning to ask themselves this question: Is the Federal Reserve (the “Fed”) a competent central bank or a terminally compromised regulator that simply does the bidding of Wall Street’s mega banks to the peril of average Americans and the U.S. economy? Millions of other Americans have already made up their minds on this point.
These persistent doubts about an institution with an $8.8 trillion balance sheet – that is backstopped by the U.S. taxpayer – is very bad for confidence in the U.S. banking system, especially when the Fed pivots from one banking bailout to the next. (What was the size of the Fed’s balance sheet prior to its serial bailouts? On December 26, 2007, the Fed’s balance sheet stood at $929 billion. It has soared by 847 percent in just over 15 years of serial bailouts.)
Let’s look at the evidence that’s been stacking up against the Fed since the financial crisis of 2008 – the worst economic collapse in America since the Great Depression of the 1930s.
In response to the 2008 financial crisis, the Fed introduced a hodge podge of emergency lending programs to Wall Street’s biggest banks, as well as cranking out its traditional discount window loans. While the Fed released general details of what the programs were created to do, it did not release the names of the Wall Street firms that were doing the bulk of the borrowing, or the sums borrowed by each institution.
A tenacious investigative reporter at Bloomberg News, the late Mark Pittman, filed a Freedom of Information Act (FOIA) request with the Fed for the names of the banks, the amounts borrowed and the terms. Under the law, the Fed had to respond in 20 business days. The Fed stalled Pittman for six months, leading to the parent of Bloomberg News, Bloomberg LP, filing a lawsuit against the Fed in the Federal District Court in Manhattan in November 2008. Bloomberg won that suit. The Fed then appealed the decision to the Second Circuit Court of Appeals. A large number of other mainstream media outlets and groups filed an Amicus brief in the matter, in support of the release of the information.
The Fed also lost at the Second Circuit. The Fed was, apparently, too embarrassed to take the case to the U.S. Supreme Court, because President Obama’s acting Solicitor General, Neal Katyal, planned to file a brief contrary to the Fed’s position, so a group called The Clearing House Association LLC, made up of some of the very same Wall Street banks that were being bailed out by the Fed, filed their own appeal with the Supreme Court. The Supreme Court declined to hear the case in March of 2011, leaving the decision of the Second Circuit standing.
The financial reform legislation known as the Dodd-Frank Act (which was signed into law by President Obama on July 21, 2010) had forced the Fed to release the transaction details of its seven emergency lending facilities in December of 2010. When the Supreme Court declined to hear the court case, the Fed finally released the discount window transactions in March 2011.
On March 21, 2011, then Bloomberg News Editor in Chief Matthew Winkler released this statement:
“At some point long before the credit markets seized up in 2007, financial markets collapsed and the economy plunged into the worst recession since the 1930s, the Federal Reserve forgot that it is the central bank for the people of the United States and not a private academy where decisions of great importance may be withheld from public scrutiny. As only Congress has the constitutional power to coin money, Congress delegates that power to the Fed and the Fed must be accountable to Congress, especially in disclosing what it does with the people’s money.”
The Dodd-Frank legislation, thanks to an amendment by Senator Bernie Sanders, required the Government Accountability Office (GAO) to conduct an audit of the Fed’s emergency lending programs. When that information was released in July of 2011, it revealed that the Fed had sluiced more than $16 trillion in cumulative loans at below-market interest rates to teetering banks. (Just three Wall Street firms, Citigroup, Morgan Stanley and Merrill Lynch, received $5.7 trillion of that.)
The GAO report notes on page two that the audit does not include the Fed’s loans made through its discount window during the financial crisis. Also, in a tiny footnote on page 2 of the GAO audit, there is this statement: “…this report does not cover the single-tranche term repurchase agreements conducted by FRBNY in 2008. FRBNY conducted these repurchase agreements with primary dealers through an auction process under its statutory authority for conducting temporary open market operations.” FRBNY stands for the Federal Reserve Bank of New York – the deeply conflicted and crony regulator of Wall Street’s largest banks, which is, literally, owned by the same banks. (See These Are the Banks that Own the New York Fed and Its Money Button.)
When the Levy Institute of Economics tallied up all of the Fed’s lending programs, including the single-tranche repurchase agreements (called ST OMO or single-tranche open market operations) and added in the Fed’s dollar swap lines, it came up with a cumulative tally of $29 trillion in emergency Fed loans.
Mainstream media’s attitude about holding the Fed accountable to the people has changed dramatically for the worse since the 2008 crisis.
Wall Street On Parade is the only media outlet that continues to demand accountability for the former President of the Dallas Fed, Robert Kaplan, making million dollar plus trades in S&P 500 futures while sitting on inside information as a voting member of the Federal Reserve’s Federal Open Market Committee (FOMC). (See After 16 Months, There Are Still No Arrests in the Fed’s Trading Scandal.) The Chair of the Fed, Jerome (Jay) Powell, had the audacity to refer this investigation to the Fed’s own Inspector General, who reports to the Fed Board of Governors that is chaired by Powell.
Wall Street On Parade is also the only media outlet to crunch the numbers and report on another multi-trillion dollar bailout of the mega banks on Wall Street by the Fed that began on September 17, 2019 – months before there was any COVID-19 pandemic that the Fed could blame for the relaunch of its emergency lending programs.
These were the first emergency repo loans issued by the Fed since the financial crisis of 2008. That fact alone should have galvanized mainstream media to investigate what was going on. Instead, when the Fed was forced (under the Dodd-Frank legislation) to release after two years the names of the banks that borrowed the huge sums and the amounts borrowed, there was a bizarre total news blackout by mainstream media. (See our report: There’s a News Blackout on the Fed’s Naming of the Banks that Got Its Emergency Repo Loans; Some Journalists Appear to Be Under Gag Orders.)
From September 17, 2019 to December 31, 2019, $5.269 trillion was cumulatively doled out by the Fed in emergency repo loans to its primary dealers (the trading houses on Wall Street, most of which have federally-insured banks under the same bank holding company roof). Adjusted for the term of the loan, these figures are even more staggering.
The normal repo loan market is typically an overnight (one-day) loan market. The Fed started out with one-day overnight loans but then periodically also added 14-day, 28-day, 42-day and other term loans – suggesting an extremely serious liquidity crisis. We had to adjust our cumulative tallies to account for these term loans in order to get an accurate picture as to who was grabbing the bulk of these cheap loans from the Fed. For example, let’s say a trading firm took a $10 billion loan for one-day but on the same day took another $10 billion loan for a term of 14 days. The 14-day loan for $10 billion represented the equivalent of 14-days of borrowing $10 billion or a cumulative tally of $140 billion.
If we simply tallied the column the Fed provided for “trade amount” per trading firm, it listed only $10 billion for that 14-day term loan and not the $140 billion it actually translated into. The chart below provides the term-adjusted numbers for emergency repo loan borrowers in the last quarter of 2019.
The trading unit of the largest bank in the United States, JPMorgan Chase, was one of the largest borrowers under the Fed’s repo loans in 2019, despite its Chairman and CEO, Jamie Dimon, constantly bragging about the bank’s “fortress balance sheet.” The trading unit of the bank that received the largest bailout in global banking history during and after the 2008 financial crisis, Citigroup, was a major borrower. Goldman Sachs, which has a storied history of reckless and irresponsible trading behavior, but is nonetheless allowed to own a federally-insured bank, was a major borrower. And the trading units of numerous foreign banks, such as the Japanese bank, Nomura, and German, Deutsche Bank, were large borrowers. (The share price of Deutsche Bank, a major derivatives counterparty to Wall Street banks, was in a death spiral at the time.)
In some cases, the Fed appeared to be customizing loans for specific borrowers -– something that the Dodd-Frank financial reform legislation of 2010 expressly prohibits. For example, on December 17, 2019, the Fed made a 13-day term loan for $6.1 billion. BNP Paribas Securities received $1 billion of that; Daiwa Capital Markets got $100 million; Deutsche Bank Securities took $3 billion; and Societe Generale took the balance of $2 billion. That’s only four firms while the legal mandate of Dodd-Frank is that the Fed can only lend to “broad-based” programs. On the same date of December 17, 2019, the Fed also made an overnight loan of $52.65 billion. Deutsche Bank took three lots of that loan totaling $6.5 billion, bringing its total borrowing on that date to $9.5 billion.
The Fed’s audited financial statements show that on its peak day in the last quarter of 2019, the Fed’s emergency repo loans outstanding stood at $259.95 billion. The cause of that banking crisis remains unexplained to the American people.
Excluding the banking crisis related to the COVID-19 pandemic in 2020, Americans now find themselves in Banking Crisis 3.0 with a new Fed bailout program called the Bank Term Funding Program (BTFP). That program came on the heels of the second and third largest bank failures in U.S. history in March: respectively, Silicon Valley Bank and Signature Bank, both of which are now in FDIC receivership.
On March 12, the Fed explained its emergency action as follows:
“The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”
The operative words in the above statement from the Fed are “one year” and “valued at par.” The Fed has now morphed from an historic practice of making overnight loans to making long-term loans and is now accepting as collateral debt instruments valued at par (meaning the full face amount), despite the fact that their market value is deeply underwater. Under the Federal Reserve Act, the Fed is mandated to accept only “good” collateral. The collateral the Fed is accepting might be good in 5, 10 or 15 years, but right now it’s underwater — the reason for this new Fed emergency lending program in the first place.
Democrats on the Senate Banking Committee have asked the Government Accountability Office to investigate the supervisory practices of bank regulators in regard to the recent bank failures. That GAO investigation needs to broaden dramatically to focus on the 15-year hubris of the Fed and its bailouts.