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Nov 29 2011

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Secret Fed-Banking Sector Collusion Revealed

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An Offense to Decency

America, we have been had.

As banks remain merciless in tracking down borrowers in deeply underwater mortgages – a situation created single-handily by reckless bank securitization in real estate – we now learn that the Federal Reserve and the US banking system colluded in the largest financial bailout in US history.

A bailout that dwarfed TARP.

A bailout that the banks and the Fed fought tooth and nail for two years to keep it secret.

Thanks go out here to Bloomberg LP, which fought a two-year court battle against the Fed and the biggest banks associated in a group called the Clearing House Association to get access to 29,000 pages of Fed documents that detail 21,000 transactions at the heart of the secret bailout between 2007-2010.

The affront to the American people occurs on multiple levels in this scandal.

Secrecy: since it’s founding in 1913, the Fed has been lending money to banks as part of its role in managing monetary policy. In 2007, when the economy began to slow down and lending became more difficult, the Fed used mechanisms to help keep credit flowing.

But beyond these broad policy directions, almost nothing was known about the gargantuan size of the Fed’s efforts. According to Bloomberg, the Fed never briefed Congress. Indeed,  the secrecy was so tight that senior aides to Bush Treasury Secretary Hank Paulson were in the dark.

So while Congress was hotly debating the $700 billion TARP bailout program in September 2008, the Fed had been operating its secret lending facilities for over a year. On December 5, 2008, a little over two months after TARP had been passed, the Fed loaned out $1.2 trillion in a single day.

Over the course of the loan program, the Fed lent out $7.7 trillion – equal to half the GDP of the United States.

Lies:  that’s a tough word, but its hard to consider public statements by bank leaders as anything else.

In March 2010, JP Morgan head Jamie Dimon told his shareholders that the firm’s participation in the the Fed’s “Term Action Facility” “TAF” were designed to help motivate other banks to use the facility.  He did not say that JP Morgan’s TAF borrowings were almost twice its cash holdings.

On November 26, 2008, Bank of America’s chief executive, Ken Lewis, said that BoA was one of the “strongest banks in the world.” He failed to mention that on that day, BoA owed the Fed $86 billion.

In addition, the silence about this program by the Fed under Bernanke, and officials in both the Bush and Obama administrations constitutes conspiracy here.

Don’t believe that?

Consider how different public policy would have been had the information on the Fed loans been considered and debated publicly.

Ill-Gotten Profits:  to add insult to injury, some of the banks that availed themselves of the Feds largess made money on the loans. Since Fed interest rates were below market, the banks simply arbitraged the funds at commercial rates to get a windfall.

$13 billion in windfall.  Citigroup took the largest profit at $1.8 billion.

This, as millions of Americans were thrown into unemployment or thrown out of their houses,.

Breathtakingly outrageous.

Moral Hazard: while these banks were busy taking below market loans from the Fed, they were equally busy lobbying against any rules that would expand government regulation to prevent another massive meltdown.  Indeed, some of the very banks that required the massive infusion of cash are even bigger now.

 Crucially, neither the Fed’s $7.7 trillion liquidity facility nor the $700 billion TARP program served as incentive for financial institutions that created the “mortgage-Wall Street” crisis to take any action to correct the market they were most responsible for destroying – the real estate market.  As a result, the US housing market is in its worst situation since the Great Depression, with more Americans under water on mortgages or in foreclosure than ever before.

Despite the breathtaking brazenness here, there are defenders of the lending program.

The Fed reminds us that all monies were paid back. There are no outstanding loans.

Also, as a result of Bloomberg’s expose, the Fed’s Director of Monetary Affairs commented on the Fed’s role by stated, “Supporting financial market stability in times of extreme market stress is a core function. Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”

That may be true to an extent, but it misses the heart of the problem.

The massive infusion of taxpayer dollars to “in-need” or “at-risk” financial institutions may very well have been necessary to save the financial system.

But at the very least, it was incumbent on government officials to prevent profiteering and to promote the kind of transparency that increases public confidence in government action.

Public confidence, already badly strained, will have rightly disintegrated after this news is absorbed. But worse, for all the money poured into banks, the institutions themselves are, by and large, untouched and remorseless.

When these banks were holding on for dear life, the American taxpayer came to the rescue. But when, as a result of bank recklessness, mortgage holders were unable to stay current on underwater mortgages, banks threw those citizens into the streets.

That is unconscionable.

As this Journal has consistently posited, the necessary  next step after TARP was for banks and the federal government to implement a nation-wide write down of mortgage debt to adjust to new real estate values as a result of the financial collapse. Such a move would have created a floor in the housing industry, kept housing as an investment tool for the middle class, and made the pressures of economic downturn and unemployment easier to handle nationally through lower mortgage payments on clean titles.

But it was never done.

Now, given the revelations about the massive Fed lending, distressed homeowners have even greater right to a sense of betrayal.

You want to know how big this story is?

It is something that both the Occupy Wall Street (OWS) and the Tea Party can agree on and be very angry about.

Political earthquakes occur when the base of each Party find common purpose.

The political blow back is going to be real and substantive.

And deserved.

 

 

 

 

 

 

 

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