Back when our late pal Mark Pittman and Bloomberg sued the Federal Reserve to force it to disclose secret details on its massive crisis lending programs, he told me that he suspected the Fed was shoveling money out the door with any old asset pledged as collateral.
Pittman: But a lot of [the assets] have gone to the Fed, though, as collateral for loans. They’re still on their balance sheet, but you borrowed against them. We don’t know if those are cracked CDO’s or prime RMBS…
The Audit: That’s what you guys are suing (the Federal Reserve) for—to find out what the collateral is.
Pittman: Yeah, and that’s the secret part of the story that nobody wants to let you know.
A Bloomberg investigation today shows how the Fed took on just about anything as collateral, including equities, and how completely the financial system—and most revealingly, individual banks—depended on the Federal Reserve during the Crash of 2008.
Bradley Keoun and Phil Kuntz report that the Fed lent out $1.2 trillion during the height of the crisis—about half of it to the ten largest U.S. banks, including those protesting publicly that they had plenty of capital and liquidity.
This was a sort of TARP for short-term loans that kept the financial system afloat after those markets collapsed. Whereas TARP injected capital into the banks via government purchases of preferred equity, the Fed’s emergency loan programs lent money backed up by toxic collateral. The big difference: The Fed’s program was four times as large and it fought tooth and nail, along with the big banks, to keep the public from knowing what it was doing and had done with our money.
That’s stunning if you stop to think about it: We wouldn’t know this stuff if not for a bold lawsuit by Bloomberg News, pushback against the executive branch by the judiciary, and an amendment by the unlikeliest legislator, Vermont Socialist Bernie Sanders. Checks and balances, kids—and the press was and is still, as we continue to see with today’s story, an essential ingredient.
The scale of the interventions is mind-numbing, so we need some context. Here’s Morgan Stanley’s $9 billion equity injection and its profit history, for instance, juxtaposed with a day of emergency borrowing from the Fed:
Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.
That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show.
And regarding Pittman’s suspicions on collateral, we have this:
As the crisis deepened, the Fed relaxed its standards for acceptable collateral. Typically, the central bank accepts only bonds with the highest credit grades, such as U.S. Treasuries. By late 2008, it was accepting “junk” bonds, those rated below investment grade. It even took stocks, which are first to get wiped out in a liquidation.
Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.
“What you’re looking at is a willingness to lend against just about anything,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc.
The Fed, fortunately, got all the money back, but the no-strings-attached bailouts allowed Wall Street to fend off any real reform and to keep paying itself outlandish sums.
We are infested and surrounded by thieves in pinstripes.
#1 Posted by williambanzai7, CJR on Mon 22 Aug 2011 at 10:43 PM
"The Fed, fortunately, got all the money back, but the no-strings-attached bailouts allowed Wall Street to fend off any real reform and to keep paying itself outlandish sums."
Don't stop there.
http://sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3
"The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression...
The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.
For example, the CEO of JP Morgan Chase served on the New York Fed's board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed...
The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo. The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts. Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG...
To read the GAO report, here."
#2 Posted by Thimbles, CJR on Mon 22 Aug 2011 at 11:20 PM
FLASH!
"Fed made risky loans three years ago and got paid back. Nameless officials engaged in risky transactions."
A little underwhelming of a headline, I think...
Now don't get me wrong... I think heads should roll over this (but then I think we should ditch the federal reserve system anyway)... But whose head goes on the block?
WHICH government official(s) need to be canned?
The biggest problem with Ryan's style of "journalism" is that he routinely makes these kind of allegations of misconduct without naming any names or providing any details that would enable the reader to do anything - like call a congressman and raise Hell.
What good does this kind of reporting do anybody?
#3 Posted by padikiller, CJR on Mon 22 Aug 2011 at 11:29 PM
"Fed made risky loans three years ago and got paid back. Nameless officials engaged in risky transactions."
You left out the word collateral, padi. Collateral is kind of an essential topic in these bailout stories.
And, of course, the story makes the banks look bad, corrupt, and holders of too much influence in government so, of course, padi has to ask "What good does this kind of reporting do anybody?"
One thing it does, if you put the slightest thought into it, is that it shows how the federal reserve has tied the efforts of the federal government to TBTF bank supporting policy because if they do not keep the banks afloat, after the trillions in loans they were given, then the US government is left holding a sh*tbag of worthless collateral and a stack of billion dollar non-performing loans on its balance sheets.
Which is why Padi wants us to focus on welfare and unemployment fraud. Because, you know, priorities.
#4 Posted by Thimbles, CJR on Tue 23 Aug 2011 at 12:11 AM
Oops, systemic fraud within the securitization process could be called a crime in some circles and the federal government wants to settle for a 20 billion dollar award in exchange for blanket amnesty for the banks. Of course, padi is against this deal since he believes in prosecuting banks and bankers to the full extent of the law. *chuckle smirk*
Well so does this guy:
http://www.nytimes.com/2011/08/22/business/schneiderman-is-said-to-face-pressure-to-back-bank-deal.html
"Eric T. Schneiderman, the attorney general of New York, has come under increasing pressure from the Obama administration to drop his opposition to a wide-ranging state settlement with banks over dubious foreclosure practices, according to people briefed on discussions about the deal...
Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities...
“The attorney general remains concerned by any attempt at a global settlement that would shut down ongoing investigations of wrongdoing related to the mortgage crisis,” said Danny Kanner, the spokesman for Mr. Schneiderman. His office has opened several inquiries into mortgage practices during the credit boom...
Mr. Schneiderman became embroiled in a contentious conversation with Kathryn S. Wylde, a member of the board of the Federal Reserve Bank of New York who represents the public...
Wylde said in an interview on Thursday that she had told the attorney general “it is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”"
They all claim they just want to settle because that 20 billion would help home owners and help resolve uncertainty in the housing market.
As Atrios says: "Please just stop. Stop. It's Almost September, 2011, do not dare suggest speedy help for homeowners is any concern."
No, the concern is litigation awards and jail time could disrupt the functioning of these noble companies which have taken trillions of loans using the same sh*tbag assets as collateral.
And litigation might undermine the validity of such paper work lacking, fraud born assets as collateral.
Everybody, the government and the banks, wants to sweep the affected mortgages and homeowners under the rug because they are scared people will see it as a sh*tbag and bellow "Who is RESPONSIBLE for this sh*tbag?!"
The health of the patched together banks and the economy relies on the public being kept unaware long enough to restore every important person's losses and to give every important person amnesty and to leave taxpayers as the suckers at the end.
The financial system can only function in an environment where the public is ignorant of its transactions and its government backing. It will collapse if people know and decide to "throw a wrench into it".
This is not a system destined to last long.
#5 Posted by Thimbles, CJR on Tue 23 Aug 2011 at 05:47 AM
WHO committed malfeasance here?
The actual names of actual people who actually committed some sort of actual malfeasance.
That is the question that needs to be asked and answered in order to accomplish anything.
Without this information all we have is hindsight griping.
#6 Posted by padikiller, CJR on Tue 23 Aug 2011 at 10:31 AM
The Taibbi take on the Schneiderman deal:
http://www.rollingstone.com/politics/blogs/taibblog/obama-goes-all-out-for-dirty-banker-deal-20110824
"This is as bad as white-collar crime gets, but to Wylde, it doesn’t rise to the level of being “indefensible.” Until they do something worse than this, we apparently should support the banks, and make sure they don’t have to pay more than a fraction of what they made off of this kind of crime. What I love about Wylde’s quote is the clear implication that even an Attorney General like a law enforcement official like Schneiderman should view it as his job to “do everything we can to support” Wall Street. That would be astonishing interpretation of what a lawman’s duties are, were it not for the fact that 49 other Attorneys General apparently agree with her.
In Schneiderman we have at least one honest investigator who doesn’t agree, which is to his great credit. But everyone else is on Wylde’s side now. The Times story claims that HUD Secretary Shaun Donovan and various Justice Department officials have been leaning on the New York AG to cave, which tells you that reining in this last rogue cop is now an urgent priority for Barack Obama.
Why? My theory is that the Obama administration is trying to secure its 2012 campaign war chest with this settlement deal. If he can make this foreclosure thing go away for the banks, you can bet he’ll win the contributions battle against the Republicans next summer. Which is good for him, I guess, but it seems to me that it might be time to wonder if is this the most disappointing president we’ve ever had."
#7 Posted by Thimbles, CJR on Wed 24 Aug 2011 at 02:15 PM
A digby take on the "Schneiderman, Schneiderman, does whatever an AG can" thing.
http://digbysblog.blogspot.com/2011/08/confidence-fairies-and-attorneys.html
It's about the assets, which makes it about the collateral. The campaign plays into it to. God, when is someone going to do something about
WormtongueGeithner's influence on economic policy?And if a large group of people did start doing something about it, when would we hear about it from the press?
http://news.firedoglake.com/2011/08/23/invisible-town-hall-revolution-gets-bigger-and-bigger/
It's the Iraq anti-war protests all over again.
#8 Posted by Thimbles, CJR on Wed 24 Aug 2011 at 11:47 PM
Ah hell. In DC and Wall Street, no good deeds go unpunished:
http://www.huffingtonpost.com/2011/08/23/new-york-attorney-general-eric-schneiderman_n_934517.html
"New York Attorney General Eric Schneiderman on Tuesday was kicked off the committee leading the 50-state task force charged with probing foreclosure abuses and negotiating a possible settlement agreement with the nation's five largest mortgage firms, according to an email reviewed by The Huffington Post.
Schneiderman was one of roughly a dozen state attorneys general leading the talks with the five companies, alongside representatives of the U.S. Department of Justice, the Department of Housing and Urban Development and other federal agencies. The government launched the negotiations in the spring after widespread reports of foreclosure irregularities, such as so-called "robo-signing" and illegal home seizures, emerged...
The email announcing Schneiderman's dismissal from the states' executive committee was sent just after noon to more than 50 people by Patrick Madigan, a top lawyer in the Iowa Attorney General's Office. It read: "Effective immediately, the New York Attorney General’s Office has been removed from the Executive Committee of the Robosigning multistate."
This month, Schneiderman accused Bank of New York Mellon, the 11th-largest U.S. bank by assets, of "repeated fraud and illegality" when it came to its actions as a trustee for various mortgage securities, and he accused Bank of America of fabricating missing documents when foreclosing on some homeowners who defaulted on their mortgages.
Bank of America's stock price is down more than 55 percent over the past six months. Investors haven't seen a closing price as low as Tuesday's -- $6.30 per share -- since March 2009...
The bigger the effective grant of immunity from potential government civil lawsuits, the more cash the companies are willing to pay to settle the accusations, these people have said...
Schneiderman is "committed to a comprehensive resolution," his spokesman, Danny Kanner, said in an emailed statement...Kanner said Schneiderman was removed at Iowa Attorney General Tom Miller's "prerogative."
Miller, through a spokesman, said that Schneiderman was "intimately involved in every aspect of this investigation and possible settlement" from the launch of the probe last October to this past June. Schneiderman was "on every internal [executive committee] conference call and participated in all conference calls and meetings with the top five mortgage servicers. As such, New York had a large influence on the actions and decisions of the multistate.""
:(
""If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever," Adam J. Levitin, a bankruptcy expert and professor at Georgetown University Law Center, told a congressional panel last November. Levitin said the problem could "cloud title to nearly every property in the United States" and could lead to trillions of dollars in losses.
The banks targeted by state prosecutors and federal officials would rather settle claims that they improperly bundled home loans into securities than allow those probes to continue. In exchange, they'd shell out more cash to help homeowners and help the Obama administration avert foreclosures.
With a settlement into those investigations seemingly off the table, the banks would likely be willing to pay less in penalties.""
Collateral Damage.
#9 Posted by Thimbles, CJR on Thu 25 Aug 2011 at 03:09 AM
more 600 char limit DOH!
"The banks targeted by state prosecutors and federal officials would rather settle claims that they improperly bundled home loans into securities than allow those probes to continue. In exchange, they'd shell out more cash.."
"to help homeowners and help the Obama administration avert foreclosures.
With a settlement into those investigations seemingly off the table, the banks would likely be willing to pay less in penalties."
One could call the impact of the probes... wait for it....Collateral Damage.
*Dodges incoming fruit projectiles like a superstar*
#10 Posted by Thimbles, CJR on Thu 25 Aug 2011 at 03:28 AM
I'd feel a lot better about my so-called retirement account now if some bankers and Fedsters were rotting in jail cells. Just saying.
#11 Posted by Keith Roberts, CJR on Thu 25 Aug 2011 at 05:15 PM