Of all the things we expected to see in the 2007 Federal Reserve meeting transcripts released last week, Tim Geithner being accused by a fellow Fed president of leaking critical inside information to Wall Street was not one of them (although the Washington Post’s Neil Irwin got close).
In August 2007, the financial crisis began in earnest as the commercial paper market—which companies use for their short-term financing—seized up. The Fed board convened on an emergency conference call on August 10 and Chairman Ben Bernanke ended it by raising the possibility of significant changes to the discount window—a borrowing mechanism for distressed lenders who are having trouble getting financing. Such a move—or even consideration of such a move—would be huge, market-moving news.
On a subsequent emergency call on August 16, Geithner and Richmond Fed President Jeffrey Lacker had this remarkable exchange:
GEITHNER: Although (the banks) had lots of clarification about what is permitted now under current policies at the discount window, they obviously don’t have any idea that we’re contemplating a change in policy or what might be possible and what we might say or not say going forward…
MR. LACKER. Vice Chairman Geithner, did you say that they are unaware of what we’re
considering or what we might be doing with the discount rate?VICE CHAIRMAN GEITHNER. Yes.
MR. LACKER. Vice Chairman Geithner, I spoke with Ken Lewis, President and CEO of
Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that.CHAIRMAN BERNANKE. Okay. Thank you. Go ahead, Vice Chairman Geithner.
VICE CHAIRMAN GEITHNER. Well, I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the window. The only thing I’ve done is to try to help them understand—and I’m sure that’s been true across the System—what the scope of that is because these people generally don’t use the window and they don’t really understand in some sense what it’s about.
The New York Times gives this big story perfunctory coverage, downplays it as a “tiff” in the headline, and stuffs it inside the paper. The Wall Street Journal, the Financial Times, and Bloomberg haven’t even touched the story.
I mean, what? You have a Fed president accusing the outgoing Treasury Secretary—one loudly criticized for his closeness to Wall Street—of giving bankers critical inside information, and you’re not going to even flag that?
Of all the majors, Reuters does the best, and it advances the story by getting Lacker to stand by his 2007 comments about Geithner and to expand them to include other banks beyond BofA:
“My understanding was that (New York Fed) President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives.”
But Reuters still falls well short of telling the whole story here. It doesn’t take the obvious next step and look at what happened in markets that day.
For that we turn to… Zero Hedge, which appears to have been the first to spot the Geithner-Lacker exchange last Friday.
What makes this much more interesting, as Zero Hedge notices, is that the Lacker-Geithner spat came at about 6:15 p.m. on August 16, four hours after stocks had jumped a stunning 4 percent in the span of sixty minutes.
Many shorts ended up being carted out of the front door that day, unsure what has just happened. Sure enough, the next day at 8:00 am the Fed did what it had decided the previously it would do, and announce the 50 bps cut to the discount rate to fed funds rate spread…
…the S&P futures moved from a low of 1320 (and 1330 at the 2:00 pm moment that the market saw a mysterious “invisible hand” pushing it higher), all the way to well over 1410 the next day: an unprecedented 90 ES point move in a few hours!
Thank you for highlighting what should be one of the most troubling stories about our banking system in recent times. This is further proof of the unholy nexus that exists between federal policy agents in Washington and Bank executives. Equally disturbing is the lackadaisical response from the press.
#1 Posted by Sheldon, CJR on Thu 24 Jan 2013 at 01:47 PM
I am the George Hartzman Rolling Stone's Matt Taibbi wrote of the other week, and it appears that I am aware of a name/story that has not passed the Statute of Limitations.
Wachovia CEO Robert Steel bought Wachovia’s stock in a breach of trust, confidence and his fiduciary duty to my clients and shareholders while in possession of material, nonpublic information.
On July 9, 2008, Robert Steel became president and CEO of Wachovia after working for Goldman Sachs from 1976 to 2004 and the US Treasury under former Goldman Sachs CEO Henry Paulson from October 10, 2006 until July 9, 2008. Mr. Steel was “the principal adviser to the secretary on matters of domestic finance and led the department's activities regarding the U.S. financial system, fiscal policy and operations, governmental assets and liabilities, and related economic matters,” according to Wikipedia’s biography. Mr. Steel most likely knew about other firm’s borrowings via his time spent at the U.S. Treasury Department.
On July 22, 2008, Mr. Steel personally purchased 1,000,000 shares of Wachovia’s stock as the company’s TAF borrowing reached $12.5 billion, which appears not to have been disclosed in securities filings audited by KPMG.
In an interview with CNBC's Jim Cramer On Monday, September 15, 2008, Robert Steel said "I think it's really about...transparency. People have to understand the assets and really be able to say, this is what I own... Complete disclosure. ...we can work through this with transparency, liquidity and capital. ...Our strategy was to give you all the data so you could make your own model. We tell you what we're doing... ...we're raising capital ourselves by basically shrinking the balance sheet, cutting the dividend, cutting expenses. We can create more capital ourselves that way... for now, we feel like we can work through this..." After Jim Cramer asked "Should there be any sort of quick regulatory relief from the SEC that would make life easier to be able to make your bank much stronger?", Mr. Steel responded "I don't think it's about my bank."
After not reporting TAF loans, Wachovia's CEO wrote "I, Robert K. Steel, certify that: I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 of Wachovia Corporation; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report" on October 30, 2008.
Mr. Steel was at least aware of Wachovia’s Federal Reserve loans since July, 2012, if not the undisclosed loans to multiples of other financial institutions.
If Mr. Steel was “the principal adviser…on matters of domestic finance and led the department's activities regarding the U.S. financial system, fiscal policy and operations”, how could he not have known and acted on undisclosed material information?
On June 22, 2010, Robert Steel was appointed Deputy Mayor for Economic Development by New York City Mayor Michael Bloomberg, after which, Steel resigned his seat on the Wells Fargo board. According to Morningstar data, Mr. Steel owned 601,903 shares of Wells Fargo in 2010, which would be worth $20,446,644.91 as of October 26, 2012.
George Hartzman
Greensboro , North Carolina
#2 Posted by George Hartzman, CJR on Fri 25 Jan 2013 at 11:25 AM