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!
Reuters, in its story, never noted this very strange market movement on August 16 and 17. But it did report this about the alleged Geithner disclosure:
Private disclosure of confidential, market-sensitive information by the central bank would be highly unusual, but it was not immediately clear if it would be illegal. It also was not clear if strict Fed internal rules governing confidential information would have been breached, or whether any internal or external investigation was mounted.
But whether it’s illegal for a Fed president to leak such critical information, its certainly illegal for recipients to trade on it. If Ken Lewis et al. took Geithner’s tip and made bullish bets that would be insider trading.