`It's your 2 Trillion; not the Fed's." Fed Refuses To Provide Any Transparency

Discussion in 'Economics' started by ByLoSellHi, Nov 10, 2008.

  1. http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=home

    Fed Defies Transparency Aim in Refusal to Identify Bank Loans

    By Mark Pittman, Bob Ivry and Alison Fitzgerald

    Nov. 10 (Bloomberg) --
    The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

    Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

    ``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''

    Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

    The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

    ``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

    Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn't respond to a phone call and an e-mail seeking comment.

    The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.

    $2 Trillion

    Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.

    Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

    The plan to purchase distressed securities through TARP called for buying at the ``lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,'' according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

    `We Need Transparency'

    The legislation didn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used ``when appropriate.'' In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

    At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

    ``We need oversight,'' Paulson told lawmakers. ``We need protection. We need transparency. I want it. We all want it.''

    At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. ``Transparency is a big issue,'' he said.

    Banks Resist Disclosure

    The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

    Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

    ``You have to balance the need for transparency with protecting the public interest,'' Talbott said. ``Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.''

    Frank Backs Fed

    The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

    In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed's disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

    ``I talk to Geithner and he was pretty sure that they're OK,'' said Frank, a Massachusetts Democrat. ``If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.'' Such losses would be acceptable, he said, if the program helps revive the economy.

    Frank said the Fed shouldn't reveal the assets it holds or how it values them because of ``delicacy with respect to pricing.'' He said such disclosure would ``give people clues to what your pricing is and what they might be able to sell us and what your estimates are.'' He wouldn't say why he thought that information would be problematic.

    `Unclog the Market'

    Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D'Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

    ``I'd love to hear the methodology, how the Fed priced the assets,'' D'Vari said. ``That would unclog the market very quickly.''

    TARP's $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks' troubled assets while markets were frozen.

    The Bloomberg lawsuit argues that the collateral lists ``are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression.''

    AIG Lending

    The Fed has lent at least $81 billion to American International Group Inc., the world's largest insurer, so that it can pay obligations to banks. The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

    ``As a taxpayer, it is absolutely important that we know how they're lending money and who they're lending it to,'' said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

    Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank's rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

    Moody's Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

    The Fed's collateral ``absolutely should be made public,'' said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed's moves.
     
  2. W4rl0ck

    W4rl0ck

    "We don't need no stinking oversight" - The Fed.
     
  3. Its a scam.

    Pure and simple.

    The Bankers are literally handing themselves cash.

    The lynch pin is sub-prime mortgage losses.

    Government could have bought them all and guaranteed payment for perhaps 500 Billion.

    Running tab now is 3 Trillion. Or more. Who knows?!

    It'll hit 5 Trillion easy.

    This is a looting and raping. Nothing more.
     
  4. Given the "restructuring" happening with the AIG deal over the weekend, it boggles the mind that neither party in Congress is raising a huge stink about this. Where is Maverick McCain? Where is Co-Maverick Palin - here's a golden opportunity for her to earn major kudos in preparation for 2012.

    Depressing.
     
  5. You know, at some point Americans have to admit what’s staring them plainly in the face.

    Congress is bought and paid for.

    They are corrupt minions of Corporate America.

    IOW, Criminals.

    Its really that simple.

    Americans "just can't believe it".

    After all, they bought into these juvenile delusions where everything is apple pie and flag waving.

    So Congress can't be bad! Or Bankers!!

    Its nutz.
     
  6. The REAL issue... all of those $TRILLIONS of CDSs which everybody levered-up with presuming it was a "no-brainer, insured" play. EXCEPT... nobody reserved money to pay up if obligated to do so. Each player bought a CDS of his own to honor his obligation. But unfortunately, A couldn't collect form B until B collected from C.. But C couldn't pay B until C collected from D. And D couldn't pay until he collected from E.... and so on.

    Now, LOTS of folks have WORTHLESS or worth very little CDSs on their balance sheet... they are all "owed" but will never collect... except however much taxpayer bailout money they can get their hands on.
     
  7. Agree 100%. And some of these companies will actually profit off the CDS blowup. Government pays for all their losses and they kept the premium!!

    What I'm saying about subprime - it was the fuse to the CDS blow up. All the derivitives are written on mortgages and banks that hold mortgages.

    If the Government just bought all the underlying paper and guarenteed those mortgages to begin with, most of these derivitives on CDO's and Banks holding CDO's wouldn't have been triggered. IOW, stamping out the fuse before it lights the powder keg!

    Much cheaper solution.

    Although I'm just talking here. Don't know the actual figures, but it makes sense.
     
  8. Achilles...

    Agree 100%. And some of these companies will actually profit off the CDS blowup. Government pays for all their losses and they kept the premium!!

    What I'm saying about subprime - it was the fuse to the CDS blow up. All the derivitives are written on mortgages and banks that hold mortgages.

    If the Government just bought all the underlying paper and guarenteed those mortgages to begin with, most of these derivitives on CDO's and Banks holding CDO's wouldn't have been triggered. IOW, stamping out the fuse before it lights the powder keg!

    Much cheaper solution.

    Although I'm just talking here. Don't know the actual figures, but it makes sense.

    .........................................................................

    This is correct.....

    And this is part of what proves Bernanke/Paulson have not gotten anything right....

    Is it not amazing how the system works ?
    As important as the system is.....you cannot/will not fire the people making the mistakes.....

    I keep harping on changes in the system with my posts....
    And if they are implemented, the US would never experience this type of nonsense.....

    The system has to be transparent, truly democratic, managed by the most qualified, and is manageable because government would be township central.....

    It is utter nonsense for the US to have to be stuck with monkeys and stray dogs that cannot manage their own checkbooks, much less the governments....
     
  9. this stuff makes me crazy

    how can they get away with this
     
  10. jprad

    jprad

    I don't agree, I think there's much worse to come because the universe of problem toxic debt is much larger than sub-prime.

    A lot of it simply hasn't blown up yet.

    You've got option ARM mortgage resets out there that are still ramping up and then there's boatloads of jumbo prime mortgages that were written to finance the McMansion end of the housing boom.

    Credit card debt, car loans and leases, retail store revolving debt.

    All of that was structured as well.

    It's mind-numbing how much crap is out there in front of us...

    And, if that weren't bad enough at the end of this road are unfunded entitlements, insolvent pension plans, etc.
     
    #10     Nov 10, 2008