Recent Items

Alan Grayson on GAO Report on the Fed

Posted on by

Yves here. There has been a lot of press, deservedly so, on the information that Bloomberg managed to pry out of the Fed on its emergency lending programs during the crisis. The Fed again is in crisis mode, again in a controversial and arguably compromised position in extending currency swaps to the ECB to provide dollar liquidity to European banks. They are having difficulty securing funding because US money market funds are no longer keen about parking money with them and US regulators have been discouraging banks from extending credit lines to them. As a consequence, another set of important revelations about Fed conduct, namely, the release of the results of a GAO review of crisis related Fed operations, is not getting the attention it warrants.

But before turing to the Grayson letter, let me offer a thought on the Fed intervention of last week. If anything, even though I’m skeptical that the dollar liquidity shot in the arm is much more than a confidence building move and a very short term expedient, it is even more questionable than the currency swaps extended during the 2007-2008 crisis. Even though in both cases, the US is supposed to act as lender of the last resort, in the global financial crisis, dollar assets were the epicenter. The US has peddled toxic dreck and Eurobanks were big takers. The US had not just a practical but a moral responsibility to do what it could to alleviate the mess it had created.

This time, the dollar market stress is the result of the lousy condition of Euro assets on Eurobank balance sheets, namely their expected losses on periphery country debt. If the ECB would step into the breech and play the lender of the last resort in Euros, the need for foreign central bank action would be considerably reduced.

From Alan Grayson:

I think it’s fair to say that Congressman Ron Paul and I are the parents of the GAO’s audit of the Federal Reserve. And I say that knowing full well that Dr. Paul has somewhat complicated views regarding gay marriage.

Anyway, one of our love children is a massive 251-page GAO report technocratically entitled “Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance.” It is almost as weighty as that 13-lb. baby born in Germany last week, named Jihad. It also is the first independent audit of the Federal Reserve in the Fed’s 99-year history.

Feel free to take a look at it yourself, it’s right here. It documents Wall Street bailouts by the Fed that dwarf the $700 billion TARP, and everything else you’ve heard about.

I wouldn’t want anyone to think that I’m dramatizing or amplifying what this GAO report says, so I’m just going to list some of my favorite parts, by page number.

Page 131 – The total lending for the Fed’s “broad-based emergency programs” was $16,115,000,000,000. That’s right, over $16 trillion. The four largest recipients, Citigroup, Morgan Stanley, Merrill Lynch and Bank of America, received over a trillion dollars each. The 5th largest recipient was Barclays PLC. The 8th was the Royal Bank of Scotland Group, PLC. The 9th was Deutsche Bank AG. The 10th was UBS AG. These four institutions each got between a quarter of a trillion and a trillion dollars. None of them is an American bank.

Pages 133 & 137 – Some of these “broad-based emergency program” loans were long-term, and some were short-term. But the “term-adjusted borrowing” was equivalent to a total of $1,139,000,000,000 over one year. That’s more than $1 trillion out the door. Lending for these programs in fact peaked at over $1 trillion.

Pages 135 & 196 – Sixty percent of the $738 billion “Commercial Paper Funding Facility” went to the subsidiaries of foreign banks. 36% of the $71 billion Term Asset-Backed Securities Loan Facility also went to subsidiaries of foreign banks.

Page 205 – Separate and apart from these “broad-based emergency program” loans were another $10,057,000,000,000 in “currency swaps.” In the “currency swaps,” the Fed handed dollars to foreign central banks, no strings attached, to fund bailouts in other countries. The Fed’s only “collateral” was a corresponding amount of foreign currency, which never left the Fed’s books (even to be deposited to earn interest), plus a promise to repay. But the Fed agreed to give back the foreign currency at the original exchange rate, even if the foreign currency appreciated in value during the period of the swap. These currency swaps and the “broad-based emergency program” loans, together, totaled over $26 trillion. That’s almost $100,000 for every man, woman, and child in America. That’s an amount equal to over seven years of federal spending — on the military, Social Security, Medicare, Medicaid, interest on the debt, and everything else. And around twice American’s total GNP.

Page 201 – Here again, these “swaps” were of varying length, but on Dec. 4, 2008, there were $588,000,000,000 outstanding. That’s almost $2000 for every American. All sent to foreign countries.

Page 129 – In October 2008, the Fed gave $60,000,000,000 to the Swiss National Bank with the specific understanding that the money would be used to bail out UBS, a Swiss bank. Not an American bank. A Swiss bank.

Pages 3 & 4 – In addition to the “broad-based programs,” and in addition to the “currency swaps,” there have been hundreds of billions of dollars in Fed loans called “assistance to individual institutions.” This has included Bear Stearns, AIG, Citigroup, Bank of America, and “some primary dealers.” The Fed decided unilaterally who received this “assistance,” and who didn’t.

Pages 101 & 173 – You may have heard somewhere that these were riskless transactions, where the Fed always had enough collateral to avoid losses. Not true. The “Maiden Lane I” bailout fund was in the hole for almost two years.

Page 4 – You also may have heard somewhere that all this money was paid back. Not true. The GAO lists five Fed bailout programs that still have amounts outstanding, including $909,000,000,000 (just under a trillion dollars) for the Fed’s Agency Mortgage-Backed Securities Purchase Program alone. That’s almost $3000 for every American.

Page 126 – In contemporaneous documents, the Fed apparently did not even take a stab at explaining why it helped some banks (like Goldman Sachs and Morgan Stanley) and not others. After the fact, the Fed referred vaguely to “strains in the financial markets,” “transitional credit,” and the Fed’s all-time favorite rationale for everything it does, “increasing liquidity.”

81 different places in the GAO report – The Fed applied nothing even resembling a consistent policy toward valuing the assets that it acquired. Sometimes it asked its counterparty to take a “haircut” (discount), sometimes it didn’t. Having read the whole report, I see no rhyme or reason to those decisions, with billions upon billions of dollars at stake.

Page 2 – As massive as these enumerated Fed bailouts were, there were yet more. The GAO did not even endeavor to analyze the Fed’s discount window lending, or its single-tranche term repurchase agreements.

Pages 13 & 14 – And the Fed wasn’t the only one bailing out Wall Street, of course. On top of what the Fed did, there was the $700,000,000,000 TARP program authorized by Congress (which I voted against). The Federal Deposit Insurance Corp. (FDIC) also issued a federal guarantee for $600,000,000,000 in bonds issued by Wall Street.

There is one thing that I’d like to add to this, which isn’t in the GAO’s report. All this is something new, very new. For the first 96 years of the Fed’s existence, the Fed’s primary market activities were to buy or sell U.S. Treasury bonds (to change the money supply), and to lend at the “discount window.” Neither of these activities permitted the Fed to play favorites. But the programs that the GAO audited are fundamentally different. They allowed the Fed to choose winners and losers.

So what does all this mean? Here are some short observations:

(1) In the case of TARP, at least The People’s representatives got a vote. In the case of the Fed’s bailouts, which were roughly 20 times as substantial, there was never any vote. Unelected functionaries, with all sorts of ties to Wall Street, handed out trillions of dollars to Wall Street. That’s now how a democracy should function, or even can function.

(2) The notion that this was all without risk, just because the Fed can keep printing money, is both laughable and cryable (if that were a word). Leaving aside the example of Germany’s hyperinflation in 1923, we have the more recent examples of Iceland (75% of GNP gone when the central bank took over three failed banks) and Ireland (100% of GNP gone when the central bank tried to rescue property firms).

(3) In the same way that American troops cannot act as police officers for the world, our central bank cannot act as piggy bank for the world. If the European Central Bank wants to bail out UBS, fine. But there is no reason why our money should be involved in that.

(4) For the Fed to pick and choose among aid recipients, and then pick and choose who takes a “haircut” and who doesn’t, is both corporate welfare and socialism. The Fed is a central bank, not a barber shop.

(5) The main, if not the sole, qualification for getting help from the Fed was to have lost huge amounts of money. The Fed bailouts rewarded failure, and penalized success. (If you don’t believe me, ask Jamie Dimon at JP Morgan.) The Fed helped the losers to squander and destroy even more capital.

(6) During all the time that the Fed was stuffing money into the pockets of failed banks, many Americans couldn’t borrow a dime for a home, a car, or anything else. If the Fed had extended $26 trillion in credit to the American people instead of Wall Street, would there by 24 million Americans today who can’t find a full-time job?

And here’s what bothers me most about all this: it can happen again. I’ve called the GAO report a bailout autopsy. But it’s an autopsy of the undead.

Print Friendly
Twitter70DiggReddit1StumbleUpon1Facebook330LinkedIn11Google+13bufferEmail

79 comments

  1. killben

    Let anyone say anything .. Our Bearded Ben will go his merry way .. will stuff billions in the pockets of banksters as long as he is around!

  2. SteveA

    The numbers are mind-boggling. But the us/them US/Foreign bank emphasis is a bit off. Would it be better if a foreign counterparty failed on a USD trade with a US institution and brought the money markets to a complete halt? Or if foreign institutions had to dump EUR assets and exchange them to meet USD obligations? I have a serious problem with many actions of the Fed since 2008–the crony capitalism, the trash assets from Bear Stearns and the “loans” to AIG–but not with these currency swaps to provide liquidity.

    1. Yearning to Learn

      Unfortunately, these issues are complex.
      The financial oligarchs and their political puppets use this complexity to hammer home an erroneous message to the masses.
      The message being given is this:
      “Main street depends on Wall Street. Wall Street made a few regrettable decisions, some of which were forced upon it by government (you know, home loans for minorities). Thus Wall Street had a liquidity issue and was FORCED by Government to take out loans it didn’t need. As proof, all of that money has been paid back WITH INTEREST”.

      This narrative is taking hold, encouraged by both parties. Thus, those fighting the narrative need to simplify the story in a truthful way.

      Alan Grayson’s letter does just that. For years I’ve told family members about my irritation that Wall Street got TRILLIONS of dollars, and yet I’m supposed to believe that Social Security is bankrupting us now… and we can’t afford it now.

      I’ve tried talking about how ZIRP and all the lending facilities etc were a boon to the banks… but my family doesn’t understand.

      Now, using the GAO report I can simplify. I can say “Do you know that the big banks got $16 Trillion in support from the government? If the big banks can get $16T when they don’t even need it, why all the fuss when the Stimulus was only $700 Billion? Wall Street’s bailout was 22 times bigger!”

      That works much better.

      1. nowhereman

        Yes and $16 trillion is available for banks, but we can’t afford retirement or health care for Americans.
        As long as the criminals are allowed to control the narrative, the absurdity of the situation will continue to go unnoticed.

        1. Richard Kline

          So nowhereman, I agree completely. As do many others, which is why feet on the street and sites on the green are changing the narrative.

          The wealthy have always had preferential access to funding. That was so even if for no reason other than that they’d lend to each other, although central banking developed to put the power of state finance behind them ‘for the greater good.’ The compensation for the public was that the state also funded public spending of various kinds so that the public got some of that ‘good’ which, of course, the wealthy never provided of their own recourse. In essence, the liberal bargain was to spend on the middle class (and when forced on the poor) in return for guaranteeing the stability of the wealthy’s preferential access to funds; a devil’s bargain, but at least society got something out of it.

          That’s all over now. The oligarchy, and their rightist ideologues on leading strings, had essentially taken over the state completely. Using crisis and bogus narratives, these malefactors of great wealth have gutted state funding for society as a whole, while shifting and increasing _all_ of that funding power to guarantee the assets and preferential funding of the rich. It’s that simple: the public treasury has been entirely diverted to the special interest and sole use of the wealthy 1% (in protecting ‘their’ assets) and even more the wealthy .1% (in protecting their preferential funding).

          The political bargain that made democratic capitalism work has been broken—by the rich, for the rich, and of the rich. Our crisis was of their making. The ongoing crime is of their doing. The solution will come from the other 99% of us, and believe me we all know what the problem is . . . .

          1. Fiver

            The “liberal” bargain stank at the best of times:

            The wealthy were fine with whatever “liberals” did so long as the wealthy were fully protected financially and isolated physically. “Liberals” wrongly believed that the middle class would be prepared to carry the disadvantaged long enough to lift them out of poverty. But the money required was NEVER in the amounts truly needed. What happened is that the middle class increasingly balked at paying higher taxes, with little concrete progress and opted to have governments take on debt instead. Even in “good times” though, the borrowed spending was wholly inadequate to really help the growing number needing assistance. Without a FULL share paid by the wealthy, and major changes in policy, it was just a matter of time before the weight on the middle class crushed any lingering sense of care and obligation for their less fortunate brethren out of them. Now it’s pretty difficult to even find a “liberal” who can say the word “tax” publicly.

            The rich were always bastards. But now much of the middle class has also abandoned the underclass. Time again for a MAJOR redistribution of wealth and power.

      2. PL_2

        I’ve been trying to post about this a couple days. Can put up links if anyone’s interested.

        Same thing here almost.

        I tried showing this piece to my husband. He said it’s nothing new.

        He said it’s all paid back, even Grayson says so pretty much, and was just temporarty for ‘liquidity’ (whatever) that means. And it’s not something the taxpayers have to pay back.

        The only exception was the outstanding on the asset purchases.

        What I am saying: there have to be examples! There have to be anecdotes! These rolled-up numbers tell you nothing. Tell me just one or two _specific_ examples of giving away free money that _stays_ given away, and it might make a difference.

        I’ve been hearing this rolled up generalities forever — it simply does not cut it for a complaint that is going to resonate. I do appreciate that it is _tantamount_ to giving away money. That these loans _are_ free money, when the interest is below market, when savers suffer through zero rates, etc, etc, etc.

        Still won’t cut it. In all that stack of papers, this is all we’ve got, summaries of big numbers, and no smoking gun?

        Please, I would help with the leg work. I tried looking up the toxic asset stuff — still nothing you can get your teeth into.

        1. nowhereman

          I would suggest you could start with the Maidens. These toxic dregs are held on the Fed’s books as if they had s real value, as if they are an asset. When all they really are is a gift to the institutions that created them and then could not sell them, because after it was learned what Citi and Goldman and the rest were up too, with the collusion of the rating agencies, defrauding “sophisticated” investors, like municipalities, pension funds, foreign governments, etc. etc.
          It all comes together when you realize the scope of the fraud, and begin to track it’s effects as it ripples around the globe.
          Now Sovereigns are being blamed for the losses they took by investing in this whole shadow banking system. They are pointing the finger at social programs, and not the $12+trillions of loses incurred as a result of the systemic collapse in 2008.
          Every one other than those responsible are being blamed and it is sickening to watch how supposedly intelligent people are buying into the propaganda.
          Amazing

          1. PL_2

            Thank you thank you this may be it. I know it’s a lot of trouble to answer questions so will try to hold up my end on the follow through.

            I tried before looking into the Qualitative Easing (I think it’s called) on a hunch and maybe YankeeFranks suggestion, and it turned out it was all about the GSEs, I think they call them — Fannie and Freddie. And we know what people say about them — they’re the gov’t's fault.

            Maiden Lane may be it. I will try to look into that. If it turns out we bought dreck for money, that should qualify for the _at least one great example_ I’m looking for.

        2. Yearning to Learn

          Tell me just one or two _specific_ examples of giving away free money that _stays_ given away

          first example:
          all the TBTF banks are still TBTF. Despite what anybody says, we all know they have the implicit backing of the Federal Government… just like Fannie/Freddie did. The govt can scream and claim that it won’t backstop them, but look around! clearly everybody knows this and thus the TBTF banks get below-market pricing on their products because of the presumed guarantee.

          Second example:
          the Fed allows the big banks to borrow at near 0% (ZIRP). they have PROMISED that they will leave this at near 0 for at least 1-2 years.

          They then allow the Banks to take that money and “invest” in 1-2 year Treasuries, risk free because it is even duration matched.

          this gave the banks 1-3% GUARANTEED RISK FREE returns for years, and it continues today.

          if they go further out on the curve they can get up to 5%, but then they have a duration mis match.

          it is a continuing gift of hundreds of billions of dollars a year. wasted on the banks.
          =====

          Someone posted a link that had a great analogy. it went something like this (paraphrased);

          imagine you are a parent.
          your child develops a drug habit
          because of his addiction, he falls into $100k in debt to a loan shark. he also gets arrested and convicted of drug offenses.
          The loan sharks are going to break his legs and maybe kill him..

          So he comes to you, and you decide to pay off the loan for $100k
          then, you tell your child “you are going to pay me back every cent of this”.

          so you contact your golf buddy and call in a favor to have him give your son a job for $200k/year. Using this job, your son pays you back the $100k.

          Did your son really “pay you back”? or did you give him more assistance? A drug addicted person in $100k debt and drug conviction would normally never get a $200k/year job. he got it based on your assurances to your golf bud. in other words, the job was FURTHER support of your son, and not him becoming self-supporting.

          this is what happened with the banks.
          They got massive bailouts and loans and loan guarantees from the FedGov/Fed. they also got ZIRP and a whole host of other support that had big letters so people got confused. some of this was temporary, and some continues. but it all helped the banks immeasurably.

          We GAVE the money to the banks so that they could “pay us back”.

          1. PL_2

            Fantastic info. I always study your comments.

            Not positive this is quite what I’m looking for. Maybe I’m not expressing it right. I’m also checking the Maiden Lane mentioned in the other response — and thank you very much for taking the time to answer.

            Maybe the Maiden Lane will turn out to be the example. Really only need one great one — more wouldn’t hurt. 8-0

            One more try at my point — I have assumed there has been large bailout to the point of theft from the taxpayers. That’s the counter argument to cuts and austerity, IMHO.

            But it has to be cut and dried, or a least reducible to a bumper sticker more precise than banks-got-bailed-out-we-got sold out. Still haven’t found after all this time.

            I see both your examples 1 and 2 are dead on — but not sure either quite fits on a bumper sticker. Regarding 2, seems like I remember that the banks were actually prohibited from doing that swap of borrowing for Treasuries, and when there was some small investigation, it turned out some outliers had done it, or to a small extent. Of course we know the ‘fungible’ thing. But if they were doing it, with leverage, it would be massive returns right?

            Sorry to be vague about the counter to example 2, but remember read something about it and have consistently been disappointed at lack of specific hard smoking gun evidence or examples.

            So far I think the ZIRP hurting savers is the most ‘digestible’ example I’ve found (to mix all these metaphors). Maybe sometime I’ll find a way to say what I mean — it seems to me these perfectly true examples sound like vague temporary measures that were paid back to the common man, no matter how huge the numbers.

          2. Bhikshuni Lozang Trinlae

            Yearning to Learn says:
            December 5, 2011 at 1:52 pm

            “Second example:
            the Fed allows the big banks to borrow at near 0% (ZIRP). they have PROMISED that they will leave this at near 0 for at least 1-2 years.

            They then allow the Banks to take that money and “invest” in 1-2 year Treasuries, risk free because it is even duration matched.

            this gave the banks 1-3% GUARANTEED RISK FREE returns for years, and it continues today.

            if they go further out on the curve they can get up to 5%, but then they have a duration mis match.”

            This doesn’t count the billions they (e.g. Great Lakes Educational Loan Services in Herr Walker’s WI) are bilking out of graduate students in servicing fees on the Fed student loans:

            Grad Direct Plus Loan: 7.9% (loan fee 4.0%)
            Stafford Loan: 6.8% (loan fee 1.0%)

            The American public c/o FED has succeeded REWARDING banks & their CEOs for essentially turning a whole generation into indentured laborers for life.

            Expecting today’s students to change your adult diapers in old age and administer your pain meds, America?

          3. Richard Kline

            So Yearning, to expand and conclude your analogy, that golf buddy had his own cash flow problems so he didn’t actually _have_ $200k to pay your wastrel kid. So your gold buddy simply borrowed the cost on the open market, folding it into the rest of that buddy’s own debt-addiction funding. So not only does the kid get $100k for doing nothing, your gold buddy is further indebted to the tune of $200k plus interest, just so your kid can stay addicted and destructive.

            This is how private folly is presently being transfered into completely unproductive state or central bank debt. And because sovereigns are not only too big to fail but too integral to finance to do without, the financial systems in which those sovereigns operate are where the stress and collapse finally register. What was a containable loss with the kid sniffing green cocaine tiers up into a wipeout of the financial system as a whole when the solvency and liquidity both of sovereigns becomes problematic.

            We don’t have market capitalism at this point: we have uncontrolled kleptocracy, where the 1% are simply looting the system and everyone else to paper over their own, self-created, existing losses.

  3. allcoppedout

    The madness in all this is we are rebuilding nothing and we can’t unless we get down to some basics on equality, work and dignity. What we have is more or less Plato’s communist free-table for the rich. Some way on from the new economics and politics needed, I’d Like to see an expanded US including 5 or 6 new states including Canada, Australia, New Zealand, Scotland, England and Ireland based on a re-affirmation of democracy. Even if this isn’t possible it serves as a metaphor for the difficulties in shaking off 40 years of nonsense economics.

    1. Flying Kiwi

      “I’d Like to see an expanded US including 5 or 6 new states including Canada, Australia, New Zealand, Scotland, England and Ireland”

      In none of those 6 new states of the US do the police presently carry guns as a matter of course.

      Personally as a New Zealander I happen to think New Zealand would be better of as another State in the Commonwealth of Australia but I give thanks daily that I’m not an American and I’d fight tooth and nail against any incorporation in the US.

      1. sleepy

        All Canadian police are armed to the teeth while on duty-normally with a Glock handgun and also with a shotgun in the car, no different than the US.

        I believe that Australian police are armed as well.

        Ironically, one of the things I found strange about Europe when I first visited 45 years ago was the amount of weaponry carried by the police. In Italy, and I believe Germany as well, it appeared the cops walked around with machine guns.

    2. BondsOfSteel

      I keep hearing people say that the US builds nothing. Not true. I’m typing this on a Dell, running Windows, watching a 767 flying overhead and american made Toyotas drive by….

      It is true that much of what we build have parts that are sourced globally… and that through labor and environment arbitrage are usually bought elsewhere.

      I would argue this is a short term trend. (Automation will replace labor costs, and energy cost *hopefully* will replace the environmental savings.)

      1. kemo sabe

        Your Dell is made in SE Asia with most parts made in China. The newer Boeing airliners all made from parts made in Japan, Italy and a host of other nations and assembled here. Same thing with Toyotas – parts are made in Japan and other countries except for some of belts which are made here. The automobiles are assembled in the US! There you go – how much do we manufacture any more?

        1. rotter

          Some few Toyatas (very few realtive to waht the sell worldwide) are made in the US,by non union labor, but 90% of the parts are made elsewhere. Even most of the machinery and tools used in the factories. I think the comment you responded to reflects a pretty common american ignorance of the problem. Boeing is essentially a state enterprise (except of course, they keep the profits and everything costs more than if the govt ran it)

  4. Conscience of a Conservative

    If anyone thinks the Fed will be winding down the huge assets on it’s books or raising interest rate policy soon, they will be sadly mistaken. The additional interest cost would be so prohibitive we can be assured of ultra low interest rates for years to come.

    If anyone thinks the Fed will be inclined to truly operate in the sunlight anytime soon, they will again be sadly mistaken. The Fed very much enjoys the ability to act in the shadows. If there’s any doubt, just look at the 7.1 trillion. Nor has the Fed ever adequately explained paying banks 0.25% on their deposits at the Fed.

    Ron Paul is right, we need to end the Fed or at the very least end the dual mandate and restrict it’s role to pure monetary policy.

    1. Carla

      Milton Friedman said to Bill Still: “Boy, if you kill the Fed and don’t kill fractional reserve lending, you’ve done nothing.” (“No More National Debt,” by Bill Still, page 19 in my edition — Chapter 4)

  5. Flying Kiwi

    “If the ECB would step into the breech and play the lender of the last resort..”

    It’s ‘breach’, as in a breach in a dam, or of a contract. A breech is what guns, cannons and bazooka’s have. Oh, wait a minute…

    1. Flying Kiwi

      “Once more unto the breach, dear friends, once more;
      Or close the wall up with our English dead.”

  6. R Foreman

    I see rolling waves of bankruptcy in our very near future, a forest fire. All we need is the spark. So where does all this delevering come from? From the 1%, sure, but also from pensions, big banks and corporations. Retirement will never be the same, and our feckless leaders will finally be earning their salaries. The Fed is in crisis mode indeed.

  7. readerOfTeaLeaves

    First, quick conclusion: the Shadow Banking system now runs the Fed; it has to, because as an economic model it is actually based on externalizing all costs. Consequently, it requires constant, ever-increasing political intervention in order to absorb into itself whatever assets remain outside of its system. The power continues to concentrate, along with the wealth, because it has to: the greater distress the system creates for itself, the more political influence and power are required to maintain it.

    I doubt this will end well.

  8. ZeroInMyOnes

    These large banks are wealth-destroyers and job-destroyers and the American people know it. Wall Street is a ball and chain around the ankle of Main Street.

  9. bmeisen

    That this was done is less troublesome than that so little has been done since. Call me a troll: I am Prez and the banking system is going critical. My talented advisors warn that my name will be dirt forever if I don’t do anything. IN addition people will run out of cash in 3 days and start looting Walmarts. If the choice is either let the f*ckers burn or start throwing money at them then I would probably start throwing money at them, cursing myself the whole time but also hoping that I will be remembered as someone who was more than the laughable offspring of Herbert Hoover and Neville Chamberlain. Vanity, thou art a bankster troll.

    Clearly what should have been done on Tuesday September 16 2008 was to:

    1. position the same numbers of police as have recently been hounding OWS demonstrators in front of bank towers in Manhattan, Charlotte, and other national financial centers;

    2. send them into the bank towers shortly after 9 am;

    3. remove top banking executives to Guantanamo for brief internment and isolation;

    4. guarantee continued banking operations by placing officers in all relevant offices;

    5. replace bank executives with public servants on loan from the German finance ministry;

    6. wipe out all FIRE shareholders;

    7. re-structure and downsize TBTF organizations

    8. re-capitalize with federal funds

    9. compensate in full all citizens whose retirement plans have been adversely affected by the collapse in FIRE share prices.

    10. announce that Americans are no longer encouraged to invest in the stock market in order to secure their retirements

    11. repeal all federal legislation that subsidizes private stock purchase plans.

    12. increase the social security tax to 8% + 8%

    13. pay off the mortgages of the bottom third of all sub-prime mortgage victims.

    14. initiate a massive program of public housing that applies the hard-learned lessons of the past.

    Overall costs would have been substantially less than what we ended up paying and will continue to pay as a result of performing an autopsy on the un-dead!

    1. Jim in MN

      100% spot on. No more trouble than a DEA or immigration raid.

      You forgot one thing though:

      Mirror all executives’ hard drives on the internet for intensive forensic investigation by the global community.

      1. Glenn Condell

        ‘Mirror all executives’ hard drives on the internet for intensive forensic investigation by the global community.’

        Which would lead to the next item on the list: impound and audit offshore tax havens.

        These things would already have been done if American corporate regulation, law enforcement and domestic intelligence worked for Us rather than Them. The one Wall Streeter they’ve hacked and exposed is Eliot Spitzer.

    2. psychohistorian

      Well, IMO, when you started talking to the finance folk at Gitmo you would quickly implement my part of the suggested solution….

      Laugh the global inherited rich out of control of “Western Democracies” and into rooms at the Hague where they would be prosecuted for our social degradation.

      So, lets get on with it.

  10. skippy

    Firstly thanks to Mr. Alan Grayson and Yves.

    I would like to cement the above with this second observation see:

    The audacity and absurdity of it all is mind boggling…

    Based on many conversations I’ve had with people, it seems that the average person doesn’t comprehend how much a trillion dollars is, let alone 12.3 trillion. You might as well just say 12.3 gazillion, because people don’t grasp a number that large, nor do they understand what would be possible if that money was used in other ways.

    Can you imagine what we could do to restructure society with $12.3 trillion? Think about that…

    People also can’t grasp the colossal crime committed because they keep hearing the word “loans.” People think of the loans they get. You borrow money, you pay it back with interest, no big deal.

    That’s not what happened here. The Fed doled out $12.3 trillion in near-zero interest loans, using the American people as collateral, demanding nothing in return, other than a bunch of toxic assets in some cases. They only gave this money to a select group of insiders, at a time when very few had any money because all these same insiders and speculators crashed the system.

    Do you get that? The very people most responsible for crashing the system, were then rewarded with trillions of our dollars. This gave that select group of insiders unlimited power to seize control of assets and have unprecedented leverage over almost everything within their economies – crony capitalism on steroids.

    http://pubrecord.org/nation/8622/pentagon-papers-wall-street/

    Skippy…how that money could have been SPENT into existence….says…VOLUMES to me. Has humanity ever in its history committed to such a futile act, the dumping of 15 trillionish dollars of price, into a collapsing derivative Black Hole, in an attempt to fill it. More plaster for the Temples[!!!] always fixes things, as ***image*** is everything…methinks!

    1. Amateur Socialist

      I find people understand a trillion pretty quickly once you break it down into a million millions. Thanks to the lotto etc people can comprehend a million readily enough. Once you show them that $1T=$1M^2 it tends to sink in.

      1. rotter

        so 12.3 trillion is 12 million and three hundred thousand- checks for a million dollars. they should have just given 12,300,000 people a million bucks, the economy would have lurched upwards.

    2. patricia

      Yes, please. Thanks, skippy.

      It is not easy to understand the corruption because one needs to be knowledgeable about finance and its laws and all the cute little tricks given incomprehensible names and capital letters.

      Moreover, the media is hopeless—it tells straight out lies mixed with partial truths mixed with accuracy. How are we to know? The lies aren’t starred for better comprehension.

      But if we were told over and over, in many different ways, what could have been done with those funds instead, we could get a grasp. Americans understand quite well what their own money can buy.

    3. Glenn Condell

      ‘it seems that the average person doesn’t comprehend how much a trillion dollars is’

      These helped me:

      “if you started spending a million dollars every single day since Jesus was born, you still wouldn’t have spend a trillion dollars”

      “1 million seconds is about 11.5 days, 1 billion seconds is about 32 years while a trillion seconds is equal to 32,000 years”

      This is what happens when you let bankers create money on their keyboards.

    4. Fiver

      And THAT is why calls to supercharge the ECB and unelected Eurocrats without radically overhauling the whole global financial/legal architecture are nuts.

  11. DC Native

    Since the Fed can “create” money with the push of a few buttons on a computer, it’s no wonder that they had no real objection to creating (and then lending/donating) $20+ trillion dollars to banks. They’re just numbers. Monopoly money (to the Fed).

    1. Fiver

      Except they had no idea how crappy the collateral was, nor where or even if it was finally going to end – or who ultimately owned what. It could’ve been 20 or 25 or 30 trillion, all on their balance sheet and all worth spit. Bernanke was chosen as Chair by Wall Street precisely because he is fanatically obsessed with deflation and would bail out Satan himself without so much as a blink.

      And he got absolutely NOTHING in return, whereas at minimum he should’ve had the head of ever senior manager in every institution involved – including his own (the Fed, the NYFR, Geithner, etc.)

  12. Hal Roberts

    As obscene as these actions are I can’t help but wounder how many time Leverage was applied to these funds. I guess that would have been done in US Dollars to???

    1. Glenn Condell

      Covered bond legislation recently passed quietly into Australian law too. Great central bankers think alike; maybe the word has gone out from the BIS, finance’s Vatican – ‘get every damn thing offa the balance sheet and onto the public ledger, before this sucker goes down’

  13. JefeMT

    Its all on paper, now electrons. Makes a compelling argument for unencumbered owned hard assets, pick your poison for their relative ‘utility’. Full faith and credit… When the worm turns, Katie bar the door. As my son’s t-shirt so eloquently states:

    ‘the Federal Reserve- we put the con in economy’

    1. Fiver

      Jim,

      What you raise if one of the most important, least known depravities of global financial predation. And the World Bank of all organizations is actually Theft Facilitator In Chief, laying the legal groundwork necessary in dozens of African countries to enable this grotesque, enormous land grab. Tens of millions have already been thrown off their lands, or been reduced to farm workers on what was their own land. And US military is already shifting its focus to Africa.

  14. Jacob Richter, Esq.

    Grayson’s too good a polemicist to be submerged in a Dem congressional caucus. He should be with Rocky Anderson, strafing the Dem corporate puppets from the left. In order to get the attention of the ruling class you really need to Taft Obama – that would be great in 2012, on the centenary of that historic oligarchic realignment. An electoral defeat of that severity requires a high-profile third party.

    Think he knows what he’s doing with his attack on currency swaps. It’s not just isolationism. The Warsaw Pact disintegrated before the Soviet Union did, and Europe, the nice word for our satellites in NATO, is the coal-mine canary in this collapse. We’re only going to stop blowing up the world when we go broke. And anything that forces recognition of the West’s spreading insolvency is strong medicine. So keep shelling the Fed, and maybe Greece will really be forced to economize, by denouncing NATO under Article 13.

  15. JP Hochbaum

    Something that Paul and GRayson don’t seem to understand is that a loan isn’t money creation, because the feds receive that money back with interest. So the money created or printed in this example is the interest made from the loans. Then that money simply sits in the central banks reserves and doesn’t go into circulation.

    The money that the banks received during this crisis were used to create liquidity, and were doubtful to have entered the US circulation through business and personal loans considering that no one wants to borrow right now.

    1. F. Beard

      Something that Paul and GRayson don’t seem to understand is that a loan isn’t money creation, JP Hochbaum

      Loans do create money even if it is just temporary money. And “temporary” can be very long indeed.

      1. davidgmills

        Those enemy combatants in Guantanamo can tell you how long temporary can be when war is perpetual.

  16. Max424

    During this Great Recession, the United States has had to reluctantly add to the unemployment rolls (or gladly axe, depending on your view point) 520,000 public sector workers.

    The reason for this is, the United States of America, the richest and most powerful nation in all the known universe, is stone cold broke, and hence, must fire it’s employees at an alarming rate, all for the want of a little bit o’ money.

    And yet weirdly, the United States has plenty o’ money. In fact, it has so much money that we can say, with tremendous confidence, that it has a never ending supply of it.

    Now, what are we to make of this unusual dichotomy, where the United States must suffer in the poor house even though it finds itself, awash in riches?

    Well, it’s simple: monetary policy is treason.

    1. Max424

      I would like to add, for all you Big Government bashing Republicans, right wingers, and libertarian/anarchists/nutjobs; Barrack Obama is the first President, in my lifetime (and I go back to Kennedy), to REDUCE GOVERNMENT.

      That’s right, motherfuckers. All your Little Government guys, the Nixon’s, the Reagan’s, the Bush’s I & II, they all made government BIGGER. MUCH BIGGER. But Obama the Hated Socialist, has been the only President to actually, REDUCE GOVERNMENT (albeit one small segment, the workforce).

      So praise Obama, nutjobs. He’s doing your bidding. If he keeps it up, you might get to fulfill your lifelong dream; you might get a chance to drown the United States, not in a bathtub, but in a thimble.

    2. Yearning to Learn

      Well, it’s simple: monetary policy is treason

      I’d amend to “(current) monetary policy is treason.”

      there is a lack of capital out there, but it’s not a lack of fiat dollars. Any lack of money these days is due to a lack of political capital. The fiat flows the same direction and volume as political capital.

      Big bankers=high on the hog. Thus, awash in $16T of support.

      Public sector workers/working class americans, etc = low on political capital, thus “we’re going broke” for their issues.

      there is no dicotomy, it is hyperbole and hypocrisy instead.

      we have a lot of newspeak these days… prepare for more.

  17. sheepdog

    “The US had not just a practical but a moral responsibility to do what it could to alleviate the mess it had created.”

    Why a “moral responsibility” when all the buyers of the drek were sophisticated and knowledgeable? Why can’t US taxpayers use the same reasoning banks are using to fight lawsuits re selling of their drek?

    1. Yves Smith Post author

      First, the banks misrpresented the deals. They said the subprime met certain underwriting standards when it didn’t. They hid the fact that the later CDOs (heavily or totally synthetic) were constructed to suit the shorts. They said the asset managers on the deals were independent when they weren’t. They said the assets were being put in at market prices when they weren’t .

      That’s fraud, period. You can’t do proper analysis on garbage information, even if you are sophsticated.

      Second, they targeted unsophisticated investors for the lower rated tranches of CDOs. Town councils in Australia. Little municipalities in the Arctic circle. School boards in Wisconsin. And the person (salesman) who sold the deal lied through his teeth about the risks.

      Third, the AAA tranches also went in large measure to unsophisticated investors, namesly, German Landeshbanken. For some reason, those two Bear hedge funds that blew up were also major buyers.

      1. sheepdog

        My reply was pure snark but didn’t come across that way. The hypocrisy of the banks (and the Fed) sometimes overwhelms me. As long as the banks don’t feel any “moral responsibility” and are being ALLOWED by our government to use that “sophistication” BS to justify their sales, why can’t those of us in the 99% say the same thing?

  18. Susan the other

    Is it just coincidence, a perfect storm, that CDSs went all Fukushima at the very moment that we reached peak everything – oil, population, lots of really crappy overproduction, pollution, no jobs and no demand and blablabla. Aren’t credit default swaps based on a theory that the economy will continue to perform but if by chance it doesn’t then you are covered? Talk about lemmings.

    Angela Merkel said that Germany was 100% behind the UE and a fiscally responsive ECB but it would take many more years to achieve this. My impression of the reticence of Germany and other Europeans to doing an ECB bond buying program now is that they do not want to be liable for anything but facilitating trade. They do not want to be the ultimate collateral for default on all those GS CDSs or any other bad contracts on financial derivatives. Or gambling debts. So this is probably not a new multi trillion stop gap measure by the Fed which will be over in a year or two. Even though this currency swap it is just a revolving credit line (?) it will ultimately be used to flush out all the credit default contracts that were only defaulted on by one-half and pay the balance off to our own banks. Anyway that is where my pinwheel brain went today.

    And interest rates will remain low and there will be very little lending to average citizens and businesses for a very long time. The lack of lending bothers me the most. Next to the secretive methods of the Fed to rescue the casinos at taxpayer expense. Sure looks like Europe and the US decided to split this pig 50-50.

  19. leonberger

    Among his final observation, Grayson says:

    “(1) In the case of TARP, at least The People’s representatives got a vote. In the case of the Fed’s bailouts, which were roughly 20 times as substantial, there was never any vote. Unelected functionaries, with all sorts of ties to Wall Street, handed out trillions of dollars to Wall Street. That’s now how a democracy should function, or even can function.”

    In the final sentence, is that second word a misprint or a sardonic observation on the present state of things?

  20. mac

    Only answer is to FIRE the whole gang at the FEd and make sure they are replaced by more honest people with audits about every month!!

  21. mac

    I would add that steps must be taken to prevent the re play of the mess that caused all of this. To do that we must replace the entire House and Senate and outlaw lobbing. It would probably be good to throw out the staff also as they contribute to the problem.

  22. GlibFighter

    On the education of Yves and Alan Grayson: the topic for today is a central bank’s role as the lender of last resort. Gee, the Fed lent out lots of funds! What an absolute horror!

    1. F. Beard

      What an absolute horror! GlibFighter

      It is. What gives the banks the right to borrow government money into existence? I call that counterfeiting.

    2. Darren Kenworthy

      Who comprises the regional federal reserve governing boards? How much did they lend? To whom? What method did they use to select borrowers and determine amounts? Would the borrowers have failed without the loans? Did these loans allow the recipients to profit? Have they been paid off? Who did they inform? Was the information timely and willingly given? Is there significant information not yet made public?

      Glib, perhaps. More likely disingenuous.

    1. Fiver

      Think he actually believes it, or feels compelled to spew it?

      Either way, certainly disappointing. Thanks for pointing this out.

    2. Glenn Condell

      Me too. He is Jewish and while you don’t have to be in order to be a Zionist, it certainly helps. He is in the Jim Kunstler camp for me; almost uniquely clear-eyed on every issue except Israel.

      Then you have people who understand what Israel and it’s partisans are doing, like Ron Paul, but he thinks the Dept of Education should be abolished! It’s as if every politician within a bull’s roar of being decent enough to lead must have one absolutely crazy core belief.

  23. tg

    This is why I do not donate or subscribe to this web site. The report you cited is factually inaccurate. If you borrow X amount of dollars from someone on a given day, pay them back the next day, then on the 3rd day you borrow the same amount again, that does not mean you borrowed more than X. It means that you borrowed X amount N number of times. Any reasonable person can see that. That is not a defense of Bernanke or the practices of the Fed in anyway; but it is the truth. It would be ideal if you could report the facts instead of making copies of the same mistake.

  24. Jeff B

    What’s at stake here? The Fed prints all the money it needs without affecting the value of a dollar. Why, because it can, since the U.S. dollar is the world reserve currency, right. It’s not like it’s coming out of some taxpayer savings account. No other country can do this. But what happens if or when the U.S. dollar is no longer the world reserve currency? Currency devaluation and hyperinflation. The personal savings accounts of average Americans already struggling become worthless. Panic sets in and mayhem becomes the norm. Bullets will fly. If the average American understood the issues here, bullets would start flying sooner than later. Fortunately, these numbers are so large and issues so complex that eyes glaze over and the brain shuts down, but eventually the masses will catch on.

Comments are closed.