Bernanke Stonewalls and Prevaricates in Response to Questions by Sen. Bunning

Senator Jim Bunning gave a long, detailed, specific, and very good list of questions to Fed chair Ben Bernanke, and Bunning has posted the resulting Q&A on his website.

I find this a pretty remarkable document. While a certain amount of bureaucratic jousting is to be expected (ie, there is a level of artful dodging that I would accept as legitimate in this context, given that Bunning and Bernanke are at odds on what level of disclosure by the Fed is reasonable), there are many places where Bernanke offers substantive responses, and I find quite a few wanting and misleading, and some look to be untrue.

Because I am on the brink of coming down with something, my concentration is flagging, so I may have missed some other goodies. I hope readers will also look at the underlying document and add their own questions and observations (I will hoist any important additions from comments and add them to the post).

Numbers in the text refer to question numbers from the document. What struck me is:

1. Complete stonewall on broad information request (1). This is unreasonable but predictable. The information it would provide is important to do a proper review of Bernanke’s job performance (which some Senators like Bunning question) but also important forensic work. Understanding what the decision-making was prior to and during the crisis is key to evaluating Bernanke’s performance and to improving performance in general. Post mortems are standard in sports and medicine. Why not here? If there was a real concern re confidentiality, pare down the list and have a law firm or some other independent and trustworthy party read it and perform an assessment, pointing out noteworthy items. There might be items on Bunning’s list one could argue weren’t necessary to meet that goal, but in general, you do need to look at a lot of stuff to understand what went down and why. For stock offerings, one bit of due diligence that was required in my day was for outside counsel to read the board minutes of the issuer. There is certainly a way to have a third party read, assess, and report on the items that are of legitimate public interest.

In terms of post-mortem items, one huge gap (as pointed out by Perry Mehrling of Columbia University) is the lack of explanations and analyses of firms that were bailed out. The Swiss National Bank required UBS to make an extensive investigation of how it screwed up so badly as to need the rescue, and it prepared two versions, one for the consumption of the authorities, a second written so as to be accessible to laypeople and published as a report to shareholders (which meant it is public information). The Swiss clearly believe more disclosure of what went wrong with its worst miscreant is salutary, and beneficial rather than detrimental to confidence. And the report was extensive. Why has there been no such report on AIG, Bear, or the major TARP recipients?

2. More specifically, the later arguments re not disclosing who is using the various facility users is rubbish. The comparison is to use of the discount window, where banks were reluctant to access it because it would make other banks reluctant to do business with them (it would be an admission of weakness and could lead to an inability to fund in the interbank markets). The discount window issue was DURING THE CRISIS. This is now. And presumably just about every firm is sucking off these facilities. The odds that it will have a prejudicial impact are low now (indeed, you might see the reverse phenomenon: anger that institutions that are seen as strong, like Goldman and JP Morgan, as heavy users, which would suggest the system is being gamed and is serving to subsidize bonuses more than help institutions or markets that need support).

3. Get this juicy exchange (17):

When the first nine large banks received the initial 125 billion TARP dollars, Secretary Paulson and you said those nine banks were healthy. Do you now agree with the TARP Inspector General’s finding that Citigroup and Bank of America should not have been considered healthy by you and Secretary Paulson?

On October 14, 2008, the Federal Reserve joined in a press release with Treasury and the FDIC to announce a number of steps to address the financial crisis, including announcing the implementation of the Capital Purchase Program (“CPP”). The first nine banks to receive CPP funds were selected because of their importance to the financial system at large. In fact, the SIGTARP report notes that approximately 75 percent of all assets held by U.S.-owned banks were held by these nine institutions. In addition, these first nine institutions were considered to be viable, though some were financially stronger than others. The press release referred to these nine systemically important institutions as “healthy” to indicate that these institutions were viable and were not receiving government funds because they were in imminent danger of failure.

The Orwellian “banks were healthy” is now revealed to have mean “we thought the banks were not going to drop dead in the next 24 hours”

4. Continued repetition of the “the French wouldn’t let us cram down their banks, it is against their law to settle” as one of the reasons for the need to pay out 100% on the AIG CDS. Repeated again and it is a complete and utter lie (23):

Furthermore, it would not have been appropriate for the Federal Reserve to use its supervisory authority on behalf of AIG (an option the report raises) to obtain concessions from some domestic counterparties in purely commercial transactions in which some of the foreign counterparties would not grant, or were legally barred
from granting, concessions.

The claim was that French banks could not voluntarily agree to a lesser payment (presumably, they’d have to suffer a default or payment as determined through a bankruptcy process). That was reported in Sorkin’s book and even in the SIGTARP report and it looks like propaganda. This from Janet Tavakoli :

After it saved the day by extending the credit line, the FRBNY should never have settled for 100 cents on the dollar. In August 2008, one month prior to the FRBNY providing A.I.G. with an $85 billion credit line to pay collateral to its counterparties, Calyon, a French bank that bought protection from A.I.G. (including on some Goldman originated CDOs) settled a similar $1.875 billion financial guarantee with FGIC UK for only ten cents on the dollar.

Now it is possible that the French regulators, um, misrepresented the situation of their banks to the Fed (the party line is that the Fed called the French regulators and were told that the banks could not accept a haircut under French law. Of course, these deals were probably subject to UK law, did anybody bother checking?). But for the Fed to continue to maintain that the haircuts could not have been made (as opposed to they were operating from misinformation, and then one has to question why they didn’t know better) changes this from an error to a falsehood.

5. Bernanke tries to explain his claim in earlier testimony that the Fed’s supervisory authority aided in its monetary policy decisions (25). It’s vague and unconvincing. If the information gathered by regulatory supervision was all that useful, the Fed could have an arrangement whereby a bank supervisor shares certain types of data with the Fed. But how can the Fed claim with a straight face that it was using G2 from its regulatory role in monetary policy and missed the biggest credit bubble in the history of man?The evidence on the ground is that whatever could have been learned from regulatory supervision was not simply not used, it was affirmatively ignored.

And this strains credulity:

In addition, supervisory expertise in structured finance contributed importantly to the design of the Commercial Paper Funding Facility, the Money Market Investor Funding Facility, and the Term Asset-Backed Securities Loan Facility, all of which have helped to stabilize broader financial markets

They have no “expertise” in structured finance; if they did, they would have recognized, among other things, what a bad idea ABS CDOs were and would have stopped them from existing. And the supervisory types had little or nothing to do with the facilities. Per Economics of Contempt:

What about all those “creative emergency lending facilities” like the PDCF and the CPFF that the Fed implemented, and that Bernanke is always getting so much credit for? Those were in reality designed largely by the NY Fed’s Markets Group (headed at the time by William Dudley, who’s now the NY Fed President), not Bernanke.

Just to be clear, the Markets Group is not in the bank supervision business.

6. The attempts to claim that the price of gold (in response to multiple questions) does not reflect concerns re inflation and the dollar down the road is another howler.

7. The argument in 27 re Fed needing confidentiality to maintain independence is also rubbish. As Martin Mayer has pointed out, the Fed is supposed to be independent of the Executive. It is SUPPOSED to be supervised by Congress!

8. 28 (that the Fed can buy Freddie and Fannie bonds even though they are not full faith and credit obligations) looks like Imperial Fed. I’d love to see their theory tested in court. They take a statutory provision and justify it via their own regulation, ie, interpretation. Yes, this was no doubt a long-established practice, and the markets also long treated Freddie and Fannie bonds as if they were full faith and credit obligations (as many foreign buyers did) but the fact that a lot of people accepted this erroneous assumption does not mean the Fed’s interpretation holds water in a narrow legal sense, which was the focus on this question. If you look at the entire section (which has been amended a zillion times over the years), it does read as if the intent is to limit the Fed’s activities here to the purchase of bona fide government obligations, so the question is not as nit-picking as it might sound.

9. Many answers are complete feints, such as 30 (Bunning asks what activities the Fed might consider prohibiting banks engaging in, keying off a specific Bernanke remark to Senator Gregg), 34 (on whether tax policy distorts financial institution behavior), 69 (on too big to fail and why Bernanke differs with Volcker, Greenspan, and Mervyn King) or so non-specific as to be useless (33 on why the TARP switched from buying toxic investments to making equity injetcions, 44 on what would the Fed do if unemployment stayed high and commodities prices continued to rise). 62 (uses a recent Bernanke statement at an FOMC meeting to argue that it implies the Fed should welcome greater transparency) is a particularly astute question, and is blown off. 63 and 64 (on whether the Fed knew that it was bailing out Eurobanks when it rescued AIG) looks even more carefully worded than the other responses. It reads like an effort to obfuscate, but steer clear of a denial, which suggests they knew bloody well and are not prepared to admit it. The refusal to even acknowledge the question re bonuses (42) is offensive. He won’t even admit it as an issue.

10. 40 Bernanke thinks there is nothing wrong with derivatives, just how they are managed. I’m sorry, CDS are a terrible, terrible product and need to be eliminated, which unfortunately cannot happen quickly. And many complex OTC derivatives need more than just better risk management. Former derivatives salesman and now law professor Frank Partnoy says they need to be regulated like securities (disclosure and fraud standards need to be tougher).

11. On 43 (empirical examples of high inflation and resource slack co-existing in Latin America and therefore being a possible outcome for the US) he just denies the data. He is a complete prisoner of neoclassical economics.

12. 50, He forcefully denies the existence of the PPT. My conspiracy-minded readers will be outraged, or will argue the Fed just does it through winks and nods to dealers (as in answer is technically accurate but substantively untrue).

13. The answer to question 53 (“Do you believe the Fed’s policies are enabling banks to put off recognizing their losses?”) is another canard. In fact, it is the explicit object of policy! Why did the Fed balloon its balance sheet by $1 trillion buying MBS and Treasuries? The excuse was that they were trying to channel credit to particular markets, and whether or not that was the operative reason, the effect, and presumably the intent, was to prop up housing prices via making mortgages super cheap. In addition, there has been considerable regulatory forebearance, particularly on the accounting front.

14. 54 is another bald faced lie, it basically say, “oh we couldn’t rescue Lehman, we lacked the tools”. The Fed could have used the same device it did for Bear, a bad asset vehicle largely guaranteed by the Fed, that is in fact what Barclays wanted, which stood ready to buy Lehman (and did pick up the US brokerage in the end).

15. 55 is another distortion (the Bernanke claims that the Fed is now getting more information about derivatives, which is true, and that it is fully competent to analyze the data, which is another matter). I have readers who are in direct contact with the NY Fed who tell me that the staff recognizes that it lacks the analytical capacity to understand what the data says in terms of systemic risk implications, which is the point of the exercise.

16. on 59, the Fed continues to assert that it will take no losses on its SPVs. That is simply implausible. It is a virtual certainty that the Bear vehicle (Maiden Lane) contained ABS CDO tranches. AAA ABS CDOs are trading either at zero, or 15-20 cents on the dollar for “high grade” ABS CDOs.

Print Friendly, PDF & Email


  1. Nick in Kyoto

    Bernanke only half answers Question 8 on the limits of the Fed’s ability to continue QE.

    BB says the Fed’s QE is limited by rising inflation pressures. He fails to say that it is also limited by the Federal Reserve’s own balance sheet.

    Simply Put: The Fed cannot engage in QE ad infinitum. If the Fed continues to purchase risky securities and deflation intensifies, it will need to be recapitalized.

    This is not academic, such a recap could occur within the next few years if the Fed keeps expanding its balance sheet and US deflation approaches that of present day Japan.

    By answering only the inflation half of the question, I suspect BB doesn’t want to call attention to potential self-reinforcing negation (and massive loss of taxpayers’ money) of the Fed’s new unorthodox monetary policy under debt-deflationary conditions.

    How ironic would it be if BB’s Fed — the ultimate monoline — goes the way of its brethren? What would Congress do to Fed’s safely guarded independence then? What a legacy.

  2. tyaresun

    How many Congress critters will understand this? My guess is not many. Ultimately, people get the government they deserve.

    1. Yves Smith Post author

      They have staff. Notice the very high quality of the questions. I was impressed.

      Moreover, all they need to understand is “lie” and “cover up”. As you know, with a lot of public figures, the cover up does more damage than the actual crime.

      1. Bill

        Actually, a blogger said (on ZeroHedge) that he/she had submitted many of the questions to Bunning, who used them. I’ll try to find the link.

        1. cougar_w

          Then the system is somewhat working again. I don’t think the Senator would have given such a submission even passing consideration even a month ago.

  3. Francois T

    One simple thing that would bolster Senator Buning’s case is to remind the press and the public that Congress has a constitutional right and duty to oversee the Fed.

    I mean, I can’t fathom why the very authority charged to supervise the Fed allow the myth of “independence” to persist unchallenged.

    Beats me!

    1. cougar_w

      “Supervision” was already weak sauce. The only thing beneath supervision on the scale of responsibility is “advisory” and Congress probably slipped even under that level of engagement many years ago. Recently it’s been “spectator”.

      The Fed might as well be part of the UN for all the oversight it receives from the US Congress.

  4. Uncle Billy Cunctator

    His answer to 50 doesn’t actually deny the existence of the PPT:

    “The Federal Reserve has not intervened to provide support to the stock market or individual
    stocks by trading in futures or any other financial instrument. I have no knowledge of any other
    U.S. government entity providing such support.”

    First clue: “I have no knowledge…” Which is what people are trained to say when they do have knowledge (in addition to when they don’t).

    Elipsis?: “…by trading in futures or any other financial instrument.” Could he be equivocating on the words “trading” or “other financial instruments”?

    Second Clue: “I have not knowledge of any other U.S.Government entity…” He has a legally-informed mind. An entity is an entity, and it is very narrowly defined. The PPT (President’s Working Group on Financial Markets) is composed of the SecTreas, FedHead, SEChead, and head of the CFTC, or their designees.

    Note that these do *not* comprise a legal entity. Even less so when they have designees in their stead. Reading this way, he does not deny it at all. Evasive and slimy, but possibly defensible in is little kooky world.

    1. cougar_w

      Nice catch. Though on another level, he might actually have no more knowledge of the matter than he shows. It would not surprise if the PPT existed and was working on a daily basis, and he knew it was working, but he had neither direct nor indirect knowledge of how it worked or who was doing it. Things may really be that unhinged.

      As the good-natured and over-his-head Nazi Srgt. Schultz used to say on the TV comedy “Hogan’s Heros” any time he was confronted with the unseemly behavior of his supposed “prisoners”:

      “I see nothing! I know nothing!”


  5. Vinny G.


    I hope you’re feeling better soon.

    I’m in Eastern Europe in the hospital for some thorough tests. The hospital is as modern as any in the US, staff is relaxed and nice, and how about these prices: $200 for MRI, $150 CT, $50 for complete blood and infectious tests, $30 for a sternal biopsy, $60 per day for the room. What will cost me here under $1000 would have cost in the US $50,000 without insurance or $4000 with Blue Cross. Now tell me if America’s health system is not a scam we really want to pass onto our children. And I work in that crooked, self-serving American health system, yet if I need any care, I prefer to come here and do it.

    Any of my fellow US-trained doctors here who want to jump in and justify their outrageous (as in “criminal”) prices in a country with 50 million uninsured and 100 million underinsured, who are opposing any kind of reform, please feel free to do so right now. But please don’t insult us and blame it on the lawyers — that’s a lame excuse… be honest and blame it on your teenage daughter’s second Lexus and your Rolex collection…


    1. Elephant swimming

      Well said Vinny…AMA stands for Armed Malicious Asset Removal. As nice of a person my grandfather was those trips to NY then QEII to Germany to pick up his new Benz at the factory, so he could tour Europe for a Month and browse art galleries, then return QEII or SS France with Benz in tow, flat rail car back home once in NY says something…eh.

      Bone Biopsy/complete blood and infectious tests????? Your freaking me out now.

      1. Vinny G.

        I’ve been having some mild but persistent health problems, which were more of an inconvenience than anything. Since I’m here for the holidays, I thought I’d better do a thorough check. They are much better clinicians here.


  6. Allen C

    Thanks for the assessment. As he BSs on the topic of monetizing, the PPT statement could also be BS.

    The response to the debt to GDP was lacking to state the least.

    The AIG payoff requires investigation. Incompetence or corruption? Perhaps AIG shareholders should sue.

  7. Doug Terpstra

    Sorry you’re not feeling well, Ives. I trust it’s not schweinegrippe, a variant of which seems to have gripped our financial sector.

    Much of this goes over my head (and thins my scalp), but key elements are publically understandable toward a devastating rebuttal of Bernanke’s “prevarications”, “utter” and “bald-faced lies”. I hope Bunning and his capable staff are armed with it. This makes an independent audit of the Fed an absolute necessity, if we hope to save rigged market cannibalism from itself.

    Market Ticker addresses your #8 (Bunning’s #28) in more detail (link follows):

    From Fannie: “Although … our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.”

    Ticker notes thus: “Fannie Mae is a corporation – NOT AN AGENCY!” and “Sections 13 and 14 of The Federal Reserve Act are clear – The Fed is forbidden to take credit risk, as it acts without specific appropriation of Congress…[and] the limited exception cited by Bernanke applies only to the MAKING OF LOANS, not to the outright purchase of securities…Absent that guarantee [by Congress] …The Federal Reserve has no authority to buy their paper, irrespective of the form it is in or the torture The Fed applies to the written word.”

  8. jake chase

    Jim Bunning spent his first 38 years perfecting his curve ball. While a Hall of Fame pitcher he is just another clown politician grandstanding toward the cheap seats. Probing his belief system might profitably involve tossing a few questions about Scopes and monkeys. If our future depends upon the monetary expertise of Congressional Intellectuals all is probably lost.

    Let them focus on repeal of Glass Steagle.

    1. Siggy


      I thought Big Jim’s questions were high and tight. Not in the great BB’s ear, but close enough. Read those questions carefully. The truth is what the Great BB did not say and or respond to.

      What the Great BB, the Administration, the Treasury and the Federal Reserve fear the most is a run on the ‘Primary Dealer’ banks. They fear such a run because every one of them is insolvent.

      What should have transpired is that the Congress should have legislated the nationalization of the insolvent banks, their recapitalization and subsequent sale to NEW ownership.

      The call for an audit of the Fed is resonating because the public is beginning to understand that the source of their discomfort is a fiat currency in tandem with a fractional reserve banking system that is operating with out any oversight or supervision. Blatant fraud is going unchallenged. Such financial crime prosecutions as are occurring are fraught with prosecutorial bungling.

      As a society we are confronted with decadence and amorality that has been bred in a seed bed of a continuously eroding currency. The persistent loss in purchasing power alters the financial focus of the public from the future to the present. Borrow as much as you are permitted and repay in toilet paper.

      While the music is playing, no one cares. Well, we have come to the point where the music has stopped and the next 10 cent dance will cost 10 dollars.

      The great BB cannot directly answer the questions posed by Big Jimbo, he can only dissemble. He thinks he’s doing the right thing. Perhaps, further in time he will have an epiphany and admit that he has had it wrong. This happens to dying men a lot. The Great Alan appears to be at that stage in his life and his recent admissions are demonstrative of the phenomenon.

  9. Vinny G.

    What’s most hilarious is that Helicopter Ben has just been named Times Magazine’s “Person of the Year”.

    I’m sitting here wondering, is Times a bank holding corporation that we don’t know about?…


  10. sassysenora

    screwball posted this in the comments at ZH yesterday:

    “Grayson was asking the Fed lawyer [the question below re: government intervention in the markets] a few weeks ago at a hearing. He finally admitted it was through their primary dealer. When asked who that was he said JPM. Shocked, shocked I tell ya!”

    50. Before the financial crisis there was a widespread sense, especially on Wall Street trading desks, that the stock market was strangely resilient. This encouraged excessive risk-taking in various types of assets. Do you have direct or indirect knowledge of the Federal Reserve or any government entity or proxy ever intervening to support the stock market (or any individual stock) via futures or in any other way? If yes, who decides the timing of such intervention and with what criteria? How is it funded? Which Wall Street firm handles the orders, and who sees them before they are executed?

    BB: The Federal Reserve has not intervened to provide support to the stock market or individual stocks by trading in futures or any other financial instrument. I have no knowledge of any other U.S. government entity providing such support.

    re: #8 (question 28) Although the regs governing Section 14(b)(2) of the Federal Reserve Act (12 U.S.C. 355) allow the Fed to purchase or make loans secured by certain obligations of FHA, Fannie Mae, Freddie Mac, and Ginnie Mae, they explicitly state that those obligations must be fully guaranteed by a Federal agency:

    “(c) Nothing less than a full guarantee of principal and interest by a Federal agency will make an obligation eligible. For example, mortgage loans insured by the Federal Housing Administration are not eligible since the insurance contract is not equivalent to an unconditional guarantee and does not fully cover interest payable on the loan. Obligations of international institutions, such as the Inter-American Development Bank and the International Bank for Reconstruction and Development, are also not eligible, since such institutions are not agencies of the United States.”

  11. Realty-Based Lawyer

    #4: You’ve probably negotiated with the French. Do you agree with my reading that their statement that “French banks could not voluntarily agree to a lesser payment” is code for “they’ll do it if you order them to”? The word “voluntarily” wasn’t casually inserted; it was included to tell the US government that all that was needed was a regulatory order that all French banks doing business in the US were required to [insert appropriate conditions]. Very consistent with the culture, and even FDR’s reputed statement to a constituent that she should make him do what she wanted. Provides political cover. But the Fed was either too inexperienced to pick this up or too ideologically hostile to it to take them up on their offer.

Comments are closed.