Matt Stoller: Why Is Alan Greenspan’s Lawyer, Scott Alvarez, Still Controlling the Federal Reserve? (AIG Bailout Trial)

Yves here. This important post explains why Scott Alvarez, the general counsel of the Federal Reserve Board of Governors, needs to be fired. His responses to the plaintiffs’ questions at the AIG bailout trial weren’t simply evasive; they reveal a deep, almost visceral, dedication to defending the very policies that nearly destroyed the world economy as well as a salvage operation that favored financial firms over the real economy. We have embedded the transcripts from the first three days of the AIG bailout trial, which cover Alvarez’s performance on the stand, at the end of this post.

Alvarez was brought to the Fed by Alan Greenspan. As a staff lawyer, he helped implement bank deregulation policies such as ending supervision of primary dealers in 1992, refusing to regulate derivatives in 1996 (I recall gasping out loud when I first read about the Fed’s hands off policy), and implementing the rules that shot holes through Glass Stegall before it was formally repealed in 1999. Among those measures was giving a commercial bank, Credit Suisse, waivers to take a 44% stake one of the biggest investment banks, First Boston, in 1988 and assume control in 1990.

Alvarez also has a poor record as far as representing broad public interest in his tenure as General Counsel, which started in 2004. The Fed did an even worse job than the bank-cronyistic Office of the Comptroller of the Currency in enforcing Home Ownership and Equity Protection Act, a law that put restrictions on high-cost mortgage lenders. The Fed was also one of the two major moving forces behind the disastrous Independent Foreclosure Review, an exercise that promised borrowers who were foreclosed on in 2009 and 2010. The result instead was a fee orgy by the supposedly independent consultants, capricious and inadequate payments to former homeowners, and virtually no disclosure of what was unearthed during the reviews.

Yellen has said she wants to make financial stability as important a priority of the Fed as monetary policy. That means, among other things, being willing to regulate banks. Scott Alvarez is too deeply invested in an out-of-date world view to carry that vision forward. If Yellen intends to live up to her word, Alvarez has to go.

By Matt Stoller, who writes for Salon and has contributed to Politico, Alternet, The Nation and Reuters. You can reach him at stoller (at) or follow him on Twitter at @matthewstoller. Originally published at Medium

There’s been a sharp focus on Janet Yellen’s Chairmanship role at the Federal Reserve, and rightly so. She’s the first female Chair and she actually cares about inequality. But what is missing from virtually all Fed watching, except for this piece by Jesse Eisinger, is any recognition of how the Alan Greenspan-appointed staff at the Fed still retains substantial control of the institution through the high-level staff who were promoted into their roles by Greenspan.

Ideological drag is inevitable in any institution. But Greenspan cast an especially long shadow, running the Fed from 1987–2006 and organizing the culture of bank regulators for an entire generation. Most of his people are cycling out naturally. The entire Board of Governors of Greenspan’s era is gone, replaced by mostly Obama appointees. But there are two specific staffers retaining significant fiefdoms there who are Greenspan holdovers; the first is General Counsel Scott Alvarez, who has a team of 55 lawyers working for him that analyze everything from legal guidance to legislative changes to supervisory actions to regulations (such as those on swipe fees, insurance capital requirements, or capital surcharges to large banks). The second is Michelle Smith, who runs the office of public affairs.

Alvarez is the more significant hold-out, he’s so powerful that he is sometimes called the “power behind the throne.”

I’m reminded of this because Alvarez is now testifying in the AIG trial. While there’s been a lot of attention focused on Bernanke, Paulson, and Geithner, Alvarez is a very significant witness. His testimony took up the first three days of the trial, and he made key legal determinations about the authority of the Fed to put equity into AIG, to structure loans, and to handle the AIG board itself.

It’s a bit difficult to give you a sense of how Alvarez testified, because while there are some ‘gotcha’ moments between the plaintiff’s lawyer David Boies and Alvarez as witness, they don’t really resonate unless you can grasp some reasonably technical determinations in their courtroom context.

That said, Alvarez seems to have operated like Ronald Reagan during Iran-Contra, saying “I don’t know” or “I don’t recall” nearly every chance he could when Boies was asking him questions. On just one day, it was 36 “I don’t know”s and 17 “I don’t recall”s, often in response to simple questions. Alvarez disputed the meaning of the world “purchase” and the word “attempt.” This wasn’t because there was complicated context — the judge admonished him several times for not answering questions. Often he would say “I don’t know” and then Boies would read back his own words in deposition contradicting him.

This was in stark contrast to the liquid smooth answers he gave when the government attorney was asking him complex questions about statutory interpretations.

Behavior like this matters because Alvarez was  — along with Tom Baxter of the New York Fed — the main legal architect behind the Fed’s extraordinary lending facilities. He probably was the one who made the call that the Fed could buy equity in AIG, and restructure the company to funnel cash to counterparties like Goldman Sachs. So the judge’s polite admonitions to Alvarez for refusing to answer questions and for changing his story are remarkable.

Here’s one example, where he and Boies go back and forth on whether there were legal reasons for the Fed to hold equity in AIG. Alvarez disputes the term “legal reasons”, until Boies shows that Alvarez had in his earlier deposition used the term “legal reasons.”

Q. My question is, have you, since your deposition, had any discussions about this testimony or the subject matter of it with anyone?
A. I — I have not — let’s see. I’m not sure how to answer that question.
Q. Yes or no or I don’t remember.
MR. AUSTIN: Your Honor, we object on the grounds of attorney-client privilege and work product privilege.
THE COURT: Well, much like the discussion we had yesterday, I don’t want the witness to testify about any legal advice he may have received or requested in meetings with counsel. But if we’re talking about fact information and explanations for why his testimony may be different today than it was in his deposition, I think we should hear about that.

This isn’t the first time Alvarez pulled this rhetorical trick. He also disputes Boies characterization that AIG at one point sought to get access to the discount window, arguing about the meaning of the word “attempt”. AIG didn’t formally apply officially to become a primary dealer, he notes. Perhaps there were conversations about that, but he Alvarez says he wasn’t aware of them. Then Boies shows him his own testimony in deposition in which he says AIG attempted to get access to the discount window. He admits, sullenly, he agrees that this is his testimony, but then implies that was a slightly different question (it wasn’t).

Over three days, Alvarez made it difficult to get any useful information about what happened and when. He pretended to be unaware of key aspects of what the Fed was doing, such as attempting to broker an investment in Morgan Stanley from cash rich investors or sovereign wealth funds. Among other things, he denied knowledge of or disputed that:

• Investment grade collateral is considered better than non-investment grade collateral by financial markets
• The Fed opening the discount window to investment banks kept those investment banks in business
• Morgan Stanley ever had “severe liquidity problems”
• Goldman and Morgan Stanley were given emergency waivers to become bank holding companies because any delay would endanger their health as going concerns
• AIG’s interest rate was substantially higher than other financial institutions received at the time under 13(3) authority
• AIG sought access to Fed lending facilities prior to its bailout
• Investment banks given access to Fed lending had better access to Fed lending than AIG

He also made absurd characterizations, like saying that the emergency waiver granted to Morgan Stanley to become a bank holding company was done only because the Fed had comprehensively examined the firm and found it “well-managed.” This examination, which normally takes a year, was in this case done in two days.

There was even a moment when Alvarez says that when he agreed in a deposition with Hank Paulson’s statement that the Fed bore no risk in its loan to AIG because of the collateral, he only meant that in the context of his role as the Fed’s lawyer. Did he personally believe that the Fed bore no risk? Mumble mumble, mumble, followed by “I don’t know.”

It was maddening just reading it. Alvarez normally gets away with this, because the structure of Congressional oversight and its five minute cross-examination limits makes it impossible for anyone to truly trap someone this skilled. Boies however had all day, he also is a very skilled lawyer, and the judge was perceptive and increasingly irritated. Judge Wheeler overruled every objection by the government, and sustained every objection by the plaintiff. You can see why. Here’s just one example of Alvarez’s answers.

Q: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities?
A: I don’t know.

Here’s another.

Q: Now, when the Federal Reserve told Congress and other agencies that the September 22 AIG credit facility was fully secured, the Federal Reserve understood that what Congress and the other federal agencies were interested in was whether there was a risk to taxpayers, correct?
A. No. I don’t think that’s right.
Q. You don’t? So, you think that when Chairman Bernanke went up to the Hill to testify about whether the AIG credit facility was fully secured, Congress wasn’t interested and Chairman Bernanke didn’t think Congress was interested in whether there was a risk to the taxpayers?
A. So, I think —
Q. Is that your testimony? Yes, no, or I don’t know.
A. Could you rephrase the question?
Q. Sure.

In other words, Alvarez is a very skilled hostile witness. He disputes big questions, like whether a Treasury bond is riskier than a mortgage-backed securities, and little questions, like whether an AIG term sheet was “incorporated” or “referred to” in Fed Board of Governor meeting minutes. In most contexts, his tactics would work. But faced with lawyer David Boies, a legal team with millions in resources, and a knowledgeable Judge like Tom Wheeler, it isn’t. Wheeler is constantly directing Alvarez to answer questions, and wondering why his memory keeps being ‘refreshed’ (ie. a polite term for changing his story from his deposition to the trial).

Boies was trying to establish a couple of core ideas. One, AIG was treated disproportionately badly compared to other entities, like Morgan Stanley and Goldman Sachs. And two, the Fed did not have the authority to inject equity into AIG.

On the first point, Boies pretty well won. He showed that the interest rate to AIG was punitive and much higher than to every other entity that sought Fed loans. In no other case did the Fed try to take equity. He also showed that Morgan Stanley had borrowed tends of billions from the Fed through its 13(3) facilities while AIG was begging for similar credit lines (which the Fed refused). Alvarez glumly noted he did not know or did not recall what Morgan Stanley was borrowing when making key decisions about Morgan Stanley’s and/or AIG’s future.

On the second point, the Fed’s authority is in deep dispute, but it’s clearly true that Alvarez did not put down on in any formal memo that the Fed could or could not take equity. It was certainly a legally dubious proposition.

New York Fed General Counsel Tom Baxter had sent Scott Alvarez an email saying that the Fed couldn’t inject equity. In addition, there were slides that Alvarez saw that were prepared for a committee of regulators saying that. Bernanke even said that equity was not an available tool when testifying to the Financial Crisis Inquiry Commission. There’s even a memo from Alvarez’s deputy saying that the Fed cannot hold full voting rights of AIG stock in trust for the Treasury, on which Alvarez writes “Not clear why we should have the first part. Politically sensitive.” The firm’s outside lawyers at Wachtell, Lipton, Rosen, and Katz wrote that Alvarez had “nixed the idea” of holding AIG’s equity. But there was some evidence, notes in margins of paper, that the Fed did think that holding equity was fine as long as the Treasury took responsibility for losses in a trust.

Boies got a lot out of this testimony, as will probably become clear in the trial. But what I find more interesting than the trial outcome is what this testimony says about the culture of the Federal Reserve itself. Alvarez has done as much as anyone to keep Alan Greenspan’s deregulatory culture alive in the face of a more regulatory minded Federal Reserve board. Alvarez’s approach is ideological in nature.

I went back and read his testimony before the Financial Crisis Inquiry Commission, which was the body tasked by Congress to find out why the crisis happened. Alvarez discusses his background, the financial system, and his essential philosophy.

As a staff lawyer at the Fed since the early 1980s, Alvarez participated in significant deregulatory changes in the banking sector. It was the decades at which Alvarez was at the Fed where, through decisions big and small, Glass Steagall was pulled down via loopholes for derivatives, waivers for acquisitions, and allowances for commercial banks to engage in investment banking activities. All of these shifts required acquiesance or active complicity by the bank regulators, including and especially the Federal Reserve and the OCC. Alvarez was in the thick of all of this. It’s literally all he knows.

For example, Alvarez helped draft the law formally eliminating Glass Steagall, the Gramm-Leach-Bliley Act. He alludes to helping Citigroup merge with Travelers, which prompted the statutory shift. What’s more interesting than what he did is how he sees his actions today. After all, a lot of people in hindsight acknowledge they erred. Not Alvarez. He argues that the repeal of Glass-Steagall had nothing to do with the crisis.

His evidence? Well he claims that Lehman and Bear were the primary culprits in the housing crisis, and that neither entity took advantage of the end of Glass Steagall. By contrast, those banks that did take advantage of it, such as JP Morgan and Bank of America, well they “did rather well.” These banks were “not the cause of the crisis” and they were “not a casualty, either.” He talks about sick dog Citigroup, and says that we shouldn’t refer to “Citi as if it failed. It hasn’t. It survived, unlike Bear Stearns, unlike Lehman, unlike WaMu, Wachovia, etc.” He speaks as if Citi had no support from the government whatsoever. It was a remarkable performance, reminiscent of what French diplomat Talleyrand once said about the Bourbons, “They had learned nothing and forgotten nothing.”

Obviously the end of Glass-Steagall in 1999 was more of a formality than anything else. American Depression-era banking regulations had been chipped away since the 1960s, with an accelerated deregulatory mindset taking off just as Alvarez’s career began to flourish in the 1980s. But to Alvarez, the removal of the speed bumps in the U.S. financial system is simply irrelevant to the series of crises we’ve been experiencing since the 1970s. They are perhaps just acts of God.

For instance, when asked why the crisis occurred, Alvarez uses standard talking points you may have heard elsewhere. The financial system was more fragile than we realized. It was simply due to a global savings glut. Investors stopped doing due diligence. It was just a big crisis of confidence. Everyone was responsible. Yada yada.

Alvarez is completely unapologetic about the Federal Reserve refusing to use its authority to stop false and deceptive practices in the mortgage market prior to the crisis. He doesn’t mention the linkages of mortgage-backed securities to the financial system via derivatives, the gaming of the capital markets, or problems with banker compensation that reward short-term gains while socializing losses. Alvarez’s arguments reflect a pure and unadulterated deregulatory mindset bequeathed to the central bank by Alan Greenspan.

So what does all this mean? Well there’s a lot of chatter about how the Fed could be reformed with the right set of Governors on the Fed board, or a new New York Federal Reserve President. And that’s true as far as it goes. But Alvarez creates special problems for Yellen and the Fed.

Alvarez is a regulatory specialist who controls the bulk of the legal expertise in the Fed, whereas Yellen is a macroeconomist who doesn’t know regulations that well. Alvarez’s institutional opponent is Fed Governor Dan Tarullo, and Tarullo as a single Governor doesn’t have the resources to fight the entire Fed legal staff. So Alvarez is likely to continue to win. In other words, what Yellen really needs to do to put her stamp on the Fed is to fire Alvarez and replace him with someone who actually sees the legal mandate of the Fed in the context of the institution’s recent failures. Alvarez is simply too wedded to Greenspan’s legacy to do so; he is incapable of recognizing the needs of today’s Fed.

Today the big buzzword is ‘macro-prudential tools’, which basically means using regulatory tools to ensure that big banks and capital markets don’t adversely destabilize the economy. This is different than normal safety and soundness regulation, which is to look at the practices and balance sheets of individual banks. It’s somewhere between institution-by-institution banking regulation and the broad credit controls of World War II, where the Fed takes a direct interest in organizing credit to specific sectors to prevent inflation or prevent problems. No one knows what it means in today’s context. But unless you have people dedicated to regulating the system, ‘macro-prudential tool’ will never mean anything. Alvarez just isn’t going to let it.

This kind of personnel move has worked. Until 2012, the Office of Comptroller of the Currency was a horrific bank regulatory agency, largely because of its former General Counsel, Julie Williams. She was responsible for a whole series of regulatory determinations in the 1980s and 1990s that effectively deregulated derivatives and eliminated Glass-Steagall long before the statutory changes.

One of the first things new OCC chief Tom Curry did a few years ago was fire Williams, and despite the outcry. Lo and behold, the OCC is actually becoming a credible regulatory agency again. Scott Alvarez is in the Julie Williams role of the Fed. He’s a career civil servant, he’s served at the Fed for decades, and he’s exceedingly bright. This is not a man out to make a quick buck. But he is someone who has been at the Fed long past his time, and what we are seeing with the AIG trial is that Alvarez won’t let the Fed modernize and reform itself away from its deregulatory Greenspan-infused past. Because what he’s really good at, what he’s spent his whole life doing, is making sure it can’t.

2014.09.29 Day 1 Full

2014.09.30 Day 2 Full

2014.10.01 – DAY 3 – Full

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    1. AQ

      Stewart only takes down the little fish and really even though the Cramer interview is ballsy, nothing really came of it. Let’s not even talk about that Sanity Rally because it was a huge opportunity squandored, unless of course that was exactly the point. (which I’ve come to believe it was. Stewart is corporate and he’s mainstream with a tiny edginess now and again.)

      At the moment, it would appear that Oliver is your man.

  1. diptherio

    Q: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities?
    A: I don’t know.

    Ooh, ooh, I know the answer to that one. Can I be Fed counsel?

    How can anyone take this man seriously after that?

    1. OpenThePodBayDoorsHAL

      LOL this article has the words “broad public interest” and “Federal Reserve” in the same sentence LOL

  2. washunate

    Because it pays well? I think the short answer to the headline question is actually pretty straightforward, and critically important. We live in a society where public policy pays the enabling educated elite well to keep the system running as it is. That includes keeping quiet about how things actually work, such as the wage inequality underneath the top 1%.

    “Scott Alvarez is in the Julie Williams role of the Fed. He’s a career civil servant, he’s served at the Fed for decades, and he’s exceedingly bright. This is not a man out to make a quick buck.”

    Of course no educated person would describe themselves as out to make a quick buck. It’s just a coincidence that those jobs pay a lot more than the median wage.

    1. JohnnyGL


      From what I can tell, jobs like this are purely about power for power’s sake and not about money. The guy could have jumped ship years ago and joined a big law firm, but he’s got a powerful fiefdom where he is and after decades, it’s clear he’s not interested in giving that up.

      It seems to be that the most powerful forces for change in societies are combinations of big money/institutions lined up with ideological true believers that push for the same thing (even without making as much as they potentially could). Without Greenspan’s Ayn Rand-types in various important spots, the damage wouldn’t have been nearly so extensive.

      1. washunate

        I agree it’s about power. Although, I would say that money is a sub component of power, a tool, not a separate entity.

        But I would argue there is value in focusing on wage inequality specifically because wages present a very handy quality for analysis, which is that they are more amenable to quantification than most other aspects of working conditions. And that is useful because dollars are a universally recognized symbol, a common language whether we’re talking about the Fed or courts or prisons or hospitals or universities or banks or whatever.

        Or to say it differently, if public policy can hire people based on ideology, why does it need to pay them significantly more than most workers?

      2. washunate

        P.S., thought you might like this timely link. Click on the graphic about halfway down. It shows the average pay of tens of thousands of financial agency employees.

        The average pay of the category with the lowest average pay, the regional fed staff, is $95K. That amount would be in the top 10% of all wage earners in the country. That alone is enormous, and it’s just an average.

        The base salary of the Fed’s general counsel is of course higher. At $265K, it’s a 1% gig. There is no exact point of reference here, no objective marker, but somewhere along the way, it stops mattering whether people are jumping ship to the next higher level on the ladder (after all, there are ever fewer chairs available as you go to the extremes of a distribution).

        Rather, what matters is to observe that the entire system operates at a disconnect from broader society. The majority of American workers make less than $30K, and nearly 80% make less than $60K.

        1. JohnnyGL


          Interesting link, I know the Fed pays well. It’s a powerful institution. I believe they’re considered one of the premium places to work in the Federal Government, especially among regulators. And yes, they certainly do much better in terms of compensation than the general public, but the same is true of lawyers (like Alvarez) and doctors.

          The correct comparison, I’d suggest, is within the financial industry where you can find relevant experience/education levels. Big investment banks, hedge funds and PE shops pay better than the Fed does, generally.

            1. Yves Smith Post author

              The Board of Governors is. The regional Federal Reserve banks are not. The regional Feds are a weird public/private hybrid.

              So the staff to the Board of Governors must be treated in some way to get it off Federal pay scales. An interesting governance point that I will see if I can ferret out.

              1. Nathanael

                The key question is exactly what hoops Yellen has to jump through to, well, just fire this guy. The fact that these are *not* civil service positions means it should actually be pretty easy.

          1. James Levy

            But the Fed is not a shark tank and the burnout rate is a lot lower. I’m sure it also has perks and I doubt he picks up many tabs at NYC luncheons or lacks a first class seat on his trips to Jackson Hole and Davos. And the unspoken difference today is he can be married to a corporate lawyer or university hospital oncologist who more than doubles his yearly income, whereas in the 50s and the 60s (perhaps into the 1980s) men like him married attractive “coeds” who rarely had paying jobs once they went down the aisle or had their first kid. Hilary was making $500,000 a year when Bill was making $35,000 as governor of Arkansas. This gives ambitious men a whole new access to power they might not have had years ago. It also helps that the people making much more money at Goldman or Chase are probably very chummy and deferential at the club or on the phone when they deal with Mr. Alvarez.

    1. Ben Johannson

      Why? Because Alvarez is so hard a worker he shaved 363 days off a 365 day process? This man deserves an Excellence in Bureaucracy award!

  3. JohnnyGL

    Max, actually, I’ve found that John Oliver has shown more of an appetite to go after topics that aren’t in mainstream discussion (but should be). But yes, video clips of him saying “I don’t know” to questions that are the financial industry equivalent of “Is the grass green?” have the potential to 1) be a funny segment 2) draw attention to Fed misbehavior here, which is sorely needed.

    Matt Stoller, thanks for doing this write up. Sorely needed sunlight in a dark corner that REALLY needs some disinfectant!

  4. Dan Lynch

    FYI I tried to share this link on FB and it wouldn’t “take.”

    If I added a “/” to the end of the link, then it would show a “sorry we can’t find that page” message.

    So I ended up sharing the Medium link instead of the Naked Capitalism link.

    This has happened several times recently with NC posts — something seems to have changed either on your end or on FB’s end.

    1. John Zelnicker

      Sometimes software platforms will strip out the “http://” when copying and pasting a link. Or it’s not picked up in the original copy command. Try to make sure it’s included when pasted in the target software, i.e., FB.

  5. MRW

    Oh, God, I started reading this post–kudos for the highly informative intro, Yves–and realized I wouldn’t get a thing done all day if I got into days two and three of the trial. Your day one reporting ended with me hungering for more. So I’m booking all this for tonight with wine.

    Just wanted to say that these AIG posts are fabulous. Thank you.

  6. Dan Lynch

    The link to Medium didn’t work either — it took me to “5 reasons for the Zepher movement”.

    I give up. Yves’ pithy intro was the best part, anyway.

  7. Xelcho

    Does anyone else find this exceedingly unsurprising. I appreciate the post, and focusing on this particularly rot. I am sure that there are many many bureaucrats within the bowels of the treasury who have all sorts of subtle, and not so subtle methods to drive all sorts of results toward the expectations communicated from the top. This was a large part of the b/w the lines I got from Neil’s book Bailout.

    While this asshole is a well coached turd, historically these types of games cost all of us greatly in the long run and further erode any sort of legitimacy the govt has left.

    What is interesting is that this drama is being played out in the very capable hands of the judge and cross-examiner. This is good to know as all of us would not have the luck or $ to replicate this battle of the billions. I guess that is what it takes to actually get any semblance of fairness in our judicial system. SAD.

  8. Lambert Strether

    Bloomberg today:

    Fed Can Back Up Tough Talk on Bank Behavior With Action
    The Federal Reserve has plenty of power to follow through on regulatory threats made to top bank executives aimed at curbing misbehavior on Wall Street, even if it can’t order firms to break up.

    So, if firing Alvarez isn’t “politically feasible,” then Yellen could do the next best thing: Put him in charge of a Task Foce to “follow through on regulatory threats.” Then, when he fails — as Stoller points out he must and will — fire him for that. Better get the whole process over with before 2016, though!

    1. Nathanael

      It’s very important to note that this sort of article is being written by upper middle class people in finance.

      The plutocrats who are wrecking the economy have alienated a group of people with expertise, free time, access to bully pulpits, connections, money,…

  9. susan the other

    Great post. It seems like Alvarez is not working for himself as much as for the TBTFs. Not just an ideologue, but a mole at the Fed. The stuff about him blaming the GFC on lack of confidence among other things but certainly not on deregulation was amazing. Someone should ask him what causes lack of confidence. Boies could use the answer to prove the Fed was just hysterical. Ha. It was nice to hear Matt give Yellen a vote of confidence, saying she really wants to establish stability and fix inequality, but at this rate it will take more than a generation and so many people have been devastated it doesn’t rise to the level of justice. Yellen doesn’t convince us when she suggests that poor people use their inheritance to start a small business. Why did she ever say such a senseless thing? Did Alvarez design the living wills that were required by the TBTFs so that their response could go on for 10,000 pages and 40 years?

  10. Chauncey Gardiner

    Thank you so much for this post, Matt Stoller and Yves. I had not previously viewed the office of the Fed’s general counsel as being particularly important. I had also erroneously viewed Chair Yellen’s adoption of the term “macro-prudential” too cynically and largely a matter of public posturing through semantics. I was also unaware of Chair Yellen’s efforts to change the regulatory culture at the Fed. I stand corrected on these views.

    I hope Chair Yellen and others on the Fed’s Board of Governors are able to successfully implement the necessary changes in both personnel and culture at the Fed and particularly at the Federal Reserve Bank of New York. I suspect they will encounter political opposition from supporters of the incumbents and those who desire to continue their looting of the American people under the guise of deregulation and monetary policy.

  11. Nate

    It appears that virtually every single witness called by the Plaintiff is “hostile” to the Plaintiff’s case, including Federal Reserve officials and even AIG officials. Boies has been doing a great job under these circumstances, I wish we had video or audio of the trial in addition to the transcripts.

  12. Vatch

    If Scott Alvarez needs to be replaced at the Fed, perhaps James M. Cole would be interested in the position. On second thought, maybe not. He might have to understand some rocket science. Then again, the quoted questions and answers seem to indicate that knowledge of financial rocket science isn’t a requirement for the job.

  13. scraping_by

    Scott Alvarez is too deeply invested in an out-of-date world view …

    Ah, for the days when regulatory variance was a hole-in-the-corner business done while looking over the shoulder. The years when a crack-pot brand of economics was promoted as some sort of grand vision has left us with dozens of stumbling blocks now that we have to clean up the mess. Ideologues like Mr. Alverez will always hold fast to the free market narrative despite any and all real world consequences. A true believer, as outlined by Eric Hoffer.

    When gangsters claim a Chamber of Commerce ideology (“just a businessman”) we know they’re ignoring a large trail of broken thumbs, busted kneecaps, and dead bodies. When the bitter-enders of the Reagan Revolution ignore real results and stick to hypothetical stories, we know they’re trying to deceive us, themselves, or both.

  14. reslez

    This is what happens when psychopaths burrow deep into the regulatory apparatus. “I don’t know” things any layperson would, “I don’t remember” the biggest financial crisis of the last 50 years. And it’s all under oath, so the contempt for truth and law is laid bare for all to see, like a bandage ripped away from a black and rotting abscess. The combined picture is of a person criminally unsuited to his position.

  15. Sluggeaux

    What really floors me is that Alvarez continues to lie in order to defend his toadying to the high priests of Ayn Rand.

    A person with a shred of ethics and personal integrity would simply tell the truth: “F*ck you, Mr. Boies. We at the NY Fed and the US Treasury may do whatever we wish. We and only we decide what is “fair” and what isn’t. Your client is not entitled to a remedy. He should have bought himself a few Presidents, like my friends did. My friends are Supermen and are entitled to loot the savings and property of every other person with impunity. Tough sh*t for everybody else!”

  16. steelhead23

    I posit that the solution is not to fire Alvarez, but to fire the Fed. I am a bit surprised that folks find the bank-friendly behavior to represent regulatory capture. Really? The Fed is a bank entity – period. It is owned by large financial organizations and while these banks get about 6% of the Fed’s profits, it is Treasury (you and I) that pays its debts. Yes, the Fed performs important functions for the U.S. economy, principally as a facilitator of financial transactions and monetary policy (interest rates, determining exactly what form of dreck it will accept at its overnight windows, etc.) I openly side with the right-wingers who see the Fed as a market-manipulator, not an honest broker. Each and every job now done by the Fed could be better down by a fully public institution – the U.S. Dept. of Treasury. Kick the banksters off the boards of directors of the regional Fed banks, close the revolving door, and much of the madness we see from the Fed would subside.

    I read sharpshooting pieces from every perspective. Conservatives fear placing the U.S. government in control of monetary policy as they sense the government’s response to every crisis would be to print more money. From the left-leaning, MMT-type perspective, that would be precisely what monetary policy should do. And, it quite clear, the U.S. will never adopt MMT so long as monetary policy lies in the hands of the bank-centric Fed. So, I have a question for Yves et alia, why not join with the wingers and call for an end to the Fed, rather than simply taking shots at its public-be-damned policies and policy makers? Does the Fed provide any benefits in its current structure that would be lost if it were a truly public agency?

    1. Nate

      I would second those comments. Although it may be true that the Federal Reserve exceeded its authority in the course of executing the bailout, the question remains whether a “lawful” bailout would have been good public policy under any circumstances, especially if the Federal Reserve took NO equity and was left with AIG’s “intrinsic value” to secure taxpayer funds?

    2. Yves Smith Post author

      No, the regionals Feds are NOT owned by the banks. This is a misconstruction I’ve dealt with repeatedly in comments.

      Banks own 6% NONVOTING preferred shares in the Fed. They have no governance rights or ownership. Those shares were issued so long ago that the cashflow represented by them (it would be 6% of the par value at the time of issuance) is likely bupkis.

      Banks do not have any of the rights of shareholders relative to the Fed. They do not elect its board. They do not get proxy votes on important matters. The regional Feds no disclose its internal P&L to shareholders. It is the Board of Governors, a body whose members are nominated by the President and subject to Congressional approval, who select the presidents of the regional Feds. By contrast, with private companies, it’s the board, which was selected by and is tasked to represent shareholders, that makes that choice.

      The “boards” of the regional Feds on which banks have some members play no governance role. They are an artifact of the days when there was no decent economic data. Remember, the Fed was created in 1913 and the US didn’t begin trying to calculate GDP (then GNP) until the 1930s.

      The Feds would get in people who were well connected in an economic sense, in that they were in or had contacts with the businesses that represented a lot of economic activity in that region. That was their way of getting a reading on economic conditions so they could set suitable interest rate policy.

      So the regional Fed boards are best understood as advisory boards. They have NO role in Fed governance.

      1. steelhead23

        Thank you Yves. I had not recognized that the banksters that sit on the regional bank boards have nothing to do with regulatory issues. This then leads back to regulatory capture – and dogmatic adherence to pro-bank ideology – along the lines of “These guys are the ‘job creators’. We have to give them slack to play their games so that our economy can function” – and of course, Ayn Rand. But I still hold that it is Fed policy, not just its policy-makers, that must be changed.

        One aspect of this story that should be told is that by “rescuing” AIG and paying its counterparties 100 cents on the dollar, the troika (Bernanke, Paulson, Geithner) didn’t merely “prevent financial Armageddon”, they effectively prevented a full airing of the facts. Had AIG entered bankruptcy, I believe that within a few days it would have filed massive fraud claims against its counter-parties and the monos. It would have all been front page news for months as Greenberg squared off against Blankfein, Dimon, et al. All those Magnetar and John Paulson deals were basically insurance frauds – and by paying the fraudsters 100 cents on the dollar, our financial leaders, working on our behalf (cough-cough) made their frauds work – while we picked up the tab. Yes, fire Alvarez, but more importantly, hire Dr. William Black and his ilk to do the job Alvarez can’t.

        I will remain stinging mad about all of this a long, long time. Thanks Yves for helping me to focus more accurately on the problem. But you must admit that when folks like Paulson see justice (yes, forcing the banks to eat their own pudding would in fact be justice) as “unthinkable”, it is clear that it was the banks, not justice they served. After this trial is over, I would encourage someone (Matt, Yves?) to write a book detailing the story from the heyday of AIG Financial Services, Fed E-Z money policies fueling the housing bubble (the Greenspan put), the Magnetar et al. frauds, the Sept. 2008 debacles, and finally, the trial. Its an amazing story – which has mostly been told from Hank Paulson’s “unthinkable” perspective. And it would be fun to speculate a bit on what would have happened had AIG folded and the unthinkable (i.e. justice) had occurred.

        1. Nate

          After Lehman collapsed Anton R. Valukas was appointed by the court to conduct a detailed investigation of Lehman’s internal business practices and potential tort claims held by Lehman Brothers against counterparties. The result was a 2200 page incredibly informative report released to the public in 2010. This type of report would never have been possible without a bankruptcy proceeding.

      2. Nathanael

        That’s doesn’t seem *enitrely* fair. The regional Fed Banks are involved in the day-to-day minutia of regulation (specifically, of discount window access, interbank lending, reserve rules), and the regional Fed Boards — although advisory — could probably cause a lot of trouble for the regional Fed Workers if they strongly disagreed with what the workers were doing. If a regional Fed Bank worker finds utter fishiness — suspicious accounting — in an request from one of the megabanks who have representatives on the board, do you think that worker is actually going to deny the fishy request?

        1. Yves Smith Post author

          Did you not read what I wrote?

          The advisory boards HAVE NO ROLE IN GOVERNANCE. They cannot “make trouble.” They are there ONLY to give input to the Fed on economic conditions in the region.

          The only regional Fed that has a regulatory role is the New York Fed, through its large bank supervision unit, so you are wrong on that score too.

          The Fed gets to where it is by intellectual capture. The OCC , SEC, and DoJ, all clearly government agencies, are just as, if not more, craven. Offering demonstrably false explanations as to Fed behavior only discredits critics.

  17. kevinearick

    Inventory Turnover

    This is the issue, and you can make a life recycling treasures that others have discarded for lack of labor, out of willful ignorance, and if you do not repeat their mistake, fearing sunk cost recognition, holding the wrong inventory, one timely decision can create an avalanche, in your favor.

    Whether the Fed, the dependent critters in the FILO bankruptcy queue, or neither is in control depends upon your perspective, position and discernment. There is nothing new about civil law by class, and critters assuming that equality means that you must be bound by the laws of their class system, as defined by those above them.

    Public education has many ways of testing compliance aptitude, and I never got past the George Washington cherry tree myth, but I did spend 25 years in public education going through the ranks, looking at why a system producing such stupid outcomes for so many was the focal point of State resources.

    In the grand scheme of things, the idea that the earth can be owned is absurd, but the idea that the skills born on talent to make that land productive for you, your family and your community, by you, to be passed down to your children and theirs, even John Locke had to accept, before he made the bait and switch back to the English mortgage virus.

    In case you are not familiar with your history, which public education doesn’t teach along with grade school mythology, the American aristocracy was give land in the colonies, under the assumption that it belonged to the King, to reboot the land virus consuming England at the time – lease, on the empire’s terms, or quit, as in be branded a criminal. The English monarchy was just more desperate than the Spanish or the French.

    George Washington got his land surveying for the aristocratic squatters, and implementing the 99-year lease, paying tenant squatters to run off subsequent squatters. America was founded on speculative land booms and busts.

    Idle land as property, separate from labor, the people it could support, was specifically introduced to finance war back in Europe, giving the land away to begin the inflation cycle of density, and then encapsulating it to maximize rent. Money is generated to impoverish accordingly, and now that America has reached critical density, the whole system is imploding.

    “Religion and profit jump together.”

    So, Iowa, and everyone else, is going global, at exactly the wrong time, with artificial empire products, the incipient healthcare insurance racket primary among them. Insurance eliminates price discovery, growing derivatives and gatekeepers at the cost of natural male employment, by design. Warren Buffet is shooting fish in a barrel, nice work, if you can get it.

    Government is just another religious culture that thinks it has a superior mythology. Its public education confirms the social pecking order of squatters, taxing each other cumulatively in layers, compiling the credit gradient in the FILO bankruptcy queue, distilling out labor to control the means of production, which makes the multiplexer circuit, which is why the critters tend to hysteria, in a sh-show broadcasting corporation, DNA churn pool, or Archimedes Screw, depending upon perspective.

    Your world is what you choose to make of the noise, and you learn by doing. You only want to spend 10% of your time in gravity, because you need momentum to make the circuit. We have the resources you need, but don’t bother asking us to change the channel for you. It’s your world.

    Dad’s got the car coasting downhill. Find the gear and learn to downshift before you head uphill, or learn from a dead stop, which is a much longer process. All that clutch does is disengage the engine speed from the driveline speed, and the high end of each gear overlaps the low end of the next. Learn to change gears without the clutch, in case the need arrives. Mom has to learn once, to trust her husband, if she wants to raise productive children, preferably before dad runs out of diapers and has to pull out the hammer.

    Like anything else, you need the correct speed, traction and momentum, which is going to change. Make a couple of passes to survey the mountain before you start in earnest. If you don’t have 10, 4 and 90, go practice on smaller hills. Fred, Wilma and GPS, all with the wrong point of origin, isn’t going to get you there. Let them all take off, in the wrong direction.

    The critters chose to marry their mortgages, because that’s what ‘everyone’ else did, imprisoning themselves in jobs with the required credit rating. That’ll happen. No matter how many consumers the religious agendas collect, they can only grow debt, exponentially if you get out of the way. Let them bid against themselves, while you discount.

  18. Elise Mattu

    As lways, tremndously excellent work, Mr Stoller.

    Could you clarify this sentence you wrote? “The Fed was also one of the two major moving forces behind the disastrous Independent Foreclosure Review, an exercise that promised borrowers who were foreclosed on in 2009 and 2010.” What was supposed to happen that didn’t, in your words? (I mean, I surmise that most of these programs were shit on a shingle, in terms of what most consumers actually got, but that doesn’t make for a heady argument when discussing things with loyalist Dems.)

    1. Yves Smith Post author

      We wrote a ton of posts about the disaster of the Independent Foreclosure Reviews, although we didn’t use that term in many of the early posts because the media wasn’t using the formal description for them either.

      The Fed and OCC were behind the IFR (the Office of Thrift Supervision was the third regulator, but they are so weak as to be a non-player). The OCC was supervising it on a day-to-day basis, but the Fed was clearly involved in approving its design, and was almost certainly involved in the decision to shut it down abruptly.

      This is an overview; we had lots more posts in the series. We need to restore the documents (very long shaggy dog story as to what happened; hopefully we’ll get to that this year….)

  19. Ben Johannson

    No question the Fed overstepped its authority as the bank is not permitted to make trades that will knowingly result in losses. What is really needed is a lawsuit on that basis, that Fed managers were fully aware the risks of acquiring equity in AIG were unacceptably high and therefore a violation of the Fed’s charter.

    1. Nate

      Are you talking about a lawsuit challenging the entire bailout, because the potential losses to the taxpayer were unacceptably high?

    2. Yves Smith Post author

      The Fed made its loan secured by all the assets of AIG. There was nothing more to get, in terms of protection for the risks it was taking.

      Taking the equity when you already have a fully secured loan, as well as the interest rate being set at a punitive level (which Boies is arguing the Fed does not have the authority to do under Section 13 (3) and I find his argument to be credible) is what the beef is about.

      1. Ben Johannson

        The Fed made its loan secured by all the assets of AIG. There was nothing more to get, in terms of protection for the risks it was taking.

        Taking a loss is the only effective form of money printing the Fed can get into; it puts cash out there and gets something else of lesser value, so net financial assets have been added which it isn’t authorized to do, particularly if it knew it was likely to take a loss. Only Congress has that authority and I don’t see why that could not be a point for litigation.


        I’m suggesting there was no guarantee AIG’s assets, in that market, would be of sufficient value to serve as acceptable collateral and the Fed did it anyway, that this in and of itself could be considered a violation of its charter.

  20. grayslady

    I don’t know why Matt Stoller says that Alvarez is bright; certainly there’s no indication of that in his testimony. I’m only through Day 2 of the testimony so far, but I’m hoping Boies has enough bank lending experience to rip Alvarez to shreds on cross examination.
    Alvarez claims that it is common practice to take equity kickers in DIP financing. That is just totally false. If a company is in reorganization, DIP is the safest financing there is–first, because it’s authorized by the court; second, because it doesn’t take place until all other creditors have agreed to the reorganization plan, usually involving haircuts and extensions to existing debt. So DIP lenders are in a priority position, but no bank, even a DIP bank, is ever allowed to take equity, other than warrants. There are fees that can be based on computations of equity, but no pure equity is allowed.
    Boies is doing brilliantly, IMO. As Yves said at an earlier moment, Boies is playing to the judge; and, so far, the judge has overruled every objection by defense counsel. Alvarez comes across as conniving rather than bright.

  21. ChrisPacific

    Wow. There’s no way I will have time to read all of this, but just jumping in at random I can already find some amusing sections:

    Q. And do you see what the total dollar amount of
    3 loans is there for Morgan Stanley?
    4 A. I see that.
    5 Q. And that is $1,364,400,000, correct?
    6 A. That is the number that they have written down
    7 here.
    8 Q. You don’t have any reason to believe that that
    9 was written down there by mistake, do you?
    10 A. I do have reason to believe it’s inaccurate.
    11 Q. Inaccurate? You believe it is inaccurate?
    12 A. Yes, sir.
    13 Q. What is the accurate number?
    14 A. I don’t know the accurate number.
    15 Q. Approximately, what is the accurate number?
    16 A. I don’t know approximately the accurate number.
    17 Q. Is the accurate number above or below a trillion
    18 dollars?
    19 A. I believe the accurate number is much below.
    20 Q. Much below a trillion dollars.
    21 Do you have any estimate at all as to how much
    22 Morgan Stanley’s total borrowing from the primary dealer
    23 credit facility had been as of the end of September
    24 2008?
    25 A. I do not.

    So. He is confident that the number written in the official record is inaccurate. But he simultaneously has so little idea about what the real number should be that he can’t even provide an approximate estimate.

  22. Jay M

    Introducing the:
    Lubricrats–flexible to a mean boss.
    All the breathable air accumulates at the top of the room?

  23. Oregoncharles

    I haven’t even gotten very far in the article, but it’s already clear that Alvarez is frantically trying to cover something up, most likely (I’d say almost certainly) criminal behavior on his own part or his immediate superior’s.

    A serious investigation (as if that’s going to happen) could turn up something really juicy.

  24. TheCatSaid

    Brilliant post. Alvarez should be fired.
    Could he be tried for lying under oath? His claims to “not know” and “not remember” are obviously false, blatantly so for someone with his position and responsibility.

    1. Yves Smith Post author

      I got this from a law professor via e-mail:

      He’s either a fool or a liar, and I know he’s not a fool. Of course, there’s no chance that the DOJ will prosecute him for perjury given that they’re defending the Fed.

  25. Kim Kaufman

    Alvarez reminds me of the real evil brains behind the throne of Dick Cheney, David Addington, his chief legal counsel, who took over as Chief of Staff after Scott Libby went down. Crooks and liars, all of them.

  26. Nathanael

    Has Occupy the SEC written directly to Janet Yellen about this issue? She might actually listen. It’s a turf thing: no exec likes having a truculent, insubordinate subordinate.

    And I believe she can simply fire Alvarez, because the Federal Reserve isn’t a government agency and is not subject to civil service rules. It might require board action, but it still should be easy for her to fire him.

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