It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions

by Nomi Prins

  That would be all fine and dandy, and it is partly true. The rosy default rates of prime mortgage borrowers were certainly not an adequate measure of the default rates of subprime ones. But the profound stress was caused far more, as I’ve explained, by the leverage in the system than by how subprime loans were modeled when they were transformed into an abundance of asset backed securities.

  So, it was the models’ fault? That’s rather disingenuous. Because, as it turned out, there was plenty of evidence to suggest that a housing downturn and rising foreclosure rates would become a broad financial concern, given the fact that a record amount of securitizations based on loans in the housing sector had been issued. You simply had to pay attention to it, something neither Greenspan nor Bernanke seemed interested in doing.

  Fighting the Fed

  Over the years, several chairmen of the House Banking Committee, including Wright Patman (D TX) and Henry B. Gonzalez (D TX), have criticized the Federal Reserve and questioned its lack of transparency.94

  Representative Ron Paul (R TX), a ranking member of the U.S. House Financial Services Subcommittee on Domestic Monetary Policy and Technology, introduced legislation on several occasions to abolish the Fed or make it more transparent.95

  On February 26, 2009, after Fed Chairman Ben Bernanke had funneled trillions of dollars into the banking system, Paul introduced the Federal Reserve Transparency Act of 2009, or H.R. 1207.96 On the House floor, he stated, “Serious discussion of proposals to oversee the Federal Reserve is long overdue. I have been a longtime proponent of more effective oversight and auditing of the Fed, but I was far from the first congressman to advocate these types of proposals.”

  (Note: The Federal Banking Agency Audit Act [P.L. 95 320] was enacted in 1978 specifically to enhance congressional oversight responsibilities. It gave the GAO—once the General Accounting Office, now the Government Accountability Office—the authority to audit the Board of Governors, the Reserve Banks and the branches.97 Unfortunately, it didn’t give the GAO the ability to audit any of the Fed’s monetary policy or its Federal Open Market Committee operations, which were central to the secrecy with which it opened its books to banks.)

  Paul went on to say, “Since its inception, the Federal Reserve has always operated in the shadows, without sufficient scrutiny or oversight of its operations. While the conventional excuse is that this is intended to reduce the Fed’s susceptibility to political pressures, the reality is that the Fed acts as a foil for the government. The Federal Reserve has, on the one hand, many of the privileges of government agencies, while retaining benefits of private organizations, such as being insulated from Freedom of Information Act requests.”98 Unfortunately, there is little additional momentum in Congress toward a full analysis of the Fed’s operations and decisions and a serious questioning as to whether its responsibilities should be limited to monetary policy, not bank regulation, at which it has failed miserably. It may require quadrillions, instead of trillions, of dollars in outlay to spawn that kind of questioning or outrage.

  Representative Alan Grayson (D FL) jumped on board to provide necessary bipartisan support for Paul’s proposed legislation. On May 21, 2009, in a letter called “Bring Some Accountability to the Federal Reserve,” he wrote, “Since March 2008 . . . the Fed has resorted to using its emergency powers to pick winners and losers, and to take massive credit risk onto its books. Since last September, the Fed’s balance sheet has expanded from around $800 billion to over $2 trillion, not including off balance sheet liabilities it has guaranteed for Citigroup, AIG, and Bank of America, among others . . . An audit is the first step in bringing this unaccountable system under the control of the public, whose money it prints and disseminates at will.”

  Paul’s Federal Reserve Transparency Act would enable the GAO to audit the Fed and report its findings to Congress. As of July 14, 2009, it had 261 cosponsors in the House of Representatives.99

  The GAO already has the right within the Federal Reserve Act to audit the annual statements of the Fed, which makes it all the more ridiculous that the Fed has been reticent about disclosing which banks got which sweetheart loans, for how much, and against which exact collateral during the Second Great Bank Depression. But the Fed has its protections. United States Code 31 USC Sec. 714 prohibits audits of the Federal Reserve Board and Federal Reserve banks over a number of items, including “(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization; (2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System.”100

  The intent of the Federal Reserve Transparency Act should be a given, and not require an additional Congressional maneuver. But our tax dollars are hard at work, reinventing the oversight wheel that appears to be in chronic flat tire mode while loopholes that keep the wrong bodies in control abound.

  The Q&A section on the Federal Reserve’s Web site states: “The Federal Reserve’s ultimate accountability is to Congress, which at any time can amend the Federal Reserve Act.”101 But as Grayson’s letter explained, the “Federal Reserve is an odd entity, a public-private chimera that controls the US monetary system and supervises the banking system . . . While the Governors are appointed by the President with confirmation by the Senate, the regional Reserve Banks have boards of directors chosen primarily by private banking institutions.”102

  Indeed, the Fed has always had a much closer relationship with private banks than the public. That’s because as a condition of membership in the Federal Reserve, member banks—both state- and OCC-chartered (the Office of the Comptroller of the Currency)—are required to subscribe to stock in their district’s Federal Reserve Bank. The required subscription is equal to 6 percent of the bank’s capital and surplus; 3 percent must be paid in, and the remaining 3 percent is subject to call by the Board of Governors of the Federal Reserve. This means the bigger banks own more of the Fed. Member banks also receive 6 percent dividends on their shares, not too shabby in times of stock market turmoil, when no bank offers that to individual shareholders.103

  The problem with today’s Fed is its out of-control, unaccountable secrecy. It has opened the spigots of funding to a pack of financial firms that simply don’t deserve that kind of largesse. Plus, the Fed blessed bigger mergers and the conversion of investment banks to bank holding companies without blinking an eye. Bernanke talks about the need for better regulation, yet shirks transparency with his own books. The Fed simply operates above any law and beyond reason. That is, always was, and will prove to be a developing disaster. If not repaid, those trillions of dollars’ worth of loans—as of mid-July 2009, over $7.6 trillion, to be exact104—will fester in the dark pockets of the Fed’s books, enabling the banks to go about their old business, with a super lender there to catch them when they falter again. And the kind of secrecy that Wall Street and its supporters in Washington really like will remain the norm.

  The Open Door Policy Is Now Closed

  It didn’t matter whether it was the liberal or conservative media asking for disclosure. The Fed’s answer was always, “That’s none of your business.” On November 7, 2008, Bloomberg L.P. filed an official complaint with the Southern District Federal Court in New York against the Fed to try to force it to disclose information about $2 trillion worth of loans to banks.105 In a FOIA request on January 28, 2009, Bloomberg asked the Treasury for a detailed list of the Citigroup and Bank of America securities it planned to guarantee but hadn’t received a response as of this writing.106

  This FOIA request was in addition to several similar ones Bloomberg had made in May and October 2008, as well as the aforementioned complaint filed in Federal Court.107
The Fed’s response was consistently opaque. It was perfectly fine to withhold internal memos, as well as information about trade secrets and commercial information. “The Board must protect against the substantial, multiple harms that might result from disclosure,” Jennifer J. Johnson, the secretary for the Fed’s Board of Governors, wrote in an e-mail to Bloomberg News. “It would be a dangerous step to release this otherwise confidential information.”108

  Dangerous? Really? Who exactly did the Fed think it was protecting from danger? Oh, yeah, right—the banks. Just in case their outrageous greed, ineptitude, loss, and self mutilation weren’t dangerous enough, disclosing how bad off they really were would have been catastrophic. This kind of quasi regulatory secrecy keeps instability reigning supreme. (The SEC isn’t any better; it won’t disclose pending investigations, ostensibly to protect firms suspected of fraudulent behavior. Only after the media get wind of foul play does the SEC reluctantly comply with the idea of transparency, which is usually after a lot of hardworking people have lost a lot of money.)

  In addition to filing two lawsuits against the Treasury for failing to respond to FOIA requests for details of the bailout funds extended to AIG, the Bank of New York Mellon, and Citigroup, Fox Business Network filed another suit against the Fed in January 2009 for ignoring Fox’s November FOIA request for the names of the banks that had received $2 trillion in funds and the collateral they provided in return between August 2007 and November 2008.109 Fox ultimately won its case against the Treasury but lost its case against the Fed.

  Considering that the dissolution of the banking system took place in full public view, the Fed’s persistent denials came across as a mix of juvenile playground banter and a blatant disregard for public responsibility.

  To add to the FOIA requests, I teamed up with the Investigative Fund of the Nation Institute in December 2008. We forwarded a list of all of the meetings that took place between the Fed, the Treasury, and Wall Street heads during the fall of 2008, along with a pretty straightforward request. We wanted the minutes detailing what took place during those power meetings, to examine the exact conversations that carved up the old Wall Street and spurted out the new financial landscape. We heard back four months later. Yeah, we got a bunch of names of people who attended the meetings—which was basically the information we had provided to them in the first place—but no minutes.

  Ben Bernanke didn’t comment on any of these FOIAs directly. But during his testimony at a House Financial Services hearing in mid November 2008 he made it clear there would be no public vetting of the Fed’s bailouts. Representative Spencer Bachus (R AL) pressed him on his rather obvious hypocrisy, “You’ve always advocated . . . transparency. I know you’re refusing to disclose the names of those institutions or the composition of those assets. Is that a short term . . . I’ll call it a refusal to disclose or when do you anticipate letting the public know?”

  Bernanke replied, “Congressman, I think there’s been some confusion about what this involves.”

  Representative Bachus nodded. “Sure.”

  “Some have asked us to reveal the names of the banks that are borrowing,” Bernanke said. “How much they are borrowing. What [type of] collateral they are posting. We think that’s counterproductive.”

  Really, Ben? It’s counterproductive to discuss just what it is you’re doing with the toxic assets and the banks at the core of the second biggest meltdown in our country’s history? He explained:

  The success of this depends on banks being willing to come and borrow when they need short term cash. There is a concern if the name is put in the newspaper that such and such bank came to the Fed to borrow overnight, even for a perfectly good reason, others might begin to worry if this bank is creditworthy, and this might create a stigma and make banks unwilling to borrow. That will be counterproductive.110

  It’s rather absurd to think that banks in critical condition wouldn’t borrow from the Fed to help them lend to their consumer and business bases simply because the Fed might tell on them. These are public institutions. They are getting public money. The Fed was enabling them to maintain the secrecy of their positions during a time when secrecy spurred a greater crisis of confidence than disclosure would have.

  Besides, the Fed is not a Swiss bank account. It may not be a fully public agency, but it does have a responsibility to the public. And the uncertainty surrounding the nature of its dealings with the banks made the whole crisis that much worse. In a criminal court, the Fed could be deemed guilty of conspiracy to commit grand larceny, if not the crime itself.

  At another hearing on February 10, 2009, Bernanke changed his tactics, this time before the Committee on Financial Services. He acknowledged the public’s interest in what the Fed was doing and with whom, and promised two new transparency oriented initiatives. One was establishing a Web site that would provide “the full range of information that the Federal Reserve already makes available, supplemented by new explanations, discussions, and analyses.”111 This proposal was completely duplicative and useless. Check the site.

  Bernanke also said that at his request, board vice chairman Donald Kohn would lead a committee to “review the Fed’s publications and disclosure policies with respect to its balance sheet and lending policies.” 112 But it was clear where Kohn stood on that. In a hearing a month earlier, Kohn had said, “I would be very, very hesitant to give the names of individual institutions. . . . I’d be very concerned . . . that if we published the individual names of who’s borrowing from us, no one would borrow from us.”113

  And just in case anyone got any wrong ideas, Bernanke promised that there would remain certain “nondisclosure of information,” but only when it was justified by criteria for confidentiality, as characterized by “factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the effectiveness of policy.”114

  The Tag Team Bailout Approach

  In a lot of ways, the Treasury Department’s $700 billion bailout gave cover to everything that was going on at the Fed, and vice versa. The Fed’s books became increasingly complex and risky. That’s evident if you simply compare the regularly reported Federal Reserve Statistical Release from February 28, 2008,115 which was four pages long and easy to read before the Bear Stearns situation, to the eleven page report issued a year later, which contained a plethora of new facilities and entries that seemed to be spawned at random to put out insta financial fires—with money instead of water, of course.116

  A little more than six months later, the Fed resembled a bad bank, injecting large chunks of money into the financial system in return for junky collateral and directly taking subprime assets for the first time on November 25, 2008.117 That same day the Fed created the Term Asset Backed Securities Loan Facility (TALF), which allowed investors holding mortgage backed assets to get loans worth less than the actual value of the securities.118 The measure was meant to protect against losses, but still, if the value dropped below what the Fed paid for the securities, the taxpayers would be on the hook.119 Plus, if no one wanted the assets, their value was zero at that moment, no matter how the ratings agencies and their models ranked them.

  On February 19, 2009, economist Paul Kasriel noted the elasticity of the Fed’s programs, “When TALF was first proposed, back in November of last year, its funding allocation was $200 billion. Under the Treasury’s new FSP [Financial Stability Program], TALF’s funding amount has been increased to $1 trillion.”120 As a veteran of the economic research department of the Federal Reserve Bank of Chicago and the former senior vice president and director of economic research at Northern Trust Corporation, Kasriel knew what he was talking about.

  Although the Fed’s losses had been minimal during its initial foray into lending against risky assets, given the lack of forthrightness regarding the details behind the assets, it would have been hard to tell what kind of losses were mounting. But, in the words of James Hamilton, professor of economics at the University of California, “if more of t
he big boys go under, I’m not sure how the Fed would even account for them. It’s like they are making this up as they go along. One thing’s for sure; those new assets are capable of losing money in a way that we haven’t seen before.”121

  These new buckets of risk on the Fed’s books make it more likely that the Treasury will have to raise more debt to compensate for the loss of interest or for direct hits from the devalued securities that were posted as collateral. And where does that money come from? Yep—the taxpayers. But the risks of this build up were never presented to the public. What was apparent, no matter how it was spun, was the extreme favoritism toward the banking sector that the bailout represented. All that was offered in return to the American public was the paper thin promise of looser credit and the protection of our tax dollars.

  Indeed, the Treasury Department, the Fed, and the FDIC promised on October 14, 2008, “These steps will ensure that the U.S. financial system performs its vital role of providing credit to households and businesses. . . . By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses.”122