Economist Michael Hudson Says the Fed “Broke the Law” with its Repo Loans to Wall Street Trading Houses

 

Economist Michael Hudson Says the Fed “Broke the Law” with its Repo Loans to Wall Street Trading Houses

By Pam Martens and Russ Martens: January 14, 2022 ~

Economist Michael Hudson

Even within economic circles, there is a growing nervousness that the Federal Reserve, the central bank of the United States – with the power to electronically create money out of thin air, bail out insolvent Wall Street megabanks, balloon its balance sheet to $8.8 trillion without one elected person on its Board while the U.S. taxpayer is on the hook for 98 percent of that, and allow its Dallas Fed Bank President to make directional bets on the market by trading in and out of million dollar S&P 500 futures during a declared national emergency – has carved out a no-law zone around itself.

The latest ruckus stems from the Fed’s release on December 30 of the names of the 23 Wall Street trading houses and the billions they borrowed under its cumulative $11.23 trillion emergency repo loan facility that the Fed launched on September 17, 2019 – four months before the first case of COVID-19 was reported in the United States by the CDC on January 20, 2020. (The $11.23 trillion figure represents the cumulative amounts borrowed from September 17, 2019 to the conclusion of the program on July 2, 2020. The Fed has thus far released the names of the banks and amounts borrowed for the last 14 days of September 2019 and the final quarter of 2019.)

On January 3, Wall Street On Parade published an article titled: There’s a News Blackout on the Fed’s Naming of the Banks that Got Its Emergency Repo Loans; Some Journalists Appear to Be Under Gag Orders.

The day after the article ran, we got a call from the well-known economist Michael Hudson. We explored the Fed’s actions in some detail with Hudson since he planned to discuss the article in an interview he had scheduled with Ed Norton on the topic of “What Is Causing So Much Inflation.” (You can watch the program and read the transcript here.)

Hudson is the Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and a prolific author. His most recent books include Super-Imperialism: The Economic Strategy of American Empire; ‘and forgive them their debts’; J is for Junk Economics; Killing the Host, which Wall Street On Parade reviewed here, among numerous others.

In the interview with Hudson, Norton reads the following from the January 3 Wall Street On Parade article:

“The Federal Reserve released the names of the banks that had received $4.5 trillion” – that is trillion with a T – “in cumulative loans in the last quarter of 2019 under its emergency repo loan operations for a liquidity crisis that has yet to be credibly explained.”

Norton notes that among the large borrowers under the Fed’s repo loan facility in 2019 were JPMorgan Chase, Goldman Sachs and Citigroup (it was their trading affiliates) and these were “three of the Wall Street banks that were at the center of the subprime and derivatives crisis in 2008 that brought down the U.S. economy.”

Norton then asks Hudson “why was the Fed giving trillions of dollars to these large Wall Street banks. And why was there a liquidity crisis? That’s unexplained. Why did the Fed refuse to release the names of these banks? And was there a financial crisis before COVID that the U.S. government later was able to blame on COVID, but it was actually a financial crisis in the making?”

What Hudson says next will take your breath away, both for its insightfulness and its candor.

Hudson: “There was actually no liquidity crisis whatsoever. And Pam Martens is very clear about that. She points out the reason that the regular newspapers don’t report it is the loans violated every element of the Dodd-Frank laws that were supposed to prevent the Fed from making loans to particular banks that were not part of a liquidity crisis.

“In her article, she makes very clear by pointing out these three banks, Chase Manhattan, Goldman Sachs – which used to be a brokerage firm – and Citibank, that the Federal Reserve laws and the Dodd-Frank Act explicitly prevent the Fed from making loans to particular banks.

“It can only make loans if there’s a general liquidity crisis. And we know that there wasn’t at that time, because she lists the banks that borrowed money, and there were very few of them…”

Let’s pause here for a moment to expand on this. The Fed is perfectly able to make loans to individual depository banks under its Discount Window. That’s been its role since its creation – as a lender of last resort to depository banks. But beginning with the financial crisis of 2008, with no authority from Congress, the Fed just decided willy nilly that it would bail out the trading houses on Wall Street, even going so far as to funnel tens of billions of dollars to their trading units in London, according to the government audit that was released in 2011.

The Federal Reserve Act has long banned the Fed from making loans without good collateral or to insolvent institutions. But in 2008 the Fed secretly made $2.5 trillion in cumulative loans to Citigroup, when it was insolvent for much of that time. Under the Fed’s 2008 Primary Dealer Credit Facility, it was accepting junk bonds and stocks as collateral at a time when both were collapsing in value. That was certainly not “good collateral.”

In addition, according to the government audit, two-thirds of the $8.9 trillion that the Fed pumped out of its Primary Dealer Credit Facility, went to just three Wall Street trading houses: Citigroup, Morgan Stanley and Merrill Lynch.

So when Congress enacted the Dodd-Frank financial reform legislation in 2010, it specifically required that the Fed could not use its emergency lending programs under Section 13(3) of the Federal Reserve Act to bail out a failing financial institution. It could only offer emergency lending programs to a “broad base” to support the entire financial system.

According to the Federal Deposit Insurance Corporation, as of June 30 of last year there were 4,951 commercial banks and savings associations (depository institutions) in the United States which have federal deposit insurance. But the Fed’s repo loan program in the fall of 2019 and first half of 2020 went to just 23 trading houses on Wall Street. To the rational mind, that doesn’t sound “broad based.”

Hudson explains how that was allowed to happen in the continuing interview:

“Well, what happened, apparently, was that while the Dodd-Frank Act was being rewritten by the Congress, Janet Yellen changed the wording around and she said, ‘Well, how do we define a general liquidity crisis?’ Well, it doesn’t mean what you and I mean by a liquidity crisis, meaning the whole economy is illiquid.

“She said, ‘If five banks need to borrow, then it’s a general liquidity crisis.’ Well, the problem, as she [Martens] points out, is it’s the same three big banks, again and again, and again and again.

“And these are not short-term loans. She [Martens] points out that they were 14-day loans; there were longer loans. And they were rolled over, not overnight loans, not day-to-day loans, not even week-to-week loans. But month after month, the Fed was pumping money into JP Morgan and Citibank and Goldman.

“But then she [Martens] points out that, or at least she told me, that these really weren’t Citibank and Morgan and Chase; it was to their trading affiliates. Now this is exactly what Dodd-Frank was supposed to prevent.

“Dodd-Frank was supposed to protect the depository institutions by trying to go a little bit to restore the Glass-Steagall Act that Clinton and the Obama thugs that came in to the Obama administration all got rid of. [Editor’s Note: We suspect, but can’t say for sure, that Hudson might be thinking about Robert Rubin when he says “Obama thugs.”]

“It was supposed to say, ‘OK, we’re not going to let banks have their trading facilities, the gambling facilities, on derivatives and just placing bets on the financial markets – we’re not supposed to help the banks out of these problems at all.’

“So I think the reason that the newspapers are going quiet on this is the Fed broke the law. And it wants to continue breaking the law.

“And that’s why these Wall Street banks fought so hard to get the current head of the Fed reappointed, [Jerome] Powell, because they know that he’s going to do what [Timothy] Geithner did under the Obama administration. He’s loyal to the New York City banks, and he’s willing to sacrifice the economy to help the banks.”

~~~~~

Since September 18, 2019, the day after the Fed first intervened in the repo loan market, Wall Street On Parade has written more than 150 articles on this subject in real time (archived here), sharing with our readers how the Fed was continuously ramping up this program in terms of both amounts loaned and the duration of the loans.

What started out as one-day (overnight) loans, which is the normal repo market, morphed into 14-day loans, then 42-day loans and 28-day loans under the Fed’s program. There is no other way to look at this than that some of these firms couldn’t get their hands on longer-term loans from any place but the Fed. But instead of allowing the free market to respond, the Fed performed another bailout and went completely against the legislative intent of Congress.

The Fed has now decided to give itself, with no vote in Congress, the right to permanently run its own Standing Repo Facility with a daily loan cap of $500 billion – half a trillion dollars – that it can loan out to the trading houses on Wall Street on any weekday — or every weekday. (On Fridays they will be 3-day loans to cover the weekend.)

The Fed has indicated that it plans to broaden the firms that can borrow under this facility beyond its 24 Primary Dealers. Two additional eligible borrowers that it named in late December were Goldman Sachs Bank USA and Citigroup’s Citibank, the federally-insured affiliates of two of its existing Primary Dealers. These two Wall Street institutions would thus be able to gobble up more of the $500 billion daily bucket because they could make twice the amount of daily loan requests.

Why would these two Wall Street firms need a quick feeding tube directly from the New York Fed’s electronically created money machine? According to the latest report from the Office of the Comptroller of the Currency, for the third quarter of 2021, Goldman Sachs Bank USA had $387 billion in assets versus $48 trillion (yes, trillion) in notional (face amount) derivatives. Citibank had $1.7 trillion in assets versus $44 trillion in notional derivatives.

Citibank’s parent, Citigroup, blew itself up in 2008 on subprime debt and derivatives and became a 99-cent stock in the spring of 2009. The Fed secretly resuscitated it despite its insolvency.

The Federal Reserve Board of Governors is an independent federal agency. The U.S. President nominates the Board members and the U.S. Senate Banking Committee confirms them. But the 12 regional Federal Reserve banks are privately owned by the banks in their regions. The Fed Board of Governors outsources the bulk of its functions to the Federal Reserve Bank of New York (New York Fed).

Just as the bulk of the Fed’s emergency lending programs of 2008 were outsourced to the New York Fed, its emergency repo loan facility of 2019-2020 was also carried out by the New York Fed, and the new $500 billion Standing Repo Facility will also be conducted by the New York Fed.

Conveniently, the New York Fed’s largest shareholders are JPMorgan Chase, Citigroup, Morgan Stanley, Goldman Sachs and Bank of New York Mellon. The banks that own the New York Fed elect two-thirds of the Board of Directors of the New York Fed. The New York Fed also supervises the bank examiners that are stationed at these megabanks. (Read what happened to former New York Fed bank examiner Carmen Segarra when she tried to write a negative examination report of Goldman Sachs.)

The New York Fed also sponsors “advisory committees” where the banks criminally-charged with rigging markets get to determine “best practices” for their segment of the markets. If this sounds too Orwellian even for this era of crony-capitalism, read the gory details here.

For just how tone deaf the Fed has become to the sensibilities of the average American, read our article: Despite Its Five Felony Counts, the Federal Reserve Has Entrusted $2 Trillion in Bonds to JPMorgan Chase.

Unfortunately, instead of being the gatekeepers of our democracy, the mainstream media continues its news blackout of this story. It’s a shocking and disturbing and shameful surrender to powerful interests.

LINK

On March 31, the Fed Has to Name Names under Four of its Emergency Loan Programs to Wall Street. Will the Media Censor that News Also?

 

On March 31, the Fed Has to Name Names under Four of its Emergency Loan Programs to Wall Street. Will the Media Censor that News Also?

By Pam Martens and Russ Martens: January 10, 2022 ~

Fed Chair Jerome Powell Testifying Before Senate Banking Committee, November 30, 2021

The Fed has kept a very tight lid on the names of the banks that received emergency loans from three of its funding facilities that it abruptly launched in mid March 2020. These are not only the most opaque of the Fed’s “official” bailout programs, set up under Section 13(3) of the Federal Reserve Act, but they are also the first three 13(3) emergency lending programs that the Fed launched in 2020. The Primary Dealer Credit Facility (PDCF) and Commercial Paper Funding Facility (CPFF) were both announced by the Fed on March 17, 2020. The Money Market Mutual Fund Liquidity Facility (MMLF) was announced the very next day.

The legal deadline, under the 2010 Dodd-Frank Act, for releasing the names of the Wall Street firms that borrowed from these facilities, and the amounts borrowed, is March 31 of this year. In addition, on March 31, the Fed is also required to release the names of the banks and amounts borrowed under its emergency repo loan operations for the first quarter of 2020. The Fed has already released the repo loan information for the third and fourth quarters of 2019, but every mainstream media outlet invoked a news blackout of that information. That leads us to question if the same censorship of another major news story on the Fed’s bailout of Wall Street will prevail on March 31.

The Fed has released the names of all of its borrowers under its other 13(3) lending facilities that sprang up in 2020, just not these three. On that basis alone, there’s reason to be suspicious of what went on here.

Another key reason to be suspicious of the Primary Dealer Credit Facility is that the Fed launched the identically-named program during the financial crisis in 2008. It took the media more than two years of court battles and a Senator Bernie Sanders’ amendment tucked into the Dodd-Frank legislation to unclench the tight fist of the Fed and have that secret data released.

The Sanders’ amendment ordered the Government Accountability Office (GAO) to audit the Fed’s emergency lending facilities and release the audit to the public no later than one year after the signing of Dodd-Frank. When the audit by the GAO was released on July 21, 2011 (exactly one year after the signing of Dodd-Frank) it showed that the Primary Dealer Credit Facility had sluiced $8.9 trillion in cumulative loans to Wall Street trading houses. Instead of good collateral for the loans, as the Fed is required to do under law, it sometimes accepted stocks and junk bonds as collateral at a time when prices of both were collapsing. In addition, the PDCF loaned 64 percent of the entire $8.9 trillion in cumulative loans to just three Wall Street firms: $2.02 trillion to Citigroup; $1.9 trillion to Morgan Stanley; and $1.775 trillion to Merrill Lynch.

The Fed is not legally allowed to make loans to insolvent institutions, and yet, Citigroup was insolvent during much of this time.

Much smaller sums appear to have been funneled to Wall Street firms under the Primary Dealer Credit Facility in 2020, however, the Fed’s repo loan facility seems to have made up the difference. According to the Fed’s own audited financial statements for 2020 and 2019, on its peak day in 2020 the Fed’s repo loan operation had $495.7 billion in loans outstanding to Wall Street and $259.95 billion on its peak day in 2019. What we also know about the repo facility, based on previous data released by the Fed, is that from September 17, 2019 through the end of the program on July 2, 2020, a cumulative total of $11.23 trillion was funneled to the Wall Street trading houses. That’s 70 percent of the total $16.1 trillion that the GAO audit tallied up as the cumulative total for the Fed’s 13(3) emergency lending programs during and after the financial crisis of 2008. That crisis was the worst since the Great Depression.

Even more troubling, from September 17, 2019 through January 20, 2020, when the very first case of COVID-19 was confirmed in the U.S. by the CDC, the Fed had already shoveled $6.04 trillion in cumulative loans to Wall Street’s trading houses. To this day, the Fed has failed to offer a credible reason for this 2019 financial crisis just as it has failed to offer a credible explanation for why its then sitting President of the Dallas Fed, Robert Kaplan, was allowed to trade like a hedge fund kingpin.

We know from the Fed’s H.4.1 weekly release of the line items on its balance sheet that as of April 8, 2020, just a few weeks after these three programs started, the Primary Dealer Credit Facility had ballooned to $33 billion in loans outstanding while the Money Market Mutual Fund Liquidity Facility had soared to $53 billion.

The Commercial Paper Funding Facility grew far more slowly but gyrated in its early days. According to the Fed’s weekly H.4.1 releases, as of May 20, 2020 the Commercial Paper Funding Facility stood at $4.3 billion. One week later, on May 27, it had almost tripled to $12.8 billion, strongly suggesting that one or more large financial institutions could not roll over their commercial paper because its counterparties were backing away.

The PDCF, CPFF and the MMLF were supposed to cease operations on December 31, 2020 but the Fed extended them through March 31, 2021. That meant that the Fed would not have to release the names of the Wall Street firms and the amounts they had borrowed under the facility until March 31, 2022.

Under Section 1103 of the Dodd-Frank financial reform legislation of 2010, the Fed is required to provide ‘‘(A) the names and identifying details of each borrower, participant, or counterparty in any credit facility or covered transaction; (B) the amount borrowed by or transferred by or to a specific borrower, participant, or counterparty in any credit facility or covered transaction; (C) the interest rate or discount paid by each borrower, participant, or counterparty in any credit facility or covered transaction; and (D) information identifying the types and amounts of collateral pledged or assets transferred in connection with participation in any credit facility or covered transaction.”

In the case of the 13(3) facilities, Dodd-Frank requires that the specific transaction data be provided to the public no later than “on the date that is 1 year after the effective date of the termination by the Board of the authorization of the credit facility.” By extending the expiration of the three facilities from December 31, 2020 to March 31, 2021, the Fed was able to maneuver not releasing the data until sitting Fed Chair Jerome Powell’s reconfirmation hearing had occurred. Powell’s confirmation hearing will be held tomorrow before the Senate Banking Committee.

Conveniently, the Fed’s release of the repo loan transaction data, under Dodd-Frank, did not have to be happen until “the last day of the eighth calendar quarter following the calendar quarter in which the covered transaction was conducted.” That information from the Fed is now coming out in dribs and drabs on a quarterly basis, with the public unable to see the full picture from the chopped-up data releases.

The Fed released the transaction data for its other 13(3) facilities on a much earlier and rolling basis because it said the Treasury had provided taxpayer money under the stimulus bill known as the CARES Act to backstop these programs. But the taxpayer is on the hook for 98 percent of the Fed’s balance sheet under any set of circumstances.

The Dodd-Frank Act indicates that the Chairman of the Fed can release this information at any time if he believes “such disclosure would be in the public interest and would not harm the effectiveness of the relevant credit facility or the purpose or conduct of covered transactions.”

There is an overarching public interest for the Fed to immediately release all of the names of the Wall Street borrowers, the amounts borrowed, and all other required information in a user-friendly format that allows quick tabulations of the total amounts loaned. The public interest will be served by allowing the public to determine for itself if the Fed is once again propping up zombie banks to cover the fact that it failed to adequately supervise them – again, as in the leadup to the 2008 financial collapse on Wall Street.

If the Fed has propped up the same zombie banks for the second time in 11 years, the Fed must be stripped of any and all oversight of Wall Street banks and any and all ability to create electronic money out of thin air to bail them out.

LINK

Congresswoman Maxine Waters Steps into the Ring as Referee in the Battle for Control of the FDIC

 

Congresswoman Maxine Waters Steps into the Ring as Referee in the Battle for Control of the FDIC

By Pam Martens and Russ Martens: December 27, 2021 ~

Congresswoman Maxine Waters, Chair of House Financial Services Committee

Maxine Waters is the Chair of the House Financial Services Committee. That Committee oversees the nation’s banks, including the megabanks on Wall Street that are serially charged by prosecutors with ever creative ways of looting the public. Waters’ Committee also oversees the bank regulators, which are frequently “captured” by Wall Street. One of those bank regulators has now come into the cross hairs of Waters.

Typically, if one is a captured bank regulator, one goes to extreme lengths to hide that fact. Thus, it is unusual that the Chair of the Federal Deposit Insurance Corporation (FDIC), Jelena McWilliams (a Trump holdover), has decided she has the power to run the federal agency with an iron hand and overturn the will of her Board of Directors. Even more unusual, McWilliams is engaging in this battle with her Board in public.

We’ve seen plenty of nasty corporate board battles over the years but this is the only time we can recall that the Chair of a federal banking regulator has taken the position that she, unilaterally, can override a decision voted favorably on by a majority of her Board of Directors.

The FDIC is the federal bank regulator that oversees federal deposit insurance and sends examiners into the banks that are federally insured in order to maintain their safety and soundness. The fact that three large, federally-insured banks in the U.S. (Citigroup, Wachovia, and Washington Mutual) blew themselves up during the 2008 financial crisis, suggests that exactly how the FDIC conducts its oversight of these institutions, and just how large and unmanageable it allows them to become, is a serious matter for Congressional oversight. (See OCC Says JPMorgan Chase Has $29.1 Trillion of Custody Assets; That’s $8 Trillion More than the Assets of All Banks in the U.S.)

Jelena McWilliams, Chair of the FDIC

House Financial Services Chair Waters has now stepped into the ring to stop the FDIC’s McWilliams from delivering a knock-out punch to her Board of Directors on the issue of how large bank mergers are being rubber-stamped by bank regulators. Last week, Waters sent a five-page letter thrashing McWilliams over her recent “obstructionist acts” to overturn the decisions of the Board of Directors of the FDIC and demanding that she provide the legal basis for her actions. Waters wrote:

“Following a 2018 deregulatory rollback of the Dodd-Frank Act’s enhanced prudential framework that applies to the largest banks, and as experts warned would happen in its aftermath, we have seen an acceleration of proposed and approved mergers in recent years creating even larger banks — including mergers of BB&T with SunTrust, First Citizens with CIT, and U.S. Bank with MUFG Union Bank. Unfortunately, there is evidence that regulators’ rates of approving pending merger applications has accelerated, even as the trend of large regional bank consolidation has picked up at a concerning pace. Communities directly affected by bank consolidation need access to financial services in order to recover from the pandemic, and we need a bank merger review framework that takes into account these dynamics.”

Waters demanded answers from McWilliams to her letter by January 21 and asked her to “stop these obstructionist acts and join the bipartisan efforts underway to strengthen the bank merger review process to ensure it is being conducted in the best interests of workers, consumers, and communities throughout the country.”

Prior to last week’s letter, Waters had sent a shot over the bow to McWilliams by releasing a public statement on December 16 which included this text:

“As I wrote last week, and at a time when a wave of megamergers is making our banking markets less competitive, I welcome the long-overdue steps by banking regulators to finally update their bank merger review procedures. However, I am deeply concerned by recent actions taken by the FDIC Chairman to — in an unilateral, unprecedented, and potentially unlawful move — attempt to thwart the will of the majority of the FDIC to seek public input on this matter. I am calling on Chairman Jelena McWilliams to explain her legal authority for attempting to veto this action approved by a majority of the FDIC Board, including by apparently directing agency staff to issue a public statement disavowing the sensible request for information from the public, and subsequently rejecting a motion to include the notational vote authorizing the request in the minutes at this week’s board meeting.”

There appears to be something highly unusual (and unseemly) afoot when it comes to Wall Street megabanks and their regulators in Washington. Saule Omarova just removed herself from consideration to become the head of the Office of the Comptroller of the Currency, the regulator of national megabanks like Citigroup and JPMorgan Chase that operate across state lines, after her bizarre proposal for radically redesigning the financial system to move all bank deposits from commercial banks to the Federal Reserve and eliminate FDIC insurance was published in a legal journal. It didn’t help either when it was revealed that Omarova, the nominee to oversee banks with $14 trillion in assets, had been arrested at age 28 for shoplifting.

Now we have the head of the FDIC (that Omarova proposed eliminating) taking the nutty position that she has the authority to override the votes of a majority of her Board of Directors.

Then there is the strange lack of vetting of the head of the criminal division of the U.S. Department of Justice, Kenneth Polite, whose division decides whether to prosecute the Wall Street megabanks or simply continue to hand out deferred prosecution agreements for criminal acts like parking tickets for being 30 minutes overdue on your meter.

It’s long past the time for Maxine Waters, and the Chair of the Senate Banking Committee, Senator Sherrod Brown, to start connecting these dots in a public hearing – and forcing all individuals to give their testimony under oath. It’s the names of the people sitting in the shadows and pulling the strings that Americans need to hear about.

https://wallstreetonparade.com/2021/12/congresswoman-maxine-waters-steps-into-the-ring-as-referee-in-the-battle-for-control-of-the-fdic/