Jamie Dimon Lands in the Cross Hairs of Senate Banking Committee Chair Sherrod Brown

 

Jamie Dimon Lands in the Cross Hairs of Senate Banking Committee Chair Sherrod Brown

By Pam Martens and Russ Martens: February 8, 2022 ~

Senator Sherrod Brown

As Wall Street On Parade, two trial lawyers, the U.S. Department of Justice, the Senate’s Permanent Subcommittee on Investigations and one of the bank’s former lawyers have suggested, the largest bank in the United States, JPMorgan Chase, has enshrined crime as a business model.

The man ultimately responsible for this business model is Jamie Dimon, the bank’s Chairman and CEO since December 31, 2006. Since 2014, JPMorgan Chase has the unprecedented distinction of admitting to five felony counts brought by the U.S. Department of Justice. In each case, it was given a deferred prosecution agreement and put on probation. (See a sampling of its Rap Sheet here.)

Now Dimon and the bank have come into the cross hairs of Senator Sherrod Brown, Chairman of the powerful Senate Banking Committee that oversees the megabanks on Wall Street.

Yesterday, Brown and five of his Democratic colleagues on the Senate Banking Committee sent Dimon a letter demanding answers regarding the bank’s credit card collection practices. The letter opens with this:

“We are deeply troubled by recent reports that JPMorgan Chase (‘Chase’) – the nation’s largest bank with over $3.2 trillion in assets – has renewed its predatory practice of robo-signing purported evidence of credit card debt to sue customers during the pandemic. We were concerned to hear that this practice has resumed after the January 1, 2020 expiration of Chase’s consent order with the Consumer Financial Protection Bureau (‘CFPB’ or Bureau). We request that Chase provide detailed information regarding the bank’s credit card debt collection practices. Chase should not utilize robo-signing in pursuing these debt collection suits, or any other debt.

“At the height of the robo-signing scandal following the 2008 financial crisis, the CFPB found that Chase wrongfully sued thousands of customers for debt they did not owe. As you know, ‘robo-signing’ is the practice where important documents are reviewed and signed by individuals with little to no knowledge about the case and proper procedures are not followed. From 2009 to 2013, the CFPB estimated that the error rate in robo-signing cases in which Chase obtained a judgement against consumers reached approximately 9 percent. In 2015, the CFPB issued a consent order prohibiting Chase from engaging in robo-signing and certain debt collections practices that were in violation of the Consumer Financial Protection Act. The consent order established that Chase’s practices harmed consumers by ‘subject[ing] certain consumers to collections activity for accounts that were not theirs, in amounts that were incorrect or uncollectable.’ Robo-signing enabled Chase to obtain judgments and collect from consumers based on ‘documents that were falsely sworn and that at times contained inaccurate amounts.’ The purpose of the consent order was ‘to ensure [Chase] do[es] not revive these practices.’ ”

The robo-signing reports come courtesy of a January 5 article written by Patrick Rucker and jointly published by Pro-Publica and The Capital Forum. That article revealed that “Today, just as it did before running afoul of the CFPB, Chase is mass-producing affidavits from the same San Antonio office where low-level employees generated hundreds of thousands of affidavits in the past, according to defense attorneys and court documents. Those affidavits are often the main piece of evidence that Chase uses to win its case while detailed customer records — and any errors they may contain — remain out of sight.”

Jamie Dimon, Chairman and CEO, JPMorgan Chase

The article goes on to explain that after Dimon publicly bemoaned wealth inequality in the United States, his bank brought thousands of consumer debt lawsuits last year after filing very few when it was under the CFPB’s consent order. The article’s author, Rucker, notes further that: “Those sued by Chase, then and now, might spot errors if the company provided full records in its court filings, consumer advocates say. Instead, Chase typically submits copies of a few credit card statements along with a two-page affidavit attesting that the bank’s records were accurate and complete.”

Taking the word of a five-count felon bank with a long history under Dimon of serial law-breaking is not something courts should be doing. The Rap Sheet we linked to above should be introduced into evidence to open the eyes of the judges that are presiding over these cases.

Senator Brown and his colleagues have given Dimon until February 21st to answer a list of questions in this matter. If the Senate Banking Committee wants to serve the public interest, it will call Dimon to testify under oath as to why it is the only U.S. bank with five felony counts notched in its belt and why it continues to thumb its nose at the law.

If the Senate Banking Committee limits its investigation to JPMorgan Chase’s consumer debt practices, it will be replicating the mistake made by the SEC when it ignored years of Harry Markopolos pounding on its door with evidence that Bernie Madoff was running a massive criminal enterprise.

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When Repos Blew Up in 2019, Hedge Funds Were $800 Billion Short U.S. Treasury Futures; Then Margins Blew Out

 

When Repos Blew Up in 2019, Hedge Funds Were $800 Billion Short U.S. Treasury Futures; Then Margins Blew Out

By Pam Martens and Russ Martens: February 3, 2022 ~

New details have emerged to provide a fuller picture of the turmoil that was taking place in the dark corners of markets when the overnight repo market blew up on September 17, 2019 and the Fed had to run to the rescue with trillions of dollars in cumulative loans that went on for months.

Imagine if you were the Federal Reserve and had been thoroughly disgraced by waging more than a two-year court battle to prevent the press in America from doing its job and publishing the granular details of the Fed’s 2007 to 2010 bailout of Wall Street and its foreign bank derivative counterparties. Then the Fed was further disgraced after losing the court battles when in 2011 the details of the $29 trillion bailout were published. Chances are that the Fed would not be anxious to let the public or Congress hear the latest details of bailing out hedge funds for the one percent that were using leverage of 50 to 1 obtained from the very banks the Fed is supposed to be supervising.

That background might help to explain why there was a complete news blackout by mainstream media, including by reporters assigned to cover the Fed, when the Fed began releasing the names of the trading units of the Wall Street megabanks that were pigs at its emergency repo bailout trough from September 17, 2019 through December 31, 2019.

That background might also help to explain why the Treasury Department’s Office of Financial Research (OFR) wrote a research paper attempting to shift hedge fund turmoil in the Treasury futures market to March of 2020 – after the onset of the COVID-19 pandemic in the U.S. – but slipped up and included two graphs that move the onset of the turmoil to smack dab in September of 2019.

As we next describe what happened, it’s important to remember that thanks to the repeal of the Glass-Steagall Act in 1999, Wall Street has been allowed to structure itself into a daisy chain of systemic contagion. The same trading houses giving 50-to-1 margin loans to hedge funds on their Treasury securities as their so-called “prime brokers,” are the same “primary dealers” used by the New York Fed for its open market operations and contractually bound to be buyers of Treasury securities when the government issues new debt. The primary dealers that are the sugar daddies to hedge funds and get a regular pat on the head from the New York Fed, are, for the most part, owned by the megabanks on Wall Street which also own giant, federally-insured, deposit-taking banks that hold trillions of dollars of mom and pop savings accounts and insured money market accounts.

But in addition to holding trillions of dollars of insured mom and pop savings, these same taxpayer-backstopped megabanks also hold hundreds of trillions of dollars in dodgy derivatives which remain, for the most part, a black hole to regulators despite the promise of the Dodd-Frank financial reform legislation of 2010 to clean up this mess.

We mention this because when any part of this highly interconnected daisy chain teeters, the key players begin to back away from providing more lending to the others because the lack of transparency prevents any player from knowing who has the bulk of the risk and might blow up.

This situation has moved the Fed from its original mandate as lender-of-last-resort to commercial banks that are the backbone of the U.S. economy to lender-of-last-resort to the high rollers on Wall Street.

The OFR report explains how hedge funds were getting 50-to-1 leverage from their prime brokers (who are not named in the report but include JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, and Citigroup Global Markets and others) and engaging in a strategy called the basis trade. The OFR report describes the strategy as follows:

“The basis trade relies on a relationship between the cash Treasury market, where investors purchase Treasuries today; the Treasury futures market, where investors agree on a fixed price to pay for Treasuries they will receive in the future; and the repo market, where investors borrow or lend Treasuries against cash today. Theoretically, borrowing a Treasury today in the repo market, for which the investor pays interest at the repo rate, should cost the same amount as purchasing that Treasury today in the cash market with the agreement to sell that Treasury in the futures market at a later date. Very small variations from that ideal can be profitable if the investment is leveraged using borrowed capital.

“Basis trades are three-legged trades that span crucial financial markets: cash Treasury markets, Treasury futures markets, and repo markets. As we show, basis trades use long cash Treasury positions and short futures positions to construct a payoff that, absent financing risks and other frictions, would be a net position similar to a Treasury bill. (In futures markets, long positions are a bet prices will go up; short positions are a bet prices will go down.) One immediate difference between the return on a basis trade and the return on a bill is the possible variation margin on the futures position. (Futures traders make variation margin payments when the value of cash and collateral in their accounts falls below set margin levels.) More importantly, basis traders generally finance the long cash position in the repo market, which exposes the basis trade to rollover and liquidity risks. The return on basis trade is thus equivalent to a synthetic bill plus a risk premium. This risk premium is positive on average but can vary significantly and can turn negative during times of stress in funding markets.”

The OFR report also offers this on the subject of leverage: “Hedge fund leverage is constrained only by the haircuts on the collateral, and for Treasury securities haircuts are typically around 2 percent. This implies a maximum leverage ratio for hedge funds of 50 to 1.”

As we previously indicated, the OFR is attempting to shift all of this to the blow up in the Treasury market in March of 2020 but it slipped up and included the chart above and the chart below. The chart above shows that in 2019, hedge funds’ short positions in U.S. Treasury futures had skyrocketed to more than $800 billion. The chart below shows that the key players became alarmed and started demanding increased maintenance margin on the trades. (Maintenance margin is the minimum equity an investor must maintain in a margin account after the purchase has been made. The amount required at purchase is called the “initial” margin.)

Notice how the sharp rise in maintenance margin first occurred in the month of September 2019 and had started to abate as the Fed pumped in tens of billions of dollars a day in repo loans but then surged again in 2020 as pandemic panic took hold.

The chart below shows the names of the six largest borrowers and their borrowing amounts from the data released by the New York Fed. (These are the cumulative total of the loans, adjusted for the terms of the loans.) This is the information that mainstream media refuses to release to the public – possibly out of fear that it contradicts the Fed’s narrative that the repo crisis in 2019 grew out of corporations withdrawing their quarterly tax payments from the banks. But the largest borrower in the last quarter of 2019 from the Fed’s emergency repo operations was Nomura Securities International, part of the large Japanese investment bank. It certainly wasn’t a major holder of corporate tax payments for U.S. corporations.

A Bloomberg News article on March 19, 2020 named Field Street Capital Management as one of the hedge funds that had lost significant sums on the basis trade.

Yesterday, we checked out Field Street’s Form ADV on file with the Securities and Exchange Commission. Field Street lists as its prime brokers the following: Bank of America Securities; J.P. Morgan Securities; and Merrill Lynch Professional Clearing Corp. (part of Bank of America). Bank of America Securities and J.P. Morgan Securities are two of the Fed’s primary dealers; they were also heavy borrowers during the Fed’s repo bailout; and they are two of the four largest derivatives holders among all U.S. banks.

Field Street’s Form ADV also indicates that J.P. Morgan Securities is not just one of its prime brokers but is also a “marketer” of the hedge fund. As the chart above shows, J.P. Morgan Securities was the second largest borrower from the Fed’s repo bailout during the last quarter of 2019.

This does not mean that the basis trades blowing up were the sole cause of the repo crisis in the fall of 2019.

As we have previously indicated, Nomura was heavily exposed to derivatives; Deutsche Bank, a major counterparty to the derivatives of Wall Street’s megabanks, was in a death spiral; and $2.7 billion in credit default swaps blew up the very day before the Fed launched its repo bailout.

In other words, the ill-conceived, incompetently regulated, and opaque structure of Wall Street appears to have been coming apart at the seams in September 2019.

It is nothing short of a travesty against the American people that Congress has failed to investigate the matter, that mainstream media refuses to accurately report what happened, and that the Fed thinks Americans are stupid enough to believe its dumb corporate tax payment excuse (something corporations do every quarter).

We’ll be forwarding this article this morning to the Senate Banking Committee and the House Financial Services Committee, both of which oversee the Fed.

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JPMorgan’s Board Made Jamie Dimon a Billionaire as the Bank Rigged Markets, Laundered Money, and Admitted to Five Felony Counts

JPMorgan’s Board Made Jamie Dimon a Billionaire as the Bank Rigged Markets, Laundered Money, and Admitted to Five Felony Counts

 By Pam Martens and Russ Martens: January 21, 2022 ~

Jamie Dimon Being Sworn In at House Financial Services Committee Hearing, May 27, 2021

Yesterday’s headline making the rounds was that JPMorgan Chase’s Board had given its Chairman and CEO, Jamie Dimon, a pay raise to $34.5 million for 2021 that was 10 percent more than 2020.

That headline provides an instructive lesson in what passes for breaking news today at mainstream media outlets when it comes to Wall Street’s megabanks. The majority of Americans aren’t outraged and demanding that Congress reform Wall Street because mainstream media has overtly decided to keep the public in the dark.

The real breaking news is that despite JPMorgan Chase admitting to five criminal felony counts brought by the U.S. Department of Justice over the past 7 years for rigging markets and laundering money for Bernie Madoff, the financial criminal of the century, the Board of JPMorgan Chase has not sacked Dimon, the man who sat at the helm during this unprecedented crime spree. Instead of sacking Dimon, the Board of the largest federally-insured, taxpayer-backstopped bank in the United States has made Dimon a billionaire.

The Board of JPMorgan Chase seems to have adopted a compensation model based on “the more felony counts, the bigger the paycheck.” Consider the following: On September 29, 2020, the Justice Department charged JPMorgan Chase with two felony counts, to which it admitted, and fined the bank $920 million of shareholders’ money to settle its fourth and fifth felony counts since 2014. One felony count was for rigging the precious metals markets while the other was for rigging the U.S. Treasury market – the market that allows the federal government to pay its bills.

Rigging the U.S. Treasury market used to be a big deal with splashy headlines. But on September 29, 2020 the Justice Department didn’t even hold its usual press conference to announce the charges against JPMorgan Chase and not one newspaper thought to mention that these were the fourth and fifth felony counts during the tenure of Dimon. Nor did any newspaper mention that the bank had admitted to all five criminal counts while being repeatedly put on probation by the Justice Department but continuing its crime spree. (See JPMorgan Chase’s unprecedented rap sheet under Dimon here.)

Now here’s where you need to pay close attention. Just 10 months after the bank admitted to its fourth and fifth felony counts, the Board of JPMorgan Chase gave Dimon a bonus of 1.5 million stock options, which had a value of $50 million on paper, according to a specialist cited at Bloomberg News. In its filing with the SEC announcing the stock award, the Board wrote this:

“This special award reflects the Board’s desire for Mr. Dimon to continue to lead the Firm for a further significant number of years. In making the special award, the Board considered the importance of Mr. Dimon’s continuing, long-term stewardship of the Firm, leadership continuity, and management succession planning amidst a highly competitive landscape for executive leadership talent.”

If JPMorgan Chase had a properly functioning Board, and the Justice Department had a properly functioning criminal division, Dimon would have been forced out in 2013 when the U.S. Senate’s Permanent Subcommittee on Investigations released a 300-page report detailing how the bank had lied to its regulators as it used depositors’ money from its federally-insured bank to gamble in derivatives in London and lose $6.2 billion. The FBI investigated that matter and yet the Justice Department brought no criminal charges.

The JPMorgan Board had its second opportunity to fire Dimon when the bank admitted to its first two felony counts in 2014 for its outrageous handling of the business bank account of Ponzi-schemer Bernie Madoff.

The Board had its third chance to fire Dimon the very next year when the bank pleaded guilty to its role in a bank cartel (actually called “The Cartel”) that rigged the foreign currency market.

Based on the bank’s fourth and fifth felony counts in 2020 and the $50 million bonus to Dimon from the Board 10 months later to keep Dimon at the helm for “a significant number of years,” it’s pretty clear that criminal activity is perceived by the Board of JPMorgan Chase as an accepted business model as long as the stock price keeps going up. (The outside Board members at JPMorgan Chase receive an annual stock award of $250,000 on top of other fees. In 2020, five members of JPMorgan Chase’s Board received over $400,000 in total annual compensation.)

The words “independent director” appears 73 times in the most recent proxy statement that JPMorgan Chase filed with the SEC. The bank calls all non-management members of its Board of Directors “independent,” writing in its proxy statement year after year that they “had only immaterial relationships with JPMorgan Chase and accordingly were independent directors.”

In October of 2020, we took a close look at those “immaterial” relationships some of the Board members had with the Bank. You can decide for yourself if this is a Board that you would feel comfortable calling “independent.”

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Can the Fed Engineer a Soft Landing for the Biggest Bubble Since $12,000 Tulip Bulbs?

Can the Fed Engineer a Soft Landing for the Biggest Bubble Since $12,000 Tulip Bulbs?

 

By Pam Martens and Russ Martens: January 21, 2022 ~

In her 2007 book, Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, Anne Goldgar writes that a tulip bulb in 1637 sold for the equivalent of $12,000 in 2007 money. Now think about the tens of millions of dollars that were spent last year for one NFT.  It’s pretty clear that Tulipmania has nothing on the Fed-induced Bubblemania that is currently in the early stages of The Great Unwind.

Goldgar points out that as historians have looked back, the tulip mania of the 1630s in Holland has become a “byword for idiocy.”

At least a tulip bulb is a thing of beauty that reblooms year after year. Bitcoin, called “rat poison squared” by Warren Buffett, one of the smartest investors of all time, is not a thing of beauty, has nothing backing it, and is currently in free fall. After trading as high as $69,355 in November on the CME’s futures market, its front month futures contract closed at $36,725 on the CME today, a dive of 47 percent from its previous high.

Bitcoin was supposed to be the digital replacement for gold – a safe haven in a financial selloff. But Bitcoin, which along with other crypto currencies can be leveraged by hedge funds on a 100 times to 1 basis, closed down 13.94 percent on the CME today while the tech and SPAC bubble known as the Nasdaq stock market, closed down 2.72 percent on the day.

In early July 2019, economist Nouriel Roubini effectively summed up Bitcoin as this era’s “byword for idiocy,” stating the following on Bloomberg News:

“Crypto currencies are not even currencies. They’re a joke…The price of Bitcoin has fallen in a week by how much – 30 percent. It goes up 20 percent one day, collapses the next. It is not a means of payment, nobody, not even this blockchain conference, accepts Bitcoin for paying for conference fees cause you can do only five transactions per second with Bitcoin. With the Visa system you can do 25,000 transactions per second…Crypto’s nonsense. It’s a failure. Nobody’s using it for any transactions. It’s trading one sh*tcoin for another sh*tcoin. That’s the entire trading or currency in the space where’s there’s price manipulation, spoofing, wash trading, pump and dumping, frontrunning. It’s just a big criminal scam and nothing else.”

Today’s unwinding bubble has plenty of folks attempting to pump air back into it as it deflates. Consider the crazy headline that ran at 9:49 a.m. this Tuesday at Bloomberg News. It read: “Tech Stocks Unravel While Banks Are Hot in 2022 Rotation.” The first paragraph of the article read: “Technology stocks are out of favor, while previously shunned bank shares are popular again, as a persistent jump in bond yields is turning markets upside down this year.”

We knew that was a crazy theory so we decided to chart it. (See below.) Since November 1, 2021, shares of Goldman Sachs (which became a bank holding company in 2008) have lost 17 percent; JPMorgan Chase, the biggest bank in the U.S., has lost almost 15 percent, while the tech-laden Nasdaq stock market is down 12 percent. Rotating out of Big Tech into Big Banks is like the definition of insanity: doing the same thing over and over again and expecting a different outcome. You don’t trade one bubble for another bubble and find your way out of this corn maze of bubbles.

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Nomura, JPMorgan and Goldman Sachs Received a Cumulative $8 Trillion from the Fed’s Emergency Repo Loans in Fourth Quarter of 2019

 

Nomura, JPMorgan and Goldman Sachs Received a Cumulative $8 Trillion from the Fed’s Emergency Repo Loans in Fourth Quarter of 2019

By Pam Martens and Russ Martens: January 17, 2022 ~

The Dodd-Frank financial reform legislation of 2010 ordered the Government Accountability Office (GAO), an investigative body for Congress, to audit the Fed’s alphabet soup of emergency lending programs conducted during and after the 2008 financial crisis. The GAO found that a cumulative $16.1 trillion had been pumped out to Wall Street firms by the Fed – at super cheap interest rates. The GAO provided data for the peak amounts outstanding and also a cumulative total.

Why is a cumulative total essential and relevant? Because one institution in 2008, Citigroup, was insolvent for much of the time the Fed was flooding it with cheap loans. (Under law, the Fed is not allowed to make loans to an insolvent institution.) And when an insolvent institution is getting loans rolled over and over by the Fed for a span of two and a half years, at interest rates frequently below one percent when the market wouldn’t loan it money at even double-digit interest rates, it’s highly relevant to know the cumulative tally of just how much Citigroup got from the Fed. According to the GAO, that tally came to $2.5 trillion for just some of these Fed loan programs. (See page 131 of the GAO study here.)

The academic scholars that compiled the Fed’s loans during the financial crisis for the Levy Economics Institute also provided cumulative tallies. Their tally, which included additional Fed bailout programs not included by the GAO, came to $29 trillion.

The largest of the Fed’s emergency loan programs to Wall Street trading houses in 2008 was called the Primary Dealer Credit Facility, or in alphabet-soup-speak, PDCF. It made a cumulative tally of $8.9 trillion over a span of more than two years. Just three Wall Street trading firms received 64 percent of that money: Citigroup, a cumulative $2.02 trillion; Morgan Stanley, a cumulative $1.9 trillion; and Merrill Lynch, a cumulative $1.78 trillion.

Back in 2008 there was no law that forced the Fed to ever reveal the names of the banks that borrowed this money from the Fed and the amounts borrowed. The Dodd-Frank legislation made these disclosures by the Fed the law of the land. But Dodd-Frank set up a two-tier level of disclosures. If the emergency lending program was under Section 13(3) of the Federal Reserve Act, as the Primary Dealer Credit Facility was, the Fed would have to reveal the firm names and amounts borrowed one year after the program had been terminated. But emergency operations conducted through the Fed’s so-called “open market” operations would not have to reveal the names of the firms and amounts borrowed until two years after the loans were made.

Thus, it appears that in 2019 the Fed decided to make astronomical sums available to Wall Street’s trading houses not through a Primary Dealer Credit Facility (which it set up again in March 2020) but through its repo loan open market operations.

The repo loan market is an overnight loan market where banks, brokerage firms, mutual funds and others make one-day loans to each other against safe collateral, typically Treasury securities. Repo stands for “repurchase agreement.”

On September 17, 2019 the overnight loan rate spiked from an average of about 2 percent to 10 percent – signaling that one or more firms were in trouble. So the Fed effectively became the repo loan market on September 17, 2019 and exponentially grew the amount of loans it was making over the following months. Its repo loans lasted until July 2, 2020, by which time it had re-established the alphabet soup list of emergency loan programs from 2008.

The Federal Reserve Board of Governors in Washington D.C., an independent federal agency, outsources the vast majority of its emergency lending programs to the New York Fed, one of 12 privately owned regional Fed banks. The largest shareowners of the New York Fed are the following five Wall Street banks: JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, and Bank of New York Mellon. Those five banks represent two-thirds of the eight Global Systemically Important Banks (G-SIBs) in the United States. The other three G-SIBs are Bank of America, a shareowner in the Richmond Fed; Wells Fargo, a shareowner of the San Francisco Fed; and State Street, a shareowner in the Boston Fed.

We have now crunched the numbers for the New York Fed’s emergency repo loans for the periods in which it has thus far released the names of the borrowers: the last 14 days of September 2019 and the full fourth quarter of 2019. (The New York Fed is releasing the transaction data on a quarterly basis here. You have to delete the Reverse Repo transactions.)

After crunching the numbers, it now appears that the New York Fed may have intentionally thrown in a dizzying array of term loans to this one-day (overnight) repo loan market in order to disguise the fact that the trading units of the largest banks it supervises were the largest borrowers.

For example, the New York Fed offered one-day repo loans every business day but periodically also added 14-day, 28-day, 42-day and other term loans. Let’s say a trading firm took a $10 billion loan for one-day but on the same day took another $10 billion loan for a term of 14 days. The 14-day loan for $10 billion represented the equivalent of 14-days of borrowing $10 billion or a cumulative tally of $140 billion.

If we simply tallied the column the New York Fed provided for “trade amount” per trading firm, it listed only $10 billion for that 14-day term loan and not the $140 billion it actually translated into.

When we tallied the New York Fed’s “trade amount” column for the fourth quarter of 2019, the New York Fed’s repo loans came to $4.5 trillion. But when we set up a new column that adjusted the loans by the number of days in the term, the Fed’s repo loans for the fourth quarter of 2019 came to $19.87 trillion, or 4.4 times the “trade amount” column.

Just six trading houses received 62 percent of the $19.87 trillion, as illustrated in the chart above. The parents of three of those firms, JPMorgan Chase, Citigroup and Goldman Sachs, are shareowners of the New York Fed. The New York Fed is allowed to electronically create the trillions of dollars it loans at the push of a button.

Below is the chart that shows the understated amounts borrowed using just the New York Fed’s “trade amount” column for the fourth quarter of 2019. Below that we’ve also adjusted the Fed’s repo loans to account for the number of days in the term for the period of September 17, 2019 through September 30, 2019. (The Fed released this transaction data separately at the end of September in 2021.) It shows, convincingly, that from the get-go of the financial crisis in 2019, the same three firms were at the center of the borrowing.

The Fed originally tried to pass the problem off to corporations draining liquidity from the financial system by withdrawing their quarterly tax payments in the fall of 2019. But among the largest depository banks in the country where those quarterly tax payments would be held are Wells Fargo Bank and Bank of America, in addition to JPMorgan Chase and Citigroup’s Citibank. But as the chart below shows, neither Wells Fargo nor Bank of America seem to be having any major liquidity issues. In addition, three of the largest borrowers (Nomura, Barclays and Deutsche) are the trading affiliates of foreign banks. Are we really expected to believe that U.S. corporations are holding their quarterly tax payments with the trading units of foreign banks?

The Fed’s audited financial statements show that on its peak day in 2020 the Fed’s repo loan operation had $495.7 billion in loans outstanding. On its peak day in 2019, the Fed’s repo loans outstanding stood at $259.95 billion. It should be noted that there was no COVID-19 pandemic crisis in the U.S. in 2019. The first case of COVID-19 in the U.S. was reported by the CDC on January 20, 2020.

It’s long past the time for the Senate Banking Committee and the House Financial Services Committee to haul the relevant parties to a hearing, put the witnesses under oath, and get to the bottom of this second clandestine Wall Street bailout by the Fed in the span of 11 years.

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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.

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