Activist Group Reports that Fed Chair Powell Traded During FOMC Restricted Periods: We Fact-Checked It and It’s True

 

Activist Group Reports that Fed Chair Powell Traded During FOMC Restricted Periods: We Fact-Checked It and It’s True

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

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

An anonymous activist group called Occupy the Fed reported in a Substack article on Sunday that Fed Chair Jerome Powell traded on the final day of a Federal Open Market Committee (FOMC) meeting on April 29, 2015, when he was a Fed Governor, and also on the final day of an FOMC meeting on December 11, 2019, when he was Fed Chair. 

Powell’s trading directly violates the Fed’s written policy which prohibits trading “during the period that begins at the start of the second Saturday (midnight) Eastern Time before the beginning of each FOMC meeting and ends at midnight Eastern Time on the last day of the meeting.” The FOMC meetings are typically when the most sensitive and market-moving information occurs at the Fed, including votes on hiking or lowering interest rates and other confidential actions.

Dallas Fed President Robert Kaplan, Boston Fed President Eric Rosengren and Fed Vice Chair Richard Clarida have resigned over their own individual trading scandals and not one of them has been charged with anything as directly in violation of Fed policy as trading on the very day the FOMC is in session.

We fact-checked the Occupy the Fed report by downloading the dates of all FOMC meetings from 2015 through 2020 and comparing them to the trading transactions listed on Powell’s financial disclosure forms filed with the Office of Government Ethics (OGE) for years 2015 through 2020. We can verify that Powell traded on April 29, 2015 and on December 11, 2019. Both were the final day of the FOMC meeting. (You can read the minutes of those respective FOMC meetings here and here.)

The charts below show what Powell sold on those dates. We have eliminated any purchase transactions to avoid any possibility that the Fed would claim that these were made for dividend reinvestment purposes.

The FOMC meets eight times a year, roughly every six weeks. Multiply that by the six years of financial disclosures that the OGE has made available for Powell and you have a total of 48 FOMC meetings. Multiply the 48 meetings by two, since the FOMC meets for two days, and Powell had 96 opportunities to screw up and accidentally trade on an FOMC meeting date. But it happened on only two days during that six-year span of time – according to what we know thus far. And in both the years of 2015 and 2019, highly unusual activities were occurring at the Fed.

The year 2015 would mark the first time that the Fed had raised interest rates since it slashed them to the zero-bound range in 2008. There was a great deal of media talk in April regarding what was going to happen in various markets when the Fed raised its benchmark Fed Funds rates. The Fed didn’t raise its benchmark rate until December 17, 2015. 

The year 2019 marked the beginning of an unprecedented, emergency repo lending operation by the Fed. While the Fed made public that the repo loans were being provided to its 24 primary dealers, only the Fed knew that six large trading houses on Wall Street were getting the lion’s share of those loans. One of the six was Goldman Sachs. On December 11, 2019, the final day of the FOMC meeting, Powell sold between $115,000 and $300,000 of two Goldman Sachs proprietary mutual funds. The funds are listed as “GS” rather than Goldman Sachs on his financial disclosure forms. (See chart below.)

According to the Fed’s own H.4.1 report, on December 11, 2019, the same day that Powell dumped between $167,000 and $430,000 of predominantly stock mutual funds and ETFs, the Fed had an outstanding balance of $212.95 billion in emergency repo loans that had been used to prop up trading houses on Wall Street, including Goldman Sachs.

A larger question in all of this is why Powell is even allowed to be holding Goldman Sachs proprietary funds since Goldman Sachs is supervised by the Fed.

The Occupy the Fed report also makes the following charge against Powell:

“Instead of providing specific dates for the majority of his transactions, Powell improperly groups trades of like securities behind the phrase ‘Multiple’ on every OGE form he has filed.”

A report last year in the Washington Post indicated that a Fed spokeswoman had indicated to them that these “multiple” transactions “were for automatic dividend reinvestments – essentially transactions on autopilot and not subject to individual decisions.”

Very little is known about the Occupy the Fed group that scooped mainstream media with this story other than that it appears to be a fairly new group. Its Twitter account shows that it was opened in January 2021. Its Substack account shows it began on January 17, presumably of this year since only two articles are listed. Under “Who are we” on the Substack account, the following description is provided:

“We’re a group of like-minded regular people (workers, professionals, seniors, savers and others) who are disgusted and fed up with systemic corruption at the Federal Reserve and the total perversion of our American capitalist democracy. We’ve taken no money from special interests. We are doing this on personal time and expense because we’ve had enough.”

We have reached out to the Fed’s communications office for an explanation of Powell’s trading on these two FOMC meeting dates. We’ll update this article if we receive a response.

Powell’s term as Fed Chair expired this past Saturday and he is currently serving as Chair Pro Tempore. President Biden has nominated Powell to serve a second four-year term as Fed Chair but that requires an up vote by the Senate Banking Committee and the full Senate. Those votes have yet to happen, making Powell the first Fed Chair in a quarter century to be serving in a Pro Tempore capacity.

This latest report from Occupy the Fed simply adds to the withering criticism around Powell’s leadership of the Fed. Senator Elizabeth Warren, who sits on the Senate Banking Committee, called Powell a “dangerous man to head up the Fed” over his record of weakening Dodd-Frank legislative protections covering Wall Street megabanks. Powell has also presided over the worst trading scandal in the Fed’s history. His cozy relationship with Blackrock while the Fed awarded them three no-bid contracts has also raised eyebrows. Adding to all of this is the general consensus that Powell has fallen way behind the curve on the inflation that is ravaging Americans’ ability to make ends meet.

Trust in the Fed has been seriously weakened under Powell. That is reason enough for President Biden to reconsider this nominee.

Editor’s Update: The Fed has provided a detailed response. See the response and our critique here.

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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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Bloomberg’s Craig Torres Shakes Up the Fed’s Zombie Press Conference with a Gutsy Trading Scandal Question

 

Bloomberg’s Craig Torres Shakes Up the Fed’s Zombie Press Conference with a Gutsy Trading Scandal Question

By Pam Martens and Russ Martens: January 28, 2022 ~

Craig Torres, Bloomberg News Reporter Covering the Fed and Economy

Fed Chair Jerome Powell’s press conferences are tortiously zombie affairs even for Fed wonks like us. The vast majority of questions coming from the press strictly adhere to coloring inside the lines. That means only slight variations on endless questions about inflation, asset tapering, timing of rate hikes and similar snoozers.

We were struggling to avoid nodding off during Powell’s press conference this past Wednesday when the Fed and economic reporter for Bloomberg News, Craig Torres, jolted us upright in our chair. Torres asked Powell a wonky question and then appended a follow up question about the Fed’s trading scandal. That part of the exchange went as follows:

Torres: “Chair Powell, I have a quick administrative question. You know, Robert Kaplan’s disclosure of his securities transactions: In a couple of months, Chair Powell, or maybe sooner, you and I will file our tax returns. And we’ll list transactions and all kinds of things. And next to those transactions we’ll put dates. And Bloomberg asked for the dates of Mr. Kaplan’s transactions. The Dallas Fed is not giving us the dates. And I don’t see why this is a matter for the Inspector General or anybody else. I mean, why can’t he give us the dates? Will you help us get the dates of those transactions? Thanks.”

Powell: “I know you’ve been all over this issue with my colleagues, Craig, on the issue of information. We don’t have that information at the Board. And, you know, I had — I asked the Inspector General to do an investigation, and that is out of my hands. I’m playing no role in it. I seek to play no role in it. And I don’t — I really — I can’t help you here today on this issue. And I’m sorry I can’t.”

Torres was not suggesting that the trading scandal itself is not “a matter for the Inspector General or anybody else.” Clearly, the trading scandal is a matter for the SEC and the criminal division of the Justice Department. (See our report:  Robert Kaplan Was Trading Like a Hedge Fund Kingpin for Five Years while President of the Dallas Fed; a Dozen Legal Safeguards Failed to Stop Him.)

Torres was suggesting that there is no reason for the dates of Kaplan’s trades to be withheld from the public because of any ongoing investigation because that information was previously legally owed to the American people and Kaplan didn’t provide it as legally required. Thus, as they say in the courtroom, it’s “ripe” for disclosure.

When Kaplan made his multiple “over $1 million” trades in bets on which way the stock market would move using S&P 500 futures – during the year of 2020 when he was both sitting as a voting member of the Fed’s FOMC as well as making market-moving comments himself to the media – he was legally obligated to report the dates of each individual buy and sell on the form provided to him by the Dallas Fed. Every other regional Fed Bank President listed the dates of the buys and sells. But Kaplan simply wrote the word “multiple” where the date was required. (See Kaplan’s financial disclosure forms from 2015 through 2020 here.)

Kaplan is a sophisticated investor who spent 22 years at Goldman Sachs, rising to the rank of Vice Chairman. He clearly knew, for five solid years, that he was not providing the dates of his trades as required by the mandated financial disclosure form. That, in and of itself, is a smoking gun. Why withhold information if you have nothing to hide?

What Craig Torres should do now is what the late Bloomberg reporter Mark Pittman did in 2008. He should march into the newsroom and ask his boss if he can file a lawsuit in federal court to get the information that the Dallas Fed refused to turn over. But instead of filing a lawsuit against the Fed, which is likely telling the truth and doesn’t have Kaplan’s trading records (because it’s incompetent at policing trading abuses within its own ranks as well as on Wall Street) Torres and Bloomberg should file a lawsuit against Kaplan himself.

Think about that for a moment. Kaplan is now a private citizen. He can no longer hide behind the shield of the Dallas Fed. The information was legally required to be filed by him from 2015 through 2020 and he didn’t file it. It belongs to the American people and to the press. It is long overdue so the court should demand its immediate release. Kaplan’s stalling tactics are grinding investigative journalism in this critical area of public interest to a halt.

In addition, Torres could ask the court to make Kaplan turn over not simply the dates of his trades but the trade confirmations from his brokerage firm to confirm that he’s now being forthright about these trades. That would provide a major piece of information about the name of the brokerage firm that had such lax compliance procedures that it allowed a Fed Bank President with insider information to trade like a hedge fund kingpin. As we previously reported, Goldman Sachs Refuses to Say If It Was Placing Trades for Dallas Fed President Kaplan.

Another reason that Torres should ask to file this lawsuit alongside Bloomberg News is to find out if Bloomberg News, with billionaire Mike Bloomberg at the helm, is willing to back up its investigative reporters. Mike Bloomberg was Mayor of New York City with someone else in charge of his publishing empire when Pittman filed his lawsuit against the Fed.

Mike Bloomberg’s willingness to meddle and defend rogue actors is on full display in a headline at Bloomberg News today. He’s written an opinion piece telling Congress to back off bringing antitrust legislation against big tech companies. Should the public be listening to a billionaire tell Congress what legislation it should bring when Mike Bloomberg used his own wealth to overturn term limits in New York City so that he could get a third term as Mayor?

You might be questioning why Wall Street On Parade hasn’t brought such a case against Kaplan to federal court since we seem to be in possession of all of the salient details. It’s because we’re a two-person research and writing team and we’re already hard-pressed to pick up the slack on what mainstream media won’t report. For example, consider our report: 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.

If Bloomberg News files the lawsuit, it can do what it did in the Pittman case. It can get other major media outlets to support its position in an Amicus Brief. It’s time for American journalists to come out of our COVID caves and re-engage in a participatory democracy. 

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A Nomura Document May Shed Light on the Repo Blowup and Fed Bailout of the Gang of Six in 2019

 

WATCH WALL STREET & the FEDERAL RESERVE!

A Nomura Document May Shed Light on the Repo Blowup and Fed Bailout of the Gang of Six in 2019

By Pam Martens and Russ Martens: January 19, 2022 ~

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

There are numerous reasons that members of Congress, bank regulators, and mainstream media don’t want to talk about the repo blowup in 2019 and the massive Fed bailout that followed. Economist Michael Hudson previously explained how the Fed lacked authority to bail out a handful of trading houses on Wall Street under the dictates of the Dodd-Frank financial reform legislation. Dodd-Frank restricted the Fed to using its emergency lending powers to rescue a “broad base” of the U.S. financial system.

As we detailed on Monday, there was no “broad base” of the U.S. financial system being bailed out by the Fed in the last quarter of 2019: 62 percent of a cumulative $19.87 trillion in rolled-over repo loans went to just six trading houses: Nomura Securities International ($3.7 trillion); J.P. Morgan Securities ($2.59 trillion); Goldman Sachs ($1.67 trillion); Barclays Capital ($1.48 trillion); Citigroup Global Markets ($1.43 trillion); and Deutsche Bank Securities ($1.39 trillion).

Notice that three of the firms listed above are affiliates of foreign banks (Nomura, Japan; Barclays, UK; Deutsche Bank, Germany.) Now imagine the embarrassment to the Fed if it was forced to admit that it had to secretly bail out the affiliates of foreign banks for the second time in 11 years because the derivatives of U.S. banks were still not adequately regulated, after derivatives had played a central role in the worst financial crash in 2008 since the Great Depression.

All six of the Wall Street trading houses listed above have one thing in common: large derivative exposure. Consider the revelations in the Consolidated Statement of Financial Condition for Nomura Securities International for the period ending March 31, 2019. (As indicated above, Nomura Securities International received the largest cumulative total of repo loans from the Fed in the fourth quarter of 2019.)

The financial statement shows that Nomura Securities International had total assets of $127.5 billion but potential derivative exposure as follows: (See pages 30 and 41.) A “Maximum Payout” on protection sold on credit derivatives of $14 billion; and a “Maximum Payout” on “derivative contracts that could meet the definition of a guarantee” of $97.7 billion.

But here’s the really scary part of Nomura’s pile of derivatives: the name Nomura does not appear once in the report on derivatives that might pose a threat to the U.S. financial system that is published quarterly by the Office of the Comptroller of the Currency (OCC). It didn’t appear in any 2019 report and it still hasn’t appeared there. We asked the OCC about that yesterday and their response was that they don’t comment on individual institutions.

Three of the largest holders of derivatives in the U.S. that do appear on the OCC’s quarterly report just happen to be the trading affiliates of the same three firms that were among the largest six borrowers in the Fed’s repo loan facility in the fourth quarter of 2019: JPMorgan Chase, Citigroup and Goldman Sachs.

If Nomura was a derivatives counterparty to these firms and it found itself on the wrong side of a credit derivative trade, such as the blowup of Thomas Cook one day before the Fed launched its repo bailout, its credit rating could have been in severe jeopardy if this fact became public. A credit ratings downgrade would have likely meant that Nomura would have had to post large sums of additional collateral with its derivatives counterparties. And Nomura was not exactly in an ideal financial position in the fall of 2019.

In April of 2019 the parent company, Nomura Holdings, announced it would need to cut $1 billion in costs and close more than 30 of its 156 retail branches in Japan. It had just suffered its first full-year loss in a decade.

Less than three months after Nomura Securities International had begun to take giant secret loans from the Fed’s repo facility, Nomura Holdings announced that it had named a new CEO, Kentaro Okuda, who was quoted in the Financial Times as taking charge with a “sense of crisis.”

There is a strong stench of the Lehman Brothers and AIG derivatives fiascos of 2008 swirling around the news blackout of the Fed’s secret bailouts of 2019.

According to documents released by the Financial Crisis Inquiry Commission (FCIC), at the time of Lehman Brothers’ bankruptcy on September 15, 2008 it had more than 900,000 derivative contracts outstanding and had used the largest banks on Wall Street as its counterparties to many of these trades. The FCIC data shows that Lehman had more than 53,000 derivative contracts with JPMorgan Chase; more than 40,000 with Morgan Stanley; over 24,000 with Citigroup’s Citibank; over 23,000 with Bank of America; and almost 19,000 with Goldman Sachs.

The U.S. government had to take over the giant insurer, AIG, because it was counterparty to tens of billions of dollars in derivatives to Wall Street banks and had no money to pay them. This is a chart that AIG was eventually forced to release. It documents that more than half of its bailout money came in its front door and then was quietly funneled out the backdoor to pay off Wall Street and foreign trading houses. Five of the Gang of Six that were feeding at the Fed’s repo trough in the last quarter of 2019 appear on this chart: Goldman Sachs, Deutsche Bank, JPMorgan, Citigroup, and Barclays.

It’s long past the time for the Fed to come clean on exactly what happened in the fall of 2019 that caused it to launch its repo bailout facility. Americans will simply never trust the Fed if it doesn’t.

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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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