The Fed Responds to Report that Fed Chair Powell Traded During FOMC Blackout Periods

 

The Fed Responds to Report that Fed Chair Powell Traded During FOMC Blackout Periods

By Pam Martens and Russ Martens: February 11, 2022 ~

A Fed spokesperson has provided Wall Street On Parade with a detailed response to our article yesterday, which documented that trades were made in accounts in which Fed Chair Jerome Powell had a financial interest during a Federal Open Market Committee (FOMC) meeting in 2015 and another in 2019. Fed officials are clearly prohibited from trading before and during FOMC meetings because that is when they have insider, market-moving information.

Below is the full statement from the Fed spokesperson. Following the statement, we will explain its many, serious flaws.

“Chair Powell has not traded during FOMC blackout periods. The transactions that were reported occurred in family trusts over which he had no control. Chair Powell is not a trustee and did not direct or control the trades. He relinquished his previous role as a trustee in 2012 when he joined the Federal Reserve as a Board Member.

“These transactions were regular trades for the purposes of the trust, e.g., raising money for donations under the terms of a charitable trust. The trust is legally required to make certain charitable donations every year. In practical terms, this means that transactions must occur in order to free up funds for those donations.

“The trust financial advisor was advised of our blackout periods and was directed to avoid transactions during those blackout periods. Although they were aware of the FOMC blackout dates, the advisor mistakenly made some transactions during some blackout periods. These transactions were reported as part of his publicly available financial disclosures, which have been available regularly every year since he joined the Board. They are available to anyone through the Office of Government Ethics website, OGE.gov.”

Flaw Number 1: The 2015 trades occurred in “Powell Family Trusts” 3 and 4; the 2019 trades occurred in the “Powell Family Trust 3.” Powell’s financial disclosure forms, which he signed, define what has to be reported under “Part 7, Transactions” as follows: “Part 7 discloses purchases, sales, or exchanges of real property or securities in excess of $1,000 made on behalf of the filer, the filer’s spouse or dependent child during the reporting period.” Thus, Powell or someone in his immediate household had an interest in the assets being sold during two separate FOMC meetings. The assets were not held in Blind Trusts, so Powell – who has a law degree – should have been on top of what was happening in these accounts.

Flaw Number 2: Powell signed an Ethics Agreement in 2017 where he agreed to the following:

“If I have a managed account or otherwise use the services of an investment professional during my appointment, I will ensure that the account manager or investment professional obtains my prior approval on a case-by-case basis for the purchase of any assets other than cash, cash equivalents, investment funds that qualify for the exemption at 5 C.F.R. § 2640.201(a), obligations of the United States, or municipal bonds.”

It follows, logically, that Powell would do the same thing for sales transactions, i.e., give his approval on a “case-by-case basis.”

Flaw Number 3: The statement regarding the need to raise cash to fund charitable donations is not convincing. Many wealthy individuals gift appreciated securities to charity, obtaining a tax advantage in doing so. Regardless, in both 2015 and 2019, waiting one extra day to make the trades would have avoided running afoul of the Fed’s prohibition on trading during the blackout period around FOMC meetings.

Flaw Number 4: Powell signs all of his financial disclosure forms, including those for 2015 and 2019. Why didn’t he notice that there were trades listed that occurred on FOMC meeting dates and issue a timely public apology?

Flaw Number 5: According to the Congressional Research Service, this is the prescribed procedure at the Fed that is supposed to prevent the problems outlined above, as well as those of the three Fed officials that have resigned over their own trading scandals since last September:

“Financial disclosure reports from covered officials, including the original entrance reports and the annual reports filed by May 15, are to be reviewed by supervisory ethics personnel to identify potential ethics and conflict problems, and to resolve any conflict of interest issues that may be raised by the ownership of certain assets by a particular public official. Remedial action which may be required by ethics officials to resolve identified conflicts of interest with respect to certain assets may include divestiture, establishment of a qualified blind trust, procurement of conflict of interest waivers, specific written recusal instruments, and requests for voluntary transfer or reassignment.”

It was not an Ethics Officer at the Fed who disclosed to the public the fact that trades in Powell’s accounts occurred on an FOMC meeting date. It was an activist group called Occupy the Fed.

In fact, the General Counsel and Ethics Officer of the Dallas Fed, Sharon Sweeney, allowed Dallas Fed President Robert Kaplan to trade in and out of “over $1 million” S&P 500 futures contracts from 2015 through 2020. These types of contracts can be used to make directional bets on which way the stock market is going to move. They trade during and after the stock markets in the U.S. have closed – almost continuously from Sunday evening to Friday evening. (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.)

Supervisory ethics personnel at the Fed also did not stop Fed Chair Powell from having upwards of $25 million of his family wealth managed by BlackRock while the firm was given three no-bid contracts by the Fed.

The Fed is not some mom and pop shop in Dubois. It’s the central bank of the United States with a current balance sheet of $8.9 trillion, 98 percent of which American taxpayers are on the hook for. It’s also in charge of supervising the most dangerous megabanks in the United States, which continue to be serially charged with crimes against the investing public while the Fed continues to bail them out.

Do we really want a man at the helm of this sprawling institution who can’t even own up to his failure to police his own trading activities?

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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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Jerome Powell’s Term as Fed Chair Ended Last Saturday. The Senate Has Not Reconfirmed Him. What’s Up?

 

Jerome Powell’s Term as Fed Chair Ended Last Saturday. The Senate Has Not Reconfirmed Him. What’s Up?

By Pam Martens and Russ Martens: February 9, 2022 ~

Jerome (Jay) Powell

At 3:00 p.m. last Friday, the Federal Reserve quietly released the following statement:

“The Federal Reserve Board on Friday named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors. The action, effective February 5, enables him to continue to carry out his duties as Chair after the expiration of his term on the same day, and while the confirmation process is underway. In its annual organizational meeting in January, the Federal Open Market Committee separately named him as its Chair.”

This is the first time in a quarter century that a Fed Chairman’s term has lapsed before he was reconfirmed by the Senate. According to Reuters, the last time it happened was 1996 when Alan Greenspan served from March 3 to June 20 as Fed Chair Pro Tempore.

Powell has not even made it to a vote in the Senate Banking Committee, which has to happen before the full Senate can vote on his confirmation. So what’s going on? It appears that Democrats are playing hard ball since Republicans are waging a war against two of Biden’s other three nominees to serve on the Fed’s Board of Governors.

The two nominees under withering attack by Republicans are Sarah Bloom Raskin for Vice Chairman for Supervision and Dr. Lisa Cook for Governor. There is much less push back on the third nominee, Dr. Philip Jefferson.

Raskin is more than qualified as a former Fed Governor and former Deputy Treasury Secretary. But as Vice Chairman for Supervision, she would be in charge of supervising the megabank holding companies on Wall Street. The Fed has effectively outsourced that job to the New York Fed and Wall Street likes it that way. The megabanks on Wall Street literally own the New York Fed and its perpetual bailout spigot, so they are not happy about any supervision coming from Washington.

Helping Wall Street out in its push against Raskin is the fossil fuels industry and their toadies. On February 2, the Wall Street Journal had the audacity to run a propaganda piece by executives of two fossil fuel trade associations, masquerading as an “opinion” article.

The two executives, Tim Stewart, President of the U.S. Oil and Gas Association, and Kathleen Sgamma, President of Western Energy Alliance, which represents oil and natural-gas producers in the West, wrote that Raskin believes that fossil fuels pose “climate-change-related risks to the economy.”

According to a Gallup poll released in April of last year, 43 percent of Americans “worry a great deal” about climate change and a majority of Americans worry “at least somewhat.” Raskin is simply responding to the legitimate concerns of the American people, something that the Fed has said its listening tours around the country have been all about.

The attacks on Raskin have more to do with the fossil fuel lobby groups wanting to flex their muscles for their clients and Wall Street fearing actual supervision and nothing to do with Raskin’s credentials for the job.

Republican Mitch McConnell of Kentucky took to the Senate floor last Thursday to excoriate Raskin with the old trope that she will “pursue liberal environmental goals.” Shouldn’t saving the planet for our children and grandchildren be a goal that we can all unite around?

The Ranking Member of the Senate Banking Committee, Senator Pat Toomey, Republican of Pennsylvania, spent much of his opening remarks at the confirmation hearing for the Fed nominees last Thursday to excoriate Raskin over her stance on climate change.

Jefferson and Cook are both Black nominees. Jefferson is Vice President for Academic Affairs, Dean of Faculty and Professor of Economics at Davidson College. Jefferson previously served as Chair of the Economics Department at Swarthmore College. He was also previously an economist at the Board of Governors of the Federal Reserve System.

Cook is Professor of Economics and International Relations at Michigan State University. She earned a Ph.D. in economics from the University of California, Berkeley with fields in macroeconomics and international economics. She was previously an adjunct professor at Harvard University’s Kennedy School of Government.

If Lisa Cook is confirmed, she would be the first Black woman on the Fed’s Board of Governors in its 109-year history. (It seriously pains us to have to write that sentence.)

Last Thursday, Toomey criticized Professor Cook as a Fed nominee in his opening statement. He said “She has a Ph.D. but no academic work in monetary economics.” Jerome Powell, who has heavy Republican backing for a second term, has no Ph.D. in economics but instead has a law degree and got rich at the vulture fund Carlyle Group. Powell also presided over the largest trading scandal in Fed history. Exactly what his involvement in that scandal will turn out to be is unknown at this point because the results of the investigation, now entering its fifth month, are unknown.

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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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Bloomberg News Ran a False Headline, “Russia Invades Ukraine,” for 24 Minutes on Friday. Here’s the Untold Story.

 

Bloomberg News Ran a False Headline, “Russia Invades Ukraine,” for 24 Minutes on Friday. Here’s the Untold Story.

By Pam Martens and Russ Martens: February 7, 2022 ~

Winston Churchill once described Russia as “a riddle, wrapped in a mystery, inside an enigma.” The same could be said of Bloomberg LP, parent of Bloomberg News, which last Friday ran the false headline “Russia Invades Ukraine.” For still unexplained reasons, the headline was left up for at least 24 minutes on the digital front page of Bloomberg News.

Billionaire Owner of Bloomberg News, Michael Bloomberg

But as the hundreds of thousands of traders around the globe that use the Bloomberg Data Terminal well know, Bloomberg News first publishes many of its headlines on the Bloomberg Data Terminal – the cash cow of Bloomberg LP that has made its majority owner, Michael Bloomberg, a billionaire. Bloomberg’s largest customers for its Data Terminals include Wall Street megabanks like JPMorgan Chase that it also provides news coverage on via Bloomberg News. (Sometimes that coverage leaves a lot to be desired.)

Exactly when traders saw that headline is not precisely known. Bloomberg News said this in its statement: “We prepare headlines for many scenarios and the headline ‘Russia Invades Ukraine’ was inadvertently published around 4 p.m. ET today on our website. We deeply regret the error. The headline has been removed and we are investigating the cause.” Right next to that statement was the black box with the familiar reminder: “Before it’s here, it’s on the Bloomberg Terminal.”

What is known, from the chart above, is that 101,000 contracts in the E-mini S&P 500 futures traded at approximately 3:55 p.m. EST as the S&P 500 futures plunged, ostensibly as a result of that headline. That was, by far, the largest number of E-mini S&P 500 contracts traded in a short time span all day. If someone needed to exit a short position at a tidy profit, that was a very convenient headline. Stock exchanges in New York close at 4 p.m. weekdays. But the E-mini S&P 500 futures contract trades almost around the clock, from Sunday evening until 5 p.m. EST on Friday.

Bloomberg LP isn’t just the owner of Bloomberg News and the Bloomberg Data Terminal. It also owns a trading platform called Tradebook, which is in business with Goldman Sachs. Tradebook’s website tells us this:

“Equity: Institutional buy-side firms can access Goldman Sachs’ world-class execution platform, robust liquidity offering, and breadth of global services through Bloomberg Tradebook. Clients can save invaluable time and make more informed trading decisions by leveraging Bloomberg’s world-class data, analytics and technology all directly from the Terminal.”

Goldman Sachs is not the first Wall Street firm to have a business relationship with Bloomberg. The giant brokerage firm, Merrill Lynch, now owned by Bank of America, was a minority owner of Bloomberg LP from its very beginning. After previously selling part of its stake back to Bloomberg, Merrill sold its remaining 20 percent stake back to Bloomberg in 2008 in the midst of the financial crisis.

Bloomberg LP has another division that would not appear to be ideal for a publisher of financial news. It’s called “External Relations.” The Bloomberg website includes the following description of how the “Corporate Communications” unit of External Relations works:

“We partner with senior business leaders across the world and work directly and regularly with Bloomberg’s management committee. We advise, write and edit on behalf of these leaders as we communicate company news and innovations to our worldwide client base, global financial markets and our employees.”

Bloomberg LP also does a significant amount of lobbying of the federal government. Since 2010, it has spent more than $6.2 million lobbying on issues that could negatively impact the profits of its Data Terminal and trading platform.

This is not the profile of a business that we can reconcile with an independent news organization covering Wall Street.

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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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