First Look: Fed Lending Release



The Fed allegedly released the data that was the center of a long FOIA lawsuit fight yesterday.  I could easily make the argument that they did so in a fashion that was intended to frustrate a rational examination by handing everything over in PDFs without an index or in any sort of machine-digestible form.  There were also quite a few things missing that I would have expected to see included.

What became immediately clear with the data release was why The Fed didn’t want this out.

What you’re getting here is my “first look” – a look that should be much more detailed but isn’t, simply because of the intentional attempt to keep people from easily analyzing the material.  More analysis will come over time, and many are looking at the information and trying to import it into something that is easily manipulated and examined (such as Excel); for now, this will have to do.

There was an awful lot of hand-waving by various large banks, if you remember, that they didn’t “need” any of these programs.  And yet we find a curious mixture of large banks that actually did use these programs, including JP Morgan’s over-representation in the ABCP program itself.  For firms that claimed, in public, that they needed no help, this is rather curious is it not?

Then there’s Goldman Sachs, which claimed under oath to the FCIC that:

“we used it one night at the request of the Fed to make sure our systems were linked with their systems, and it was for a de minimis amount of money.” Peter J. Wallison, a member of the Financial Crisis Inquiry Commission, then asked, “you never had to use it after that?”

“No, and as I said, we used it on the Fed’s request,” Cohn replied.

The data says otherwise – Goldman in fact hit the window five times, not once.  Isn’t it a crime to make a false statement under oath?

Was the amount borrowed in this case large?  No.  But that wasn’t the question – it was very specific in that Goldman stated they only hit the window once – period.  Again, the data says otherwise.

Dexia, a large conglomerate and foreign entity, hit the window several times.  We’ve known that our Federal Reserve propped up foreign companies.  Now we have the amounts of that “propping up”, and they’re popping – eye-popping, that is.

There are other deeply troubling facts in this release.  Among them are the fact that The Fed apparently accepted more than $100 billion in defaulted bonds and stocks as “collateral.” 

Common stocks?  Yeah.  Where’s that permitted in The Fed’s charter?  Well, that’s open to some question.  So is accepting defaulted debt.  The black-letter of the law requires that all lending be “fully collateralized.”  But it appears that the “fourth mandate” – the one The Fed arrogated to itself, that is, to make the stock market go up, despite having zero legal authority to do so – may have come directly and indirectly from this set of decisions.

The problem with this set of “decisions” is that we have zero transparency on the actual haircuts given, other than the generic data we got before. Knowing now that defaulted debt and common equities were part of the mix, it’s rather clear that The Fed was breaking the law which requires that sufficient overcollateralization exist for all loans made by The Fed such that every loan remains fully secured in every case.

That, in turn, means that The Fed was in fact taking market risk in its lending, and that is, as a matter of black-letter law, a prohibited act.

The Fed is prohibited by law from taking market risk because it is able to take actions, without any review and few legal constraints, that can cause the price of assets to rise or fall pretty much at will.  It thus has the ability to do that which others cannot without going to prison – manipulate the markets.  By doing so The Fed would be put in the position of not only choosing winners and losers, but conspiring with others to provide them with unearned gains not as a consequence of their decisions but rather as a consequence of inside dealing and privileged information.  This is unlawful for private industry and individuals to engage in, but it is inherently part of monetary policy.

The Fed as a matter of charter has no mandate nor authority to intervene in the price of equities.  Yet Bernanke has made clear that one goal of his policies over the last three years has been to make the price of stocks go up.  Now we know where the motivation originally came from to do that – The Fed was, at the time, holding “collateral” that was subject to stock market risk.

These actions were an unprecedented usurpation of authority by what is supposed to be a strictly-limited monetary body.  You can argue the purity of motive all you want, but the fact remains that there is nothing in The Fed’s charter that permits them to lend against anything other than fully-secured collateral.

At the time Section 13.3 read:

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.

Common stocks and defaulted bonds are not, by any reasonable definition, secured collateral.

I’ll likely have more on this as I explore further, but this much is clear: The Fed radically stretched the law in terms of what it is permitted to do, and there’s a pretty clear argument that some of these programs, particularly those where collateral included equities and defaulted bonds, exceeded that lawful authority.

In addition a response to an FOIA request is supposed to include everything that is responsive.  How this could be considered sufficient is beyond me – as just one example there’s no specific identification of what the collateral was or how it was valued for these various loans, leading one to believe that either (1) The Fed intentionally did not disclose everything called for by the Court or (2) they literally did not know what stocks made up “Common Stocks” and what bonds made up “Defaulted Bonds.”

If the believe the latter I have a bridge for sale in Brooklyn at a very-attractive price.

The Market-Ticker