During the Global Financial Crisis(GFC) the Federal Reserve would use their emergency lending abilities to extend loans to financial institutions and purchase toxic/distressed debt from the big banks to prevent failure and collapse of the global financial system.
The Federal Reserve’s loans, purchases, and swaps totaled 29 trillion dollars!
Most people are unaware of the actual size of the Federal Reserve’s emergency intervention. They think the bailout of the financial sector was 800 billion AND that it was paid back. The banks may have appeared on paper as paying back their bailouts but the intricacies of how they did so show this story is disingenuous at best. The banks were practically given unlimited capital and the Fed purchased many of their Mortgage Backed Securities above market value and at a time when nobody wanted to touch these securities. Government programs like “HAMP” drastically reduced rates for borrowers but the banks were still paid the original rate by the government. After the worst Mortgages were unloaded onto the taxpayer, the GSE’s, under the Federal Government’s control(Conservatorship), purposely delayed foreclosure processes(not necessarily foreclosures) to limit the supply.
One of many questionable decisions involving the Fed was the acquisition of Bear Stearns by JPMORGAN at $2 a share with $30 Billion of assistance from the NY Fed – this deal had to be renegotiated because the terms were absurdly favorable for JPM. In fact, Maiden Lane(Fed Facility) was created to unload the toxic debt held by Bear Stearns because JPMORGAN didn’t want to be liable for the risk. Years after the purchases, the Fed attempted to unwind their position but had to delay the sale of their MBS holdings. They would end up delaying that sale until 2018, when the securities matured. Here is a list of the shit show that is the Maiden Lane Transactions. The other two “Maiden Lane” facilities were designed to keep AIG afloat. Thankfully, the Fed can no longer create emergency facilities with the intent of bailing out a specific company. Of course, they have methods of circumventing this policy.
This page details the total funds each bank was provided by the Fed.
The Federal Reserve is “audited” every year.
The Federal Reserve claims they’re audited because the OIG and one independent financial services firm(KPMG) review that their financial statements are in compliance with accounting standards and no material misstatements are made.
The accounting standards the Federal Reserve Banks and Board must adhere to are created by the Federal Reserve Board.
The OIG is also responsible for Audits and Investigations of the Federal Reserve Board. Who appoints the IG? The Federal Reserve Chairman of the Board.
The one and only time the Federal Reserve was audited thoroughly was after the GFC by the Government Accountability Office in a 266 page report – this report was still short of including all of the Fed’s lending because the GAO was not provided the ability to do so by Congress.
The Federal Reserve is a government agency and a corporation. The Board of Governors is an agency of the government; the 12 reserve banks are corporations. This allows the Fed to operate in the dark as their asset purchases and other financial activities are conducted by the New York Fed – occassionally the other banks will provide a small portion of their lending or asset purchases. According to sources covering the history of the Fed this was done to help and protect the Fed’s independency from the Government. The Federal Reserve Banks are predominantly owned(shareholders) by the “Big Four” Banks on Wall Street – this Is my “opinion”. However, Dodd-frank* changed the voting rights of shareholders in an attempt to level the playing field.
In 2018, the NY Fed honored a FOIA request asking Who Owns The Fed?
The Freedom Of Information Act does not apply to the New York Fed. They claim to support the “spirit of the law” and will do their best to fulfill FOIA requests.
Speaking of ownership –
If the New York Fed holds almost all of the assets purchased by the Federal Reserve, who has the claim to these assets? The New York Fed is now the holder of Treasuries, Mortgage Backed Securities, Municipal Bonds, Corporate Bonds, and more!
The Federal Reserve has its own police force. They have their own academy and training The Patriot Act expanded their role: Under section 364 the Board of Governors of the Federal Reserve System are given authority to authorize personnel to act as law enforcement officers to protect the premises, grounds, property and personnel of any U.S. Federal reserve bank, as well as any operations conducted by or on behalf of the Board. The Board may also delegate this authority to a U.S. Federal reserve bank, so long as the reserve bank makes sure they follow the regulations proscribed by the Board and which are approved by the U.S. Attorney General.the Federal Reserve Act to provide for uniform protection authority for Federal Reserve facilities, including law enforcement officers authorized to carry firearms and make warrantless arrests.
HR 218 was amended to allow these officers off-duty carry.
So Reserve Banks like the New York Fed have Federal police working for private and public bankers? What happens if a Federal Reserve officer arrests and hurts an individual from their negligence? Who is responsible?
Here is an Inspection Report of the Boards law enforcement team conducted by the OIG. The OIG monitors and reviews the Boards processes and decisions. The report details how law enforcement at the Board are not adhering to most of their obligations. Of course, it has gone on for many years because the OIG is the only one responsible for monitoring their behavior and the IG is nominated by the Fed Chairman.
The Federal Reserve conducts Repo or Reverse Repo’s with its member banks. In March, the pandemic caused the financial markets to become illiquid. The Federal Reserve will use “repo agreements” to provide dollars to banks in exchange for collateral – this prevents further liquidation of assets. When the Fed announced they’d offer two Repo operations a day of $500 billion, the largest ever, many members of Congress acted as if Wall Street was getting another bailout. It’s not a bailout but it’s bailoutish, depending on the circumstances. What’s of greater concern is that none of these Congress members discussed the the Fed’s cumulative 9 trillion of Repo’s to Wall Street before this massive intervention. In other words, the banks and other financial firms have been receiving loans from the Federal Reserve for over a year. At the end of the 3Q in 2019, the overnight lending rate between financial institutions had soared as high as 10%. In response, the Federal Reserve launched Repo operations and continued through the end of 2020.
Section 13(3)of the Federal Reserve Act grants the Fed authority for emergency lending under unusual and exigent circumstances. Since 2008, The Fed has used these facilities to extend loans to almost every sector in the economy. The financial crisis emergency lending was limited to financial institutions(+AIG); the Covid pandemic extended lending beyond financial institutions to municipalities, corporations, and stocks(ETFs).
The Federal Reserve does not need the approval of Congress for their emergency lending. The only approval needed is from the Treasury Secretary – currently former Fed Chairman of the Board, Janet Yellen. They also do not need funding from Congress and theoretically could use unlimited dollars for their emergency facilities. However, unlimited isn’t plausible because the loans must be secured by collateral. Congress/Treasury decided to backstop the Fed’s facilities in 2020 in case there were any losses.
An Emergency Facility is actually a Special Purpose Vehicle(or entity). These are separate companies created by the Fed designed for a specific objective. For example, the Secondary Market Corporate Credit Facility(SMCCF) was one of the facilities/SPV’s created in response to the pandemic. The purpose was to buy corporate bonds(secondary market) and ETFs(diverse holdings of corporate bonds) to provide liquidity and prevent yields from rising – as much as I hate this idea, think it should be illegal, and believe it’ll return to be a permanent policy tool, it was extremely effective. The Board’s best policy tool in recent years has been “Forward Guidance.” Each Emergency facility could’ve potentially used hundreds of billions of dollars for asset purchases and Powell’s announcement implied the Fed would do so. However, just the expectation was enough to propel markets to all-time highs even as the Fed barely used some of the facilities.
These facilities are not managed by the Federal Reserve. Instead, they pay Wall Street to facilitate purchases that help Wall Street. The facility used in the example(SMCCF) was managed by BlackRock and a large percentage of their purchases were of their own products. Furthermore, they were awarded the contract without a competitive bidding process – several months after the contracts were renegotiated through a competitive bidding process(SMCCF had already stopped asset purchases). The Federal Reserve states this was due to the urgency in quickly establishing these facilities. In 2008, 8 of the top 10 highest paid contracts were awarded non-competitively(GAO-11-696 Page 52/Data from NYFED)The oversight of the 2008 facilities was practically non-existent. So after Wall Street played a huge part in causing the crisis, they were provided a bailout, and then paid to facilitate their own rescue. The GAO report details how little oversight they had multiple times. In fact, I submitted a (FOIA)records request to the Board in an attempt to gain better insight into the little oversight they did. It turns out, according to the Board, that the NYFed holds these records – a corporation. I’m guessing the NYFed holds a majority of the records about the Fed’s emergency lending and asset purchases. This way the Board doesn’t have to provide records to citizens or media. “Transparency”
The Federal Reserve is responsible for the supervision
of the financial sector/banks. They also are able to suspend regulations or capital requirements during unusual circumstances. After the suspension of the Gold Standard in 1971 and the amendment to the Federal Reserve Act in 77, the Fed and the financial sector would begin to increase the role they played in the U.S. Economy. What has occured since this period is the “Financialization” of our entire system which coincided with a concentration of assets into a few banks – this change is detailed in charts on this page, “Wealth Inequality.”
If the Federal Reserve supervises Wall Street, is it a good idea so many current and former Board members and employees have also worked at many of these firms?
The current Fed Chairman Jerome Powell and Vice Chair of Supervision Randal Quarles were both apart of the Carlyle Group, a prominent private equity firm.
The former Fed Chairman and now Treasury Secretary, Janet Yellen, made millions giving speeches to Wall Street(Office of Government Ethics disclosure) – since she was nominated by Biden, the left has convinced themselves these firms paid Yellen for her wisdom about financial markets and they’re apparently fine with that; if you understand Wall Street, you’d know Fed members seek advice/knowledge about financial markets and conditions from Wall Street, not the other way around.
The Chairman before Yellen and Powell was Ben Bernanke(pronounced “Burn-anun-key). After he departed the Fed, he became an adviser to the now famous Hedge Fund, Citadel – wallstreetbets/reddit + Robinhood controversy – and PIMCO.
And the others…