The Tax-Payers' Tab: a Cool $9 Trillion and Then Some
By PAM MARTENS
Originally published at CounterPunch, The Tax-Payers' Tab: a Cool $9 Trillion and Then Some
In December 1, the Fed was forced to release details of 21,000 funding transactions it made during the financial crisis, naming names and dollar amounts. Disclosure was due to a provision sparked by Senator Bernie Sanders of Vermont. The voluminous data dump from the notoriously secret Fed shows just how deeply the Federal Reserve stepped into the shoes of Wall Street and, as the crisis grew and the normal channels of lending froze, the Fed effectively replaced Wall Street and money centers banks in terms of financing.
The Fed has thus far reported, without even disclosing specifics of its lending from its discount window, which it continues to draw a dark curtain around, that it supplied, in total, more than $9 trillion to Wall Street firms, commercial banks, foreign banks, corporations and some highly questionable off balance sheet entities. (Much smaller amounts were outstanding at any one time.)
A careful review of these data makes it highly likely the GAO will be releasing some startling findings come next July 2011. That’s when the American people will have a much clearer picture of how the Federal Reserve shoveled taxpayer money to Wall Street by the trillions. As a result of Senator Sanders’ legislative efforts, the Government Accountability Office (GAO) is to complete an audit by next summer of the Fed’s lending programs during the financial crisis.
The data starkly show a comatose Wall Street being resuscitated with whatever financial might the Federal Reserve could pump into its tangled web of funding vehicles. It also points to how the Fed was dispersing sums which dwarfed the U.S. Treasury’s $700 billion TARP (Troubled Asset Relief Program) bailout program while allowing the TARP to take the media heat for obscene funding of Wall Street.
The Fed has made the task of seeing the big picture of what it was up to exceptionally difficult by segregating its multi-prong funding into a dizzying array of spread sheets. Nonetheless, a few things jump off the pages. On the spread sheet for the Primary Dealer Credit Facility (a program to provide overnight loans to key brokerage firms, known as primary dealers because they assist the Fed in open market operations) are astronomical sums that Citigroup, Morgan Stanley and Merrill Lynch were drawing from the Fed on a regular basis from the Spring of 2008 to the Spring of 2009 (and potentially well beyond). The three firms borrowed almost equal sums which cumulatively totaled over $6 trillion, and that does not include their borrowing from other Fed facilities. In its current release the Fed cut off these data as of May 12, 2009 while the program lasted until February 1, 2010, making the full extent of this funding unknown at present. Calls to the Fed on this point had not been answered at CounterPunch’s press time.
Citigroup owns one of the largest commercial banks in the country, Citibank. One could reason that the bank’s solvency had come under serious question at that time and it needed massive liquidity to meet depositor withdrawals from its bank as well as to fund its $2 trillion balance sheet (with another $1 trillion in off-balance-sheet vehicles). Why Morgan Stanley and Merrill Lynch, which are large investment banks and retail brokerage firms, needed funds of this magnitude raises many questions.
Runs on banks, which invest depositor funds in illiquid assets like real estate and corporate loans, are typically met with a government liquidity response. Brokerage firms, on the other hand, hold stocks and bonds which can typically be sold in seconds with the proceeds “settling” (available to pay out) 3 business days later.
Liquidity problems were likely aggravated at Morgan Stanley and Merrill Lynch because they each cater to both institutional clients and retail mom and pop investors. While the mom and pop accounts should have had little trouble cashing out of most stocks, municipal bonds and well known corporate bonds, less liquid securities in institutional accounts may have found their markets frozen for trading and needed interim financing -- this may have included problematic commercial paper positions in some money market funds used by the big brokerage firms for both retail and institutional clients.
This mystery is further intensified by one Fed spread sheet showing that the largest Wall Street firms deposited a total of $2.1 trillion in stocks as collateral in order to obtain liquid funds from the Fed. Depositing stocks as collateral began on the day Lehman died and was done in large size by Lehman Brothers, Morgan Stanley, Merrill Lynch, and Citigroup. Raising additional red flags, tens of billions of dollars in stocks were posted as collateral by the London operations of Morgan, Merrill and Citi.
Was this publicly traded stock from the firms’ proprietary trading desks, otherwise known as the in-house casino? Was it illiquid private equity in which the firms had their money tied up? Was it equity tranches from the dubious Collateralized Debt Obligations (CDOs)? If it was either of the latter, how could it have been properly priced as collateral? The Fed describes the equity as follows: “Securities representing ownership interest in a private corporation….” Without knowing the details of these securities, or the other unspecified junk bonds used as collateral, we don’t know the extent of the trash the Fed was swapping for cash with Wall Street.
Merrill Lynch was rescued in a buyout by Bank of America on September 15, 2008, the same day that Lehman Brothers filed bankruptcy.
The Fed risking $9 trillion of taxpayer money to bail out positions of dubious worth is highlighted further in the spread sheet for the Commercial Paper Funding Facility, which loaned $38 billion more than TARP, or a total of $738 billion to fund not just U.S. corporations but foreign banks as well, potentially because they were ensnarled in Wall Street’s off-balance-sheet funding schemes. Most alarming, a significant portion of this went to conduits that hide liabilities of Wall Street firms off their balance sheets, leaving Wall Street short of capital for emergencies just like this one, and shareholders in the dark about the true risk of the company’s balance sheet.
The Commercial Paper Funding Facility was announced by the Fed on October 7, 2008, 3 weeks after Lehman Brothers filed for bankruptcy. Its first funding day was October 27, 2008 and its last funding day was January 25, 2010. One of the borrowers on both its first day and last day of funding and many days in between was an entity called Hudson Castle, whose cumulative borrowings were over $50 billion from the Fed for commercial paper it sponsored for three off-balance-sheet conduits: Belmont Funding LLC, Ebbets Funding LLC, and Elysian Funding LLC.
On April 12 of this year, Louise Story and Eric Dash, writing for the New York Times, reported that while Hudson Castle was set up to appear to be an independent business, its board was controlled by Lehman; Lehman owned a quarter of the firm; and it was staffed with former Lehman employees. The reporters had gotten their hands on an internal 2001 Lehman memo indicating that the arrangement would maximize Lehman’s control over Hudson Castle “without jeopardizing the off-balance-sheet accounting treatment.” The memo noted further that Lehman would serve “as the internal and external ‘gatekeeper’ for all business activities conducted by the firm.” The internal document was authored by Kyle Miller, who worked at Lehman at the time but went over to Hudson Castle to become its president. According to the article, until 2004, Lehman had an exclusivity agreement with Hudson Castle, but the deal ended in 2004, with Lehman reducing its board seats from five to one.
Lehman was far from alone in having employees leave to set up conduits which conveniently benefited their former Wall Street employer by moving debt off the balance sheet. It was the norm, not the exception.
A July 2010 staff report from the Federal Reserve Bank of New York, titled “Shadow Banking,” noted the following about the shadow system in which conduits played a significant role:
Obama is only pro-choice on abortion and infanticide. On everything else, there is no choice, from the car you drive to the food on your plate to education. Failure is a feature, not a bug, of public schools. Keep the public dumb. Needy. Wanting more government that Democrats are only all too willing to provide. Voucher systems have been successful wherever they have been honestly tried. Which is why the Democrats have killed such programs. What the MSM has done its best to do is to lose this down the memory hole, and the above CNN clip is emblematic of that, as it is an utterly shameful act by Obama and Congressional Democrats in deep-sixing the successful voucher program in D.C., dooming 1,800 low-income mostly black students to one of the worst educational systems in the country (the worst is DPS -Detroit Public Schools, which I have bogged about ad infinitum here):Education secretary Arne Duncan referred to DC public schools as a district with “more money than God.” More than $28,000 per student. Failing miserably. The only success in that district was a voucher program that Obama attacked, even though vouchers cost a quarter (that's right - 25%) of the $28,000 number and helped the students. Should Obama get his head screwed on straight (good luck with that one), he will announce today to all students that since vouchers have been a smashing success in D.C., proved by concrete educational data, they should be a smashing success elsewhere. I mean -wouldn't that be a move to "restore scientific integrity in governmental decision making?" Especially since vouchers are proven to help students and drive down costs?
- It's official: Democrats kill successful DC voucher program, resegregate DC Public Schools
- After hiding the data and dumping the successful DC voucher program, the only thing Obama should tell students today is "I'm sorry"
- Freep: Public Schools Are Crap - Let's Remold It!
- Detroit News: DPS FAIL!!!
- Vouchers vs. D.C. public schools
- WaPo: Voucher Subterfuge
But that is not what anyone will hear. That's because Obama and his administration hid data indicating the program's successful educational results as they pushed Congressional Democrats to scrap the program. After all, they have the teachers unions to protect. The WSJ published an article a while back about the shenanigans:It's bad enough that Democrats are killing a program that parents love and is closing the achievement gap between poor minorities and whites. But as scandalous is that the Education Department almost certainly knew the results of this evaluation for months.
Voucher recipients were tested last spring. The scores were analyzed in the late summer and early fall, and in November preliminary results were presented to a team of advisers who work with the Education Department to produce the annual evaluation. Since Education officials are intimately involved in this process, they had to know what was in this evaluation even as Democrats passed (and Mr. Obama signed) language that ends the program after next year.
Opponents of school choice for poor children have long claimed they'd support vouchers if there was evidence that they work. While running for President last year, Mr. Obama told the Milwaukee Journal-Sentinel that if he saw more proof that they were successful, he would "not allow my predisposition to stand in the way of making sure that our kids can learn . . . You do what works for the kids." Except, apparently, when what works is opposed by unions.
Mr. Duncan's office spurned our repeated calls and emails asking what and when he and his aides knew about these results. We do know the Administration prohibited anyone involved with the evaluation from discussing it publicly. You'd think we were talking about nuclear secrets, not about a taxpayer-funded pilot program. A reasonable conclusion is that Mr. Duncan's department didn't want proof of voucher success to interfere with Senator Dick Durbin's campaign to kill vouchers at the behest of the teachers unions.The decision to let 1,700 poor kids get tossed from private schools is a moral disgrace. It also exposes the ugly politics that lies beneath union and liberal efforts across the country to undermine mayoral control, charter schools, vouchers or any reform that threatens their monopoly over public education dollars and jobs. The Sheldon Silver-Dick Durbin Democrats aren't worried that school choice doesn't work. They're worried that it does, and if Messrs. Obama and Duncan want to succeed as reformers they need to say so consistently.Ouch. Read the whole thing as it is a very worthy read. There's more and it is equally devastating. There is not enough shame to be heaped on the heads of Democrats for this obscenity of a decision. In Arizona, the school choice program there has been targeted for termination as well: Video: Arizona School Choice Fight Goes to U.S. Supreme Court
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