Federal Reserve

Break Up Bank of America Before it Breaks Us

Mary Bottari — Wed, 21 Dec 2011 12:33:47 -0500

On Monday, Bank of America (BofA) stocks briefly traded for under $5. Yes, you could buy a share of BofA for less than the noxious debit card fee they tried to force down your throat.

BofA is massive, with assets equivalent to 15 percent of U.S. GDP. So why is it trading for the price of a latte?

Because Wall Street's dirty little secret is that BofA is a zombie bank. Now the reek is getting too strong to ignore.

The Most Dangerous Bank In America?

In 2008-2009, BofA publicly took $45 billion in TARP bailout funds and secretly took another $91 billion in emergency Federal Reserve loans. According to Bloomberg News, it made $1.5 billion in profits off of those loans. Yet, several analysts predict that BofA is woefully short of capital reserves.

A recent study by NYU's Stern School of Business ranks BofA as the most systemically risky firm in the United States. These analysts use public information and focus on the capital shortfall that would be experienced by the bank in the event of another crisis. BofA's weak condition means it is in a position to "create or extend" such a crisis.

As if this were not enough, recent news reports indicate that BofA is trying to move $22 trillion in derivatives out of its Merrill Lynch subsidiary into its FDIC-insured bank. The Fed favors the move (naturally). The FDIC, which provides insurance to depositors if a bank fails, does not.

In this pile of derivatives could be all sorts of problems, including bad European debt, the same kind of debt that brought down Jon Corzine's derivatives firm, MF Global. Taxpayers don't backstop MF Global. We do backstop BofA through the FDIC and the Fed.

Obama Promised to End the Era of Big Bank Bailouts

While public rage focused on the $700 billion TARP bailout bill at the height of the crisis, we have learned that far more went out the door from the Fed to aid the big banks. The Center for Media and Democracy tallies the bailout at $4.7 trillion under 35 federal programs. Bloomberg News puts the number closer to $7.7 trillion in loans plus guarantees, which generated $13 billion in profits for the banks.

With European Union countries teetering on the verge of default and no resolution in sight, the U.S. government needs to take decisive action to prevent another bailout of a major American firm - a move sure to generate explosive controversy in an election year.

When President Obama signed the Dodd-Frank Wall Street reform bill in 2010, he promised: "It will end taxpayer bailouts of Wall Street firms."

Yet, the "resolution authority" included in the Dodd-Frank Wall Street reform bill requires a joint decision by a group of bank regulators to break up a systemically risky institution. Unfortunately, bank regulators like Tim Geithner and Ben Bernanke, strongly prefer zero accountability and unlimited bailouts.

Time for a Redo

While some on Wall Street frame the financial crisis as events of the distant past, the 99% understand that the crisis hasn't ended for millions of Americans out of work. It hasn't ended for small businesses who can't get credit. It hasn't ended for the millions of Americans facing foreclosure. And now we learn that a new bailout of BofA could be in the works.

We learned from Ron Suskind's new book Confidence Men that President Obama ordered the breakup of Citibank at the height of the crisis, but was stonewalled by Tim Geithner. The President's instincts were good. Now he has an opportunity for a redo.

Most American's have had it with bailouts of the big banks on Wall Street when so little has been done for Main Street.   Banks that are "too big to fail" are too big to exist.

Tell President Obama it's time to break up Bank of America before it breaks us.

The Greatest Hoax in the History of Money: The Fed, the Banks, the Lies

Richard Eskow — Thu, 01 Dec 2011 22:14:34 -0500

It took the journalists at Bloomberg News two years - and presumably lots of legal fees - to pry information out of the Federal Reserve that should have been made public long ago. We now know that the Fed's secret $7.7 trillion lending program wasn't just the most massive bank bailout ever seen, and it wasn't just free money for mega-bankers - though it was certainly both of those things. It was also the greatest hoax in stock market history.

No, scratch that. It was the greatest hoax in the history of money. And it was built on lies. How many? Let us count the ways.

Here's the first one: The banks paid back all the money back that they were given. No, they didn't. They paid back the principal on these loans. But by obtaining loans at rates far below market value, we now know they received the equivalent of $13 billion in cash giveaways.

Here's another lie: Fed economists support a free-market economy.

Ben Bernanke is a conservative economist who claims to support a free-market system. But we now know that the Federal Reserve lent astonishing sums to US banks in secret, and Bernanke fought with all the resources at his disposal to ensure that this information didn't become public. He didn't just want it to be held back to avoid a panic during the crisis. He wanted it kept secret forever.

I don't know what you call somebody like that, but I know what you don't call him: A capitalist. Free markets need transparency, so that investors and customers can make informed decisions and 'the wisdom of the market' can prevail. Nobody wanted the market to do its job. When it came to banks, they wanted it to be blind, deaf, and dumb, unable to make sound judgments about their financial soundness.

They still want it that way. They don't want investors to know how badly Wall Street executives failed at their jobs. They don't want the free market to do what it does best - thin the herd so it's free of incompetent managers like the executives who still run our largest banks.

You can believe in the free market, ur you can believe in today's Wall Street. But you can't do both.

Here's another lie, one that's spread by Dimon and others: Giant banks are more efficient. Size brings efficiency in other kinds of business, but these banks needed massive help. America's six largest banks accounted on any given day for an average of 63 percent of the debt on these loans. The only thing they're more efficient at is wringing free money out of government-created institutions.

And, wow. Jamie Dimon sure is a hypocrite. As Bloomberg noted:

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed's Term Auction Facility "at the request of the Federal Reserve to help motivate others to use the system." He didn't say that the New York-based bank's total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program's creation.

He also didn't mention that these favorable loans gave his bank nearly half a billion dollars in cash it otherwise wouldn't have had. Know what's convenient about that? It helps make up for the three-quarters of a billion Dimon's bank gave up to settle charges of bribery and corruption in Jefferson County, Alabama.

Chase borrowed massive sums of money, either because it was in bigger trouble than it has admitted or because it was bleeding an emergency public program out of greed. Either way, they weren't doing anybody a favor except themselves. How big a favor? Chase netted $457.9 million.

Citigroup's an even more extreme example. Once our largest bank (until continued mismanagement led to ongoing shrinkage). It only exists because Robert Rubin and other officials in the Clinton Administration,cleared the way for the largest merger in history with the enthusiastic support of the Republicans. That merger combined a bank with an insurance company, a harbinger of bad things to come in the risk area.

Citigroup's got the equivalent of a $1.8 billion gift, courtesy of Uncle Sam.

Bank of America CEO Brian Moynihan sneers at his critics, especially those who think you shouldn't foreclose on families without obtaining proof that you own their mortgage. "Oh, sure," he said in response to government demands, "we'll do our homework."

Bank of America's gift came to $1.5 billion.

Goldman Sachs shouldn't have been eligible for any Fed giveaways because it wasn't a commercial bank. But a special "waiver" allowed Goldman allowed to become commercial bank so it could be rescued from actions it took before it was a commercial bank. Before that it was an investment bank. Yet, strangely, it seems to have kept operating as an investment bank even after the transition, too, even though commercial banks aren't allowed to do that.

Understand that? Don't take it personally if you don't. You're not supposed.

Goldman Sachs's take? Just under $1 billion.

Washington's always telling us that bankers may have done naughty things, but they weren't illegal things. That gets us to our next lie: There's no evidence that bank executives have committed crimes. Thanks to Massachusetts Attorney General Martha Coakley, we may be about to discover whether that's true regarding foreclosures and mortgage filings. But when it comes to stock fraud, the evidence is already piling up.

The Federal Reserve and the US government may have stopped believing in the free market, but the law hasn't. It's a crime to deceive investors about the financial condition of your business, either by lying or by failing to provide the right information. Eliot Spitzer, who knows a thing or two about prosecuting financial crimes, hit the nail on the head when heasked: "where are the inquiries into the false statements made by the bank CEOs? And where are the inquiries about the Fed and Treasury officials who stood by silently as bank representatives made claims that were false, misleading, or worse?"

(Spitzer also proposes a five-point action plan that should be implemented immediately. His piece is well worth a read.)

How about this fib? The media's done a good job reporting on the banks. There's some great reporting going on out there -- Bloomberg, ProPublica, the Huffington Post, the Nation, the New York Times - but they're the exceptions.

Television's still a wasteland most of the time. Are you as sick of the "we got all the money back" line as I am? CNN personality Erin Burnett infamously used it to make an Occupy Wall Street demonstrator look stupid. But the reason he didn't know that because it isn't true. Banks paid back the principal but got a freebie from the interest. That's real money - billions of dollars of it.

You know that. I know that. But Erin Burnett, CNN financial reporter, doesn't seem to know that.

We're not condemning all television. Scott Pelley did a great report about homelessness on 60 Minutes just last week. But most channels haven't found the time to fully or accurately report on the enormity of this secret loan program. They've pretty much taken a pass on what, barring some ancient event I'm forgetting, is the greatest financial hoax in history.

And while we're on the topic of Occupy, let's thanking them for the fact we'll probably never hear this next lie again: "Wall Street and Main Street rise and fall together." Banks got massive giveaways. And despite their recent credit downgrade they're doing fine, thank you very much. The rest of the country? Not so much. In fact, let's do a quick inventory:

Robert Rubin made an estimated $155 million during his tenure at Citigroup.

One in four mortgages in this country is still underwater.

Brian Moynihan at Bank of America got promoted, then made that 'homework' wisecrack.

Twenty-four million Americans are un- or under-employed, including record numbers of young people and African-Americans.

The CEO of Goldman Sachs , Lloyd Blankfein, still has his job.

Poverty has soared to record levels since the financial crisis.

Erin Burnett, who made fun of a young demonstrator for not being aware of the misinformation she had repeated, still has an evening news program on CNN. She is engaged to be married to a Citigroup executive.

College graduates' unemployment rate rose last month, while the total amount of student loan debt in the United States is now greater than the total amount of credit card debt.

Jamie Dimon made a second career out of complaining that bankers are being unfairly criticized, even as Chase became the largest bank in the United States - and the world.

Jefferson County, Alabama, where Chase was forced to settle charges of bribing local officials, recently declared bankruptcy.

What That Exposé of the Fed's Secret Bailout Told Us ... And What It Didn't

Richard Eskow — Thu, 25 Aug 2011 14:41:36 -0400

We've just learned about the Federal Reserve's extraordinary secret bailout of the country's big banks. We now know that the TARP bailout program was only the tip of the iceberg, and that financial institutions received a total of $1.2 trillion in loans and other funds while the rest of the country was left to struggle for economic survival.

We also know that, despite all that "we got our money back" rhetoric, these loans represent a cash giveaway to the banks that totals up to tens of billions of dollars - while homeowners and student loan borrowers continue to struggle.

Here's what we now know about this secret bailout, thanks to a Bloomberg report, along with what we already knew - and what we still don't know:

We now know that the 10 biggest banks in America received $669 billion in emergency loans from the Fed.

We already knew that the same 10 banks now own 77% of the country's banking assets, more than before the crisis, making them even more "too big to fail" than ever.

We now know that the low interest rates they received were, in fact, a massive transfusion of cash - courtesy of the American taxpayer -just like TARP. Whenever Tim Geithner or Ben Bernanke says "We've got all our money back," they're distracting you from the real point. These banks received short-term loans at 1.1%, instead of the prevailing 3.8%.

That means each bank received a gift of $27 million each - tax-free, no less - for every billion they received under that particular program.

We already knew that the banks have not been asked to write down any of the principal on underwater homes, even though their industry spent decades persuading homeowners that real estate was a foolproof investment - and even though they often hired adjusters who inflated the estimated value of those homes.

We now know that the American taxpayer was asked to rescue failing businesses without being given any of the concessions any other lender or investor would have been demanded -- like replacing the failed executives who ruined the enterprise, ending the practices that brought down the corporation (and the economy), or ensuring that the lender (who is also a customer) be treated fairly in all future business dealings.

We already knew that they've refused to refinance most homeowners, even though underwater homes are arguably more reliable than some of the collateral the Fed accepted when it rescued Wall Street. At the peak of the crisis it agreed to accept junk bonds and essentially worthless stocks in return for a trillion in loans - and tens of billions in giveaways.

We now know that the total amount of this secret bailout is $1.2 trillion - which, as Bloomberg's investigative journalists observe, is roughly the same amount that's owed on delinquent and foreclosed mortgages.

We already knew that the nation's homeowners owe banks between $750 billion and $1 trillion in loans for nonexistent home value, since that's the estimated difference between what people owe on their mortgages and what their homes are currently worth. Banks have never been asked to write down the principal for loans, even though they fueled the housing bubble and frequently knew (or should have known) that estimated home values were exaggerated.

We now know that Jamie Dimon's JPMorgan Chase received $48 billion in direct emergency loans, and that it also benefited from the $107.3 billion in loans given to Morgan Stanley. It did this while it was bragging about its "fortress balance sheet" and its financial invincibility - no less than 16 times, according to Bloomberg. We also know that it kept taking these loans a year later, which means it was lying when it said it took these loans merely to convince other banks to do the same, out of patriotic duty.

We already knew that Dimon and JPM made the same claim about the TARP funds they received, so that was a bogus claim too. And we also knew that Dimon has thrown public tantrums about the criticism directed toward his profession ("Bankers! Bankers! Bankers!") even though he knew about these loans.

We now know that the amount lent to these banks exceeded their total earnings for the entire decade!

We already knew that the Dodd/Frank bill did not reinstitute the Glass-Steagall Act and did not include a "too big to fail" provision.

We know now that, in the words of the Bloomberg report, "Even as the firms asserted in news releases or earnings that they had ample cash they drew Fed funding in secret, avoiding the stigma of weakness."

We already knew that there have been no indictments of senior Wall Street executives, despite abundant evidence of criminality, and that many cases of stock fraud have been settled with no convictions and relatively small cash settlements. Those settlements are paid by the very same investors who were defrauded, not by the executives who defrauded them.

We now know that America's banks, which were too mismanaged to receive credit from any reputable institution, received massive loans - even though the only collateral they provided was pretty much worthless at that point.

We already knew that these shaky enterprises depend on the kindness of strangers - in Washington and certain Attorney General's offices around the country - to protect them from the consequences of their own illegal behavior. That strategy's worked pretty well for them so far, to the detriment of the nation and the global economy.

_________________________________

As for what we don't know yet -- well, as Donald Rumsfeld said, there are the "known unknowns" and the "unknown unknowns." (Or whatever the hell he said -- you get the point.) Here are three "known unknowns":

Did JPMorgan Chase lie to investors when it bragged about its rock-solid balance sheet, or did it take emergency loans it didn't need in order to bilk the taxpayer?

It's a crime to lie to investors about your own balance sheets, so how many bankers committed stock fraud by taking these loans, failing to disclose them, and making false statements about their own bank's financial stability?

Why did the Federal Reserve and the government demand secrecy for these loans and fight so hard to prevent them from being exposed? If they wanted to maintain confidence in the banks and prevent a panic, have they decided where to draw the line between protecting the economy and deceiving the public? (f they have, they've drawn it in the wrong place.)

How much outrage is required before people demand rigorous bank reform, strong regulation, and criminal investigations?

I gotta tell ya - it's that last question that keeps me up at night.
___________________

We discussed this issue the other day on Thom Hartmann's "The Big Picture." The video is here.

That Secret Federal Reserve Bailout: A Conversation with Thom Hartmann [VIDEO]

Richard Eskow — Thu, 25 Aug 2011 14:30:24 -0400

The other day we had an interesting discussion of that secret Fed bailout on Thom Hartmann's TV program, The Big Picture. Here's the video.

Fedspeak as a Second Language: What the Federal Reserve Really Said Today

Richard Eskow — Tue, 09 Aug 2011 16:30:53 -0400

Aspiring journalists are often advised to become multilingual so they can cover more stories. That's why I'm prepared to offer the first summer program in Federal Reserve as a Second Language ... once anybody turns up who can really understand it. Any attempt to translate the Fed's latest announcement could wind up sounding like the Hungarian/English phrasebook in that old Monty Python sketch, the one where the customer tells the shopkeeper, "My hovercraft is full of eels."

The gist of the Fed's statement today was this: "We're surprised that things are this bad and we realize we were wrong, but we have no immediate plans to change anything. (Although we might - someday)." The Fed then added: "We're failing at the jobs part of our dual mission ... and we expect to keep failing for a long time to come."

Markets rebounded at the news.

The Fed's done a lot of unusual things in the last couple of years. It has used public communication to manipulate markets in unprecedented ways. It has bought up extraordinary assets, dropped its rates to zero, flooded banks with rescue money, and even allowed companies that weren't banks to become banks so they could be rescued. (Goldman Sachs to The American Taxpayer: Hey, thanks, folks! I owe ya one!)

That's why it's surprising and disappointing that none of the Fed's innovations have been directed at the ongoing crises of unemployment, wage stagnation, and consumer spending. They're the root causes of the problems that seem to keep the Fed perpetually perplexed and disappointed.

Simultaneous Translation

We've got our phrasebook in hand. Let's get to work.

When the Fed says growth is "considerably weaker" than expected, rather than "somewhat weaker." it means: Things have really gone to hell. When it says there's "deteroriation" in the labor market where once it was merely "weaker than expected," they mean: Holy crap! And when it says the housing sector "remains depressed" the Committee means: You don't need a realtor, Mr. and Ms. Homeowner, you need an arsonist.

What about jobs?

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability."

Translation: A lot of times we forget to even mention this part of our job. See? We mentioned it!

"The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate."

Translation: We got it wrong, and things are worse than we thought. But we're not going to do anything about it, so we'll be failing at this part of our job for a long, long time.

And the monetary outlook?

"... the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent ... The Committee currently anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

Translation: These zero and zero-ish rates were supposed to be an emergency measure to rescue the banking system in 2008. But we've decided to keep it on life support for a long time to come. That hasn't created any jobs, and we're sorry about that, but it should inflate the market a bit."

"The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability."

Translation: We talked about a lot of things we could do ... and aren't doing right now.

"It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate."

Translation: The greatest jobs crisis in a generation doesn't call for pulling out every tool in the tool box.

But if this isn't the time to do everything you can, when will it be the right time? If that's your thinking, then what does "as appropriate" really mean? That's easy to translate. For the millions of people who can't find work or are struggling to pay their bills, it means Your hovercraft is full of eels.

What could the Fed do?

We're constantly being told that the Federal Reserve is limited in its ability to respond to the ongoing crisis. But we didn't hear that kind of talk in 2008, and there's nothing in the Fed's charter that precludes it from taking more aggressive and innovative action. What could the Fed do?

Joseph Gagnon at the Peterson Institute of International Economics has some smart suggestions.for action the Administration - and the Fed - can take the need to ask permission from the obstructionists in Congress. Gagnon proposes an aggressive third round of quantitative easing, accompanied by "a clear statement that more is forthcoming if the economy continues to underperform." A a small additional step, the Fed could stop paying interest on the reserves it holds. While this wouldn't have a dramatic effect, it would remove an incentive for not lending money.

Gagnon also proposes that the Administration use its control over Fannie and Freddie to aggressively provide debt relief to homeowners. (The Administration's own program, which is limited to distressed mortgages, continues to be a disaster.)

There's more that the Fed could do if it really wanted to fulfill its dual mandate. It could link those zero-interest rates to consumer debt relief, especially for underwater loans. It could build the framework for an infrastructure development lending program.

Once the translating's done, the Fed sounds like nothing so much as a world-weary cop trying to keep the frightened citizenry away from the scene of a disaster. The Committee's members are trying to reassure everybody that things will be fine. They'e saying everything's under control., when they really don't know that for sure. They're saying Move along, folks. There's nothing to see here.

But like any crowd that's witnessed a disaster, everybody watching knows that's not true.

Shipwreck!

Richard Eskow — Fri, 05 Aug 2011 17:19:44 -0400

It's beginning to look like there's an economic shipwreck dead ahead. That plunging stock market is the wealthy passengers, trampling the children as they rush headlong toward the lifeboats. The nation's capital, the bridge of our ship of state, lies abandoned.

The officers have gone to their quarters, the wheel's left unattended, and nobody's trying to turn the ship around. If you're not sounding the alarm, you aren't paying attention. And it looks like a lot of people aren't paying attention.

Rough seas

Sure, this month's jobs report is slightly better than the last couple of months, but that just means the drowning passengers are a couple of inches closer to the surface. That's not much comfort to them, since they're still drowning, but it seems to cheer up the ship's officers. Now that Congress has concluded its debt-ceiling deal they've all gone home.

The President's economic advisor, Austan Goolsbee, is plaintively whispering the words "unemployment insurance" to their receding backs, but it wasn't important enough to be included in the deal. And the "bipartisan" mantra forced Goolsbee to mention two free-trade deals in the same breath. That's like throwing a brick to a drowning sailor, rather than a life preserver.

Of course, the jobs figures would be heartening if they meant that things were moving in the right direction. But there's no reason to believe they are. Real unemployment, as opposed to the official number, is still devastating. Today's improved numbers aren't nearly enough to make up for increases in the work force, much less to make a dent in real unemployment. And the misguided debt deal is about to cost us millions more jobs.

The illusion of good news is actually a problem, since it relieves our leaders of the political pressure that's needed before they stir themselves into anything resembling action.

Scrambling for the lifeboats

The rest of our little ship's in equally lousy shape. We had the worst run of stock prices since the worst of the crisis in 2008. It has looked perilously like a new disaster several times during the course of the week. And we're not in the clear yet. The market rebounded slightly, but it's still way down. The waves are crashing over the stern, and European instability could bring on another crisis at any time.

Investors understand that the debt-ceiling deal makes new spending on jobs and growth more difficult, and yet doesn't do much to stabilize the government's finances, so they're convinced things are going to be grim for the foreseeable future. In fact, it's gotten so ugly that high-dollar corporate investors are hoarding cash rather than investing the money. That's putting a strain on banks, who have to insure their deposits. One bank has already started charging its clients for keeping large amounts of cash in their bank accounts.

What's next - a 2% surcharge for paying cash rather than using a credit card? (Ssshh. Don't give them any ideas.)

Investors aren't convinced that the government has solved its own deficit problems. And it hasn't. The best way to stabilize the government's finances is by taxing the wealthy at more normal levels, investing in growth, and then addressing spending issues once people are back at work and a) paying taxes and b) not in need of government help.

Down in the fo'c'sle

The real misery isn't in the captain's quarters, of course. It's down in the fo'c'sle, that forward part of the ship where the ordinary sailors live and work. That's also the part of the ship that hits an iceberg first. That's where unemployment is deep and ongoing, where middle class families have lost most of their wealth, and where those in need are about to face devastating cuts.

What can be done? The Federal Reserve could step in right now and make more cash available. It could create a fund to be used for specific types of lending. The Fed did a lot of unconventional things in 2008, after all, including a quick legal maneuver that allowed Goldman Sachs to be treated as a bank. Where there's a political will, there's a way.

So why can't the Fed do some new unconventional things in order to meet its other mandate -- the one that says it needs to keep unemployment low? Or it could act more conventionally, as Dean Baker suggests, by raising inflation and easing some of the crushing debt faced by homeowners. Why doesn't it do any of these things? Because the reverse is also true: Where there's no political way, there's no way. Remember that when the talking heads tell you that Ben Bernanke's hands are tied. It's not true.

Thar she blows!

Jamie Dimon, CEO of JPMorgan Chase, said it more plainly than anyone else. He patronizingly told the country that he explained to his tiny daughter that financial crises are something that happens every five to seven years - and, he no doubt added, "only to other people.' Their lifeboat is secure and ready. How's yours?

Five-to-seven year cycles are pretty much the norm in under-regulated banking economies like the one Dimon and others are successfully fighting to retain. On our economic ship, most of us are merely ballast. And since the last crisis was three years ago, wwe're likely to be deep in the middle of this ongoing jobs and housing crisis when the next wave hits. And instability around the world is making it seem as if that next crisis could come earlier than expected - perhaps much earlier.

We should have all hands on deck right now, repairing this economic wreck and fortifying ourselves for the coming threat. But the government has turned the wheel into the storm, gone below decks for a drink, and decided to hope for the best. We're headed into the teeth of a disaster, and the soft murmurs of the political class are nothing more than the sound of the orchestra playing "Nearer My God to Thee."

Bernankemania! Empty Golden Words From the Temple's High Priest

Richard Eskow — Wed, 27 Apr 2011 23:51:48 -0400

Ben Bernanke's voice has been known to put humans into a trance even under the best of circumstances, and I was under the influence of a fever and some cold medications. Still, other observers reported a similar reaction to my own. The Fed Chair's press conference felt like a sensory deprivation tank, but with extra-credit math questions.

Was Mr. Bernanke calm? Put it this way: I watched the video feed for several minutes before I realized it wasn't a photograph. A lizard can stay motionless for so long, you start wondering if it's real. It was like that. Then Bernanke turned his head, and I got the same feeling you get when the lizard finally blinks.

That's the Robitussin talking, not me.

Bernanke needed to do two things today: First, he needed to avoid making a careless remark that would roil the world's markets and set off a panic. Mission accomplished. And to avoid excessive scrutiny, he needed to be as placid and boring as possible. He might have overshot the mark on that one.

How did he do it? Perhaps he mastered the serene "void" mind of Japanese swordsmanship from The Book of Five Rings. Or maybe he dropped a lot of downers. Either way, it was especially hilarious to read this afterwards: Sarah Palin says the White House released Obama's long-form birth certificate this morning to "distract you" from Bernanke's appearance. Right. Because otherwise everybody would be glued to their sets, hypnotized by his performance, transfixed and motionless ...

... like lizards.

If only Bernanke had offered a glimpse of hope for the millions of Americans battered economically since he assumed leadership of the Fed. If only he had made the case for jobs. If only. But he didn't, and that's tragic.

That's not the Robitussin talking. That's me.

Master of the Temple

The Federal Reserve's been called the Temple ever since William Greider popularized the term in his 1989 book, Secrets of the Temple, which is still a must-read. (It's available at fine booksellers everywhere - which is to say, you can buy it online). Although this secretive institution was created by a democratically elected Congress, it has presided over our economic fate without public accountability ever since.

Yes, the Fed chair made a public appearance today. As the High Priest of his temple, it's his job to ensure that the public doesn't lose faith in its power. They could. They keep offering sacrifices, and there's still no sign of rain. And that's attracting attention to the Fed's secrecy and lack of accountability. So, like any good temple priest from ancient times, Mr. Bernanke reasserted his air of authority by mumbling in an archaic language understood only by his fellow initiates.

Yes, this was the first press conference ever given by a Fed chair. That means Bernanke managed to give the appearance of being less secretive by holding an event which, as many observers noted, managed to be both historic and boring at the same time.

The Many Moods of Ben Bernanke

But it wasn't really boring, if you were listening carefully. Uninformative? Pretty much. Disappointing? Yeah. But it was fascinating to watch a smart guy not communicate so effectively. And he didn't do it by saying too little. He did it by saying too much.

And by adopting a lot of different personas (personae). Instead of one Ben Bernanke, we got a whole roomful: Bernanke the Job Creator, Bernanke the Budget Cutter, Bernanke the Activist, Bernanke the Fatalist ... He used some sort of "identity easing" to increase the Bernanke supply, then hid in a flock of decoy selves.

So how can you tell which one's the real Bernanke? By paying attention to at what gets done, not what gets said.

Golden Words

Bernanke did offer some golden words, however - literally. The price of gold soared after his press conference. Let's hope Mr. Bernanke's Things To Do list for today didn't include "Build confidence in the dollar."

But Bernanke never said the words that might have improved the economy and helped a lot of people. He came close. He almost said we need a strong job-creation policy. But then, he almost said lots of things.

And while it was good of him to be so "transparent" and all, it would have been even better if he hadn't first waged a two-year battle to keep the Fed's discount lending a secret - and if it hadn't taken a court order to get them released.

Where are the jobs?

Bernanke indicated that the Fed's "quantitative easing" policy - buying up tons of government bonds to increase the money supply and cool inflation - was coming to an end. A reporter asked, should you really do that with unemployment near 9%? Another asked, why is the public so dissatisfied?

A cloud of phantom Bernankes arose in response. Jobs are important, said one. Jobs are part of our dual mandate, another agreed. But policies to address long-term unemployment are outside of our mission, frowned another. Yes, another agreed, nodding sadly. Unfortunately, we're a macroeconomic institution.

One of the Bernankes appeared to be struggling to say something - something important. Yes, yes, we whispered. Say it! Say, "Quantitative easing and discount windows can only help the entire economy when they're accompanied by government policies which require the banks to use the advantages they bring in an economically constructive way."

But that Ben Bernanke fell silent. Then he shivered, grew translucent, and faded from sight. Another Bernanke spoke in his place. Strategies for addressing long-term unemployment were, he said, "out of the scope of the Fed."

Enter the Hawk

But that "outside our scope" language evaporated quickly when budget deficits came up. All of a sudden, policy-shy Ben was replaced by policy arm-twister Ben. Those politicians better shape up, this shadow growled, or there'll be hell to pay.

A question about Standard & Poor's recent threat to downgrade the US government's credit (they were never that aggressive about mortgage-backed securities, were they?) brought out Bernanke's inner Deficit Hawk. He was "hopeful" the report will "provide one more incentive to address this problem," he said. "It's the most important economic problem this nation faces."

("Most important problem"? Better make that "dual mandate" one-and-a-half mandates instead. Sayonara, jobs!)

Bernanke added that it's "encouraging that we're seeing efforts on both sides of this aisle ... We're still a long way from a solution, but I think it's of highest importance that our political leaders address this problem ..."

(Sorry, jobs, but that clinches it: Fed Chairs may date mandates like you, but they always marry the other kind.)

In other non-news, Bernanke said that many of our current economic woes were driven by fuel prices, which the Fed doesn't control. Which is true ... sorta. The Fed does influence the value of the dollar, which in turn affects prices for commodities like oil. On the other hand, a lower dollar should help jobs and economic growth at home ... especially if it's accompanied by aggressive job creation policies.

So why not push for better jobs policies? Because Shy Ben comes out when jobs are mentioned. Tough Ben only appears when the topic is deficits.

Lip service

Bernanke didn't say today, nor has he ever said, that the real bubble that shattered the economy was really a credit bubble (to use Barry Ritholz's term), not a housing bubble. He didn't acknowledge that the models and assumptions that have guided US monetary policy for a generation were disproved by the events of the last three years. And he won't. He can't - not without questioning this entire career. And that would take real courage and wisdom. I thought he might have that in him. Guess not.

Bernanke could have said that the deficit must be addressed, but that the best way to do that is by starting with an aggressive program that puts people back to work, expands the economy, and then provides a strong foundation for addressing government deficits. He didn't say that.

Sure, he gave a lot of lip service to the Fed's jobs charter - finally. For two years he barely mentioned it, but today he actually used the phrase "dual mandate" - twice! That's good news ... if you think that golden words can create jobs. Otherwise its reasonable to assume that Bernanke wanted to look concerned about jobs, without actually doing anything more about them.

A Ben for all seasons

The bubble exploded and shattered on Bernanke's watch. Then the banks feasted off the goodies the Fed gave them, fattening themselves as the rest of the country starved. Bernanke's "quantitative easing" was never accompanied by what might be called "qualitative easing" - targeted policies designed to ensure that some of the financial advantages given to banks by the Fed were used to help the overall economy. Nope. And Bernanke still won't tell to the country or its leaders why those policies are needed.

S-sh-sh-sh. That kind of talk makes Tough Ben go away and Shy Ben come out.

It's not about Ben Bernanke in the end, anyway. It's about a broken political system and the economic powers it serves. Under this system, Bernanke's free to lower the interest rate and give American mega-banks billions in near-zero interest loans. And he has. Those banks can then keep his cheap money, refuse to use it constructively, and get rich by bleeding the economy dry instead. And they have.

As long as that behavior is acceptable to leaders in both parties, we'll keep on struggling. The next Ben Bernanke will differ in appearance only. He or she will serve the same banks, make the same mistakes, then offer the same ritual murmurings afterwards. They say that talk is cheap. But this talk distracts us from our most urgent economic problems, and that makes it very expensive talk. So expensive, in fact, that we can't afford it any more.

You could let golden words rain down night and day for a thousand years. You could bury this country in words from coast to coast, words that glittered like gold coins, and it wouldn't matter. Because words aren't coins. Words are words, and coins are coins. And while a few people keep raking in the the coins, the rest of us are still struggling to make change.

What Does Wikileaks have on Bank of America?

Mary Bottari — Thu, 13 Jan 2011 21:55:22 -0500

WikiLeaks founder Julian Assange is promising to unleash a cache of secret documents from the hard drive of a U.S. megabank executive. In 2009, he told Computer World that the bank was Bank of America (BofA). In 2010, he told Forbes that the information was significant enough to "take down a bank or two," but that he needed time to lay out the information in a more user-friendly format.

Recent new reports suggest that BofA is now moving into high gear on damage control, creating a "war room" and buying up hundreds of derogatory Internet domain names including BankofAmericaSucks.com and BrianMoynihanblows.com (BofA's CEO).

Before the big banks start calling for Assange's internment at Guantanamo, the question worth considering is what does Wikileaks have on America's largest bank?

Legal Liability for Toxic Mortgages

BofA is already under the gun, defending itself from multiple lawsuits from private investors as well as Fannie and Freddie demanding that the bank buy back billions worth of toxic mortgages-backed securities. The firm stopped issuing subprime mortgages in 2001, but it kept underwriting subprime mortgage-backed securities for many years. In September 2009, for example, BofA underwrote $239 million worth of securities backed by subprime loans. BofA has reserved $4.4 billion for these "put back" lawsuits. If Assange has emails showing that top executives at BofA knew they were peddling toxic dreck to investors, it would rock the firm and give tremendous ammunition to the army of lawyers already knocking on BofA's door.

Reckless and Illegal Foreclosures

BofA is at the heart of the robo-signing scandal and has wrongfully foreclosed on countless American families. One poor woman returned to a vacation home to find it locked, all her possessions gone -- including the ashes of her late husband. How could such a mistake be made? A BofA employee deposed in February 2010 said that she signed as many as 8,000 foreclosure documents a month without reviewing them, in violation of the law. Mounting questions about the fraudulent and illegal foreclosure practices at the big banks and mortgage service companies prompted BofA to temporarily halt foreclosures nationwide in October 2010. If Wikileaks can document that top BofA officials have a callous disregard for legal processes and constitutionally protected property rights, BofA's mounting legal liability may not be sustainable.

Countrywide Headaches

In 2008, BofA acquired Countrywide, one of the most aggressive and fraudulent lenders during the housing bubble. The result has been a trainwreck of liability and lawsuits for the megabank that now has over 1.3 million customers in foreclosure. To settle the lawsuits with Illinois, California and eight other states over predatory lending, BofA came up with an $8.4 billion loan relief plan for those holding Countrywide mortgages. In June, 2010 BofA paid $108 million to settle a Federal Trade Commission case that charged Countrywide with having extracted excessive fees out of borrowers facing foreclosure. BofA paid $600 million in August 2010 to settle shareholder claims that Countrywide had concealed the riskiness of its lending standards. There is no end in sight for these suits. In June 2010 the State of Illinois sued Countrywide again, this time over racial discrimination in its lending practices. Wikileaks could have further documentation of Countrywide's illegal and reckless underwriting practices or ongoing fraud at BofA.

Taxpayer Paid Bonuses

BofA acquired the brokerage firm Merrill Lynch for $50 billion in January 2009. The U.S. government blessed the merger with a $20 billion bailout loan to aid BofA. After the acquisition went through, it was revealed that Merrill Lynch had lost $15.8 billion in the last quarter of 2008 and that $3.6 billion in bonuses were paid ahead of schedule to top executives at Merrill. Among beneficiaries of the bonus bonanza was Merrill's CEO John Thain, who famously spent a million redecorating his office at the height of the crisis. About the deal New York Attorney General Andrew Cuomo said: "One disturbing question that must be answered is whether Merrill Lynch and Bank of America timed the bonuses in such a way as to force taxpayers to pay for them through the deal funding." If Wikileaks has emails showing top executives knowingly used bailout bucks for bonuses, this ugly chapter in history could be reopened, prompting Congressional investigations and further bailout backlash.

Still Too Big To Fail

In addition to the $25 billion in TARP bailout money and the $20 billion for purchasing Merrill, America recently learned of the extraordinary actions taken by the Federal Reserve to prop up BofA at the height of the crisis, details that were kept secret from the public. When the Fed was forced to release data about its emergency loan programs in December 2010, we found that BofA tapped an estimated $931 billion from the Fed in short term loans and government subsidies. If Wikileaks has information showing that America's biggest bank is only being kept alive by accounting tricks and ongoing government subsidies, the result could be another government bailout. Or is it possible we might see the first orderly dissolution of a of a "too big to fail" under the new Wall Street reform law?

"We Don't Suck"

BofA doesn't just want you to know that their CEO Brian Moynihan doesn't suck, they want you to know that their top staff does not suck either. The bank has started buying damaging domain names for a long list of executives, prompting many to wonder: just what have those executives been up to over there at BofA?

Hopefully Wikileaks and Julian Assange will soon let us know.

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Learn more about America's biggest bank in Sourcewatch.

Quietly Ticking Time Bomb in Fed Data

Mary Bottari — Fri, 10 Dec 2010 13:00:00 -0500

Last week, the Federal Reserve was finally forced by law to release some (not all) of the details of its back-door bailout of the global financial system. The Fed data focuses on the emergency lending programs initiated in 2007/2008, but it also includes data for the Fed’s more recent purchases of mortgage-backed securities (MBS). These later purchases represent the real risk for taxpayers in the Fed’s continuing bailout activities, but have received the least coverage in the mainstream press.

Federal Reserve Efforts Dwarf TARP

The Fed data supports our long-held contention that the Congressionally-approved and much despised $700 billion Troubled Asset Relief Program (TARP) was only a small fraction of the total bailout. By our count, and as we illustrate below below, TARP funds were a mere seven percent of total funds disbursed by federal government to aid the financial sector since 2007. Why does this matter? Because the more we focus on the much-despised TARP, the less we see the invisible hand of the Fed doing the heavy lifting.

Mortgage-Backed Insecurities?

As our next graph shows, the second phase of the bailout is all about housing. The Fed and the U.S. Treasury Department have struggled mightily to keep the housing and mortgage markets from melting down by pumping $300 billion in direct loans into Fannie and Freddie and collectively buying up $1.6 trillion in mortgage-backed securities (MBS) guaranteed by Fannie and Freddie. While Fed emergency loan programs have largely been wound down, these MBS purchases are still on the books.

These MBS purchases represent the most significant intervention in the housing sector in history, yet have not been subject to the scrutiny or oversight to which the TARP has been subject. Why is this a problem? Recent developments suggest these funds could be at risk.

If you read the headlines, you know that banks stand accused of robo-signing mortgages, shredding original mortgages, failing to notarize properly and otherwise breaking or bending the law to feed the Wall Street securitization machine. These problems are only coming to light now because the same banks are rushing to throw Americans out of their homes. As some homeowners fight back in court, more illegal practices are uncovered.

In addition to outright fraud, numerous state Supreme Courts have questioned the legality] of the Mortgage Electronic Registration or "MERS" system. MERS is the mortgage holder of record for 60 percent of U.S. mortgages, yet its legal standing to foreclose on American homeowners is in doubt and its shoddy processing of the promissory notes for millions of mortgages has ramifications for the securitization process as well.

In short, by screwing up the mortgage registration and transfer system, the big banks may have also screwed up the securitization process under New York trust law, casting doubt on the legality of an untold number of foreclosures and potentially trillions of dollars worth of MBS -- some of them held by U.S. taxpayers via the Fed, Treasury, Fannie Mae and Freddie Mac.

Hot Potato Actions Proliferate

This may explain why many private investors, and the Fed itself, are trying to force the big banks to buy back the troubled securities. Recently, the New York Fed requested that Bank of America take back $47 billion of mortgage securities, alleging that the bank didn’t properly “service” the mortgages. Fannie and Freddie are starting to push the banks to take back $13 billion of MBS and these are early days. “Put-back” lawsuits are in the works from investors across the nation and this entire house of cards may come tumbling down.

Not surprisingly the big banks are balking at taking back flawed securities. Acting like they are above the law, Bank of America and J.P. Morgan Chase, are refusing to buy back flawed securities from Fannie and Freddie. At the same time, they are refusing to modify mortgages for the very taxpayers who bailed them out during the crisis to the tune of $931 billion for Bank of America and $161 billion for J.P. Morgan Fed documents reveal.

Only very recently have some regulators cautiously conceded that the mortgage mess poses "systemic risk" to the economy. But the only government report on the risks these securities pose was issued by the feisty Congressional Oversight Panel for the TARP. The report warns “it is possible that ‘robo-signing’ may have concealed deeper problems in the mortgage market that could potentially threaten financial stability.”

Time to "Stress Test" the Fed?

The big banks themselves may have trillions of dollars worth of questionable securities on their books. Now we learn that the federal government does as well. While Fed Chair Ben Bernanke will be "stress testing" the banks for their exposure to faulty MBS, he has indicated that he won't make this information public. What does Bernanke have to hide? The sky did not fall when this information was released in the past, nor did it when the Fed data was released last week.

It's time to stress test the Fed. Should the MBS issue blow up in the courts, U.S. taxpayers could be on the hook for billions, dwarfing the cost of the bailout thus-far.

In the build-up to the 2008 meltdown, the Fed looked the other way as the big banks sold predatory and abusive mortgages to millions of American families. The result? A historic financial crisis and untold misery. Now the Fed is AWOL as the same banks abusively foreclose on millions using faulty documentation and illegal practices. Once again, the devil is in the details, and these details may hold the key to the next crisis. Congress needs to step up and put Bernanke on the stand to tell us exactly what he plans to do if trillions of dollars worth of mortgage-backed securities detonate.

Jamie Dimon of [[J.P. Morgan Chase]] assures us that we will undergo financial crises every five to seven years. With Dimon and Bernanke's help, we may be ahead of schedule.

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LEARN MORE ABOUT FORECLOSURE FRAUD AND FAULTY MBS: Credit Slips blog and Naked Capitalism blog.

Barney Frank and the Fed Bailout Fallacy

Zach Carter — Thu, 09 Dec 2010 10:05:49 -0500

Mike Stark has posted a provocative on-the-street interview with Barney Frank about the recently released Fed data. Frank offers what is now a standard defense of the Fed's bailout operations: Without them, the economy would have collapsed, so critics should just quit whining. But Frank takes this line a step further, accusing liberal Fed critics of playing into the hands of right-wingers who don't want to extend any economic relief to anybody for anything, ever. It's all hooey.

Here's Frank:

"On the whole, frankly, those who were looking for conspiracies and scandals were disappointed. I think the fact is, what you saw was a series of events that worked pretty well and helped the economy . . . . Would you have had the Fed do nothing? At a time when there was no credit available, would you have had the Fed do nothing? That's what the right-wing wants."

First, the "disappointed" critics line massages away the fact that the Fed failed to disclose an enormous amount of information. We still don't know the credit ratings of collateral accepted at some facilities, and we don't know the trading prices of securities they accepted as collateral at any of the facilities. Without that information, we can't determine whether many of these actions were scandalous.

Second, yes-- without major government intervention, the economy would indeed have collapsed. Really, the economy collapsed anyway—two years later unemployment is near double-digits—but it's safe to say the collapse would have been worse had the Fed failed to act. But just because the Fed had to do something doesn't mean it had to do exactly what it did. There were always other alternatives, and the most obvious would have involved attaching some strings to the bailout facilities.

If you want this money, you have to help homeowners avoid foreclosure, or your executives have to take a hike, or you all have to spend the next month wearing a shirt that reads, "I hijacked the U.S. economy and all I got was this lousy t-shirt." Just about anything to make clear that aid from the U.S. government came at a price would have been better than, well, nothing.

Frank spends a good deal of the discussion arguing that liberal Fed critics are catering to right-wing agendas:

"My friends on the liberal side shouldn't always focus on the negative. You're playing into the hands of the right-wing. You know, it's the right wing that thinks this is some terrible conspiracy. This was a case of government intervention. The Federal Reserve is a government entity. It intervened substantially to stave off worse damage than we would have gotten, and I think it's a great mistake for people on the liberal side to engage in this kind of Fed-bashing."

The Fed had extraordinary powers and was not faced with the choice of whether to intervene, but of how to intervene. I fail to see what is so ultraconservative about objecting to free money for fabulously wealthy criminals/fools who wrecked the economy with predatory loans.

Indeed, it seems to me that the ideological pressure here is really on Frank's shoulders. When a traditional liberal icon like Frank endorses a bankers-and-brokers-first policy, the public starts to believe that all Democratic policies are just handouts for Wall Street. This was the biggest reason why voters abandoned Democrats at the polls last month. The stimulus and the bailout were all mushed together in peoples' minds.

But things get really interesting when Stark proposes cutting checks to individuals instead of making loans to the banks. Frank responds:

"You understand how fallacious that is because the money was paid back . . . You acknowledge the money was paid back. Doing what you're suggesting, cutting everybody a check, they wouldn't have paid the money back . . . You're saying instead of lending the banks money, why don't we give it to individuals? Because then you would have had that much more deficit!"

Frank gets the best of this argument because Stark proposes cutting checks instead of making loans. But what if the Fed had offered everyone in the country a loan at zero or near-zero percent interest, on the condition that individuals put up sufficient collateral? This is a (very) charitable way of describing what the Fed did to support the banking system. If the same courtesy had been extended to individuals, I'm sure plenty of people would have defaulted. But certainly not everybody-- zero percent loans are actually pretty easy to pay back. And for those people who did in fact default, the Fed could have simply held onto the collateral to avoid taking a loss.

It's not obvious that this policy ends up working wonders—plenty of people would have been unable to post collateral, and for many who could, the risk of losing the lawnmower in order to pay the heating bill for another couple of months isn't really a great deal. There's no way to gauge whether the additional spending generated could have brought the unemployment rate down very much. And of course, personal loans wouldn't have helped debt-burdened homeowners very much. But then again, neither did any of the policies the Fed actually implemented!

And it is obvious that the government wouldn't end up taking a big loss on a big direct-lending-to-actual-people policy. As a result, crowing about the government turning a profit on the Fed's bailout facilities is really very silly. That doesn't stop Frank from doing it, however:

"It came back with interest! . . . The Fed is making money off that."

In short, you don't have to endorse Michelle-Bachmann-dystopia to object to the Fed's bailouts. Watch the whole thing: