The dark secrets in the Fed’s last Wall Street bailout are getting a devious makeover in today’s bailout

by PAM MARTENS & RUSS MARTENS

Largest Recipients of Federal Reserve Bailout Funds, 2007 to 2011

From December 2007 to November 10, 2011, the Federal Reserve, secretly and without the awareness of Congress, funneled $19.6 trillion in cumulative loans to bail out the trading houses on Wall Street. Just 14 global financial institutions received 83.9 percent of those loans or $16.41 trillion. (See chart above.) A number of those banks were insolvent at the time and did not, under the law, qualify for these Fed loans. Significant amounts of these loans were collateralized with junk bonds and stocks, at a time when both markets were in freefall. Under the law, the Fed is only allowed to make loans against “good” collateral.

Six of the institutions receiving massive loans from the Fed were not even U.S. banks but global foreign banks that had to be saved because they were heavily interconnected to the Wall Street banks through unregulated derivatives. If one financial institution in this daisy chain of derivatives failed, it would set off a domino effect.

Another $10 trillion was spent by the Fed providing dollar swaps to foreign central banks, bringing the final tally of the bailout to $29 trillion. The Levy Economics Institute used the data that the Federal Reserve was forced to release through an amendment attached to the Dodd-Frank financial reform legislation in 2010 to compile the $29 trillion tab. Its figures are in line with the audit done by the Government Accountability Office (GAO), also mandated by the same amendment. The GAO audit included most, but not all, of the Fed programs, so its figures fall short of the comprehensive job done by the Levy Economics Institute.

There are two dark secrets about the Fed’s last bailout of Wall Street. First, the Federal Reserve Board in Washington, D.C., which is a federal agency with its Chairman and Board appointed by the President and confirmed by the U.S. Senate, outsourced the bailout to the Federal Reserve Bank of New York (New York Fed), which is a private institution owned by the Wall Street banks. The New York Fed, in turn, outsourced the management of the bailout to some of the very Wall Street firms that were receiving the funds. We know this from the details contained in the GAO audit. (See our “Vendor” section below.)

The second dark secret is that the underlying cause of the enormity of the bailout – hundreds of trillions of dollars in derivatives that interconnected the same global banks as counterparties – has never been reformed by Congress. A feeble attempt was made in the Dodd-Frank legislation but that was quickly repealed by an amendment forced into a must-pass spending bill by the largest recipient of the bailout – Citigroup, which was insolvent for much of the time the New York Fed was lavishing $2.65 trillion on it.

We know that derivatives are playing an outsized role in the current financial crisis because Wall Street banks, Deutsche Bank and the insurance companies (including AIG) that are still interconnected as derivatives counterparties are seeing their share prices bleed away to a far greater degree than the broader market indices. And, emphasizing our point, just last Friday as bank stocks were under trading pressure, the Federal Reserve announced that it was relaxing a rule on how the big banks would have to measure their counterparty credit risk derivatives contracts.

These same banks, as we write this, are currently receiving the next round of bailouts from the New York Fed, using many of the identical programs that the New York Fed used the last time around, like the Commercial Paper Funding Facility(CPFF), the Primary Dealer Credit Facility (PDCF), and the Term Asset-Backed Securities Loan Facility (TALF) along with a host of others. The goal of the New York Fed in using so many programs with so many alphabet-soup acronyms is to make it mind-numbingly difficult to keep track of the trillions of dollars it is spewing to Wall Street banks and their foreign peers. It took almost four years after the onset of the last unaccountable Fed money spigot to get accurate reports to the public about what it had done. The Fed spent more than two years in court battling to keep the public from learning the details.

How do we know that the same banks are receiving the new bailout funds? Because the New York Fed publishes a list of its 24 “primary dealers,” the Wall Street trading houses with which it conducts its open market trading operations and are eligible for its loans. (Yes, the New York Fed has its own trading floor – the only one of the 12 regional Fed banks to have one.) With the exception of AIG, which is an insurance company, Bear Stearns, which was taken over by JPMorgan Chase, and Royal Bank of Scotland (RBS), every bank listed in the chart above is currently eligible for the trillions of dollars in Fed loans that have been spewing out of the New York Fed since September 17, 2019 – four months before the first reported death from coronavirus in China and five months before the first reported death in the United States.

Wall Street on Parade for more

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