Tuesday, September 6, 2011

First Federal Reserve Audit Reveals Trillions in Secret Bailouts

First Federal Reserve Audit Reveals Trillions in Secret Bailouts

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The first-ever audit of the U.S. Fed­eral Re­serve has re­vealed 16 tril­lion dol­lars in se­cret bank bailouts and has raised more ques­tions about the quasi-pri­vate agency’s opaque op­er­a­tions.

"This is a clear case of so­cial­ism for the rich and rugged, you’re-on-your-own in­di­vid­u­al­ism for every­one else," U.S. Sen­a­tor Bernie Sanders, an In­de­pen­dent from Ver­mont, said in a state­ment.

The ma­jor­ity of loans were is­sues by the Fed­eral Re­serve Bank of New York (FRBNY).

"From late 2007 through mid-2010, Re­serve Banks pro­vided more than a tril­lion dol­lars… in emer­gency loans to the fi­nan­cial sec­tor to ad­dress strains in credit mar­kets and to avert fail­ures of in­di­vid­ual in­sti­tu­tions be­lieved to be a threat to the sta­bil­ity of the fi­nan­cial sys­tem," the audit re­port states.

"The scale and na­ture of this as­sis­tance amounted to an un­prece­dented ex­pan­sion of the Fed­eral Re­serve Sys­tem’s tra­di­tional role as lender-of-last-re­sort to de­pos­i­tory in­sti­tu­tions," ac­cord­ing to the re­port.

The re­port notes that all the short-term, emer­gency loans were re­paid, or are ex­pected to be re­paid.

The emer­gency loans in­cluded eight broad-based pro­grammes, and also pro­vided as­sis­tance for cer­tain in­di­vid­ual fi­nan­cial in­sti­tu­tions. The Fed pro­vided loans to JP Mor­gan Chase bank to ac­quire Bear Stears, a failed in­vest­ment firm; pro­vided loans to keep Amer­i­can In­ter­na­tional Group (AIG), a multi­na­tional in­sur­ance cor­po­ra­tion, afloat; ex­tended lend­ing com­mit­ments to Bank of Amer­ica and Cit­i­group; and pur­chased risky mort­gage-backed se­cu­ri­ties to get them off pri­vate banks’ books.

Over­all, the great­est bor­row­ing was done by a small num­ber of in­sti­tu­tions. Over the three years, Cit­i­group bor­rowed a total of 2.5 tril­lion dol­lars, Mor­gan Stan­ley bor­rowed two tril­lion; Mer­ryll Lynch, which was ac­quired by Bank of Amer­ica, bor­rowed 1.9 tril­lion; and Bank of Amer­ica bor­rowed 1.3 tril­lion.

Banks based in coun­ties other than the U.S. also re­ceived money from the Fed, in­clud­ing Bar­clays of the United King­dom, the Royal Bank of Scot­land Group (UK), Deutsche Bank (Ger­many), UBS (Switzer­land), Credit Su­isse Group (Switzer­land), Bank of Scot­land (UK), BNP Paribas (France), Dexia (Bel­gium), Dres­d­ner Bank (Ger­many), and So­ci­ete Gen­eral (France).

"No agency of the United States gov­ern­ment should be al­lowed to bailout a for­eign bank or cor­po­ra­tion with­out the di­rect ap­proval of Con­gress and the Pres­i­dent," Sanders wrote.

In re­cent days, ‘Bloomberg News’ ob­tained 29,346 pages of doc­u­men­ta­tion from the Fed­eral Re­serve about some of these se­cret loans, after months of fight­ing in court for ac­cess to the records under the Free­dom of In­for­ma­tion Act.

Some of the fi­nan­cial in­sti­tu­tions se­cretly re­ceiv­ing loans were mean­while claim­ing in their pub­lic re­ports to have ample cash re­serves, Bloomberg noted.

The Fed­eral Re­serve has nei­ther ex­plained how they legally jus­ti­fied sev­eral of the emer­gency loans, nor how they de­cided to pro­vide as­sis­tance to cer­tain firms but not oth­ers.

"The main prob­lem is the lack of Con­gres­sional over­sight, and the way the Fed seemed to pick win­ners who would be pro­tected at any cost," Ran­dall Wray, pro­fes­sor of eco­nom­ics at Uni­ver­sity of Mis­souri- Kansas City, told IPS.

"If such lend­ing is not il­le­gal, it should be. Our na­tion re­ally did go through a liq­uid­ity cri­sis - a run on the short-term li­a­bil­i­ties of fi­nan­cial in­sti­tu­tions. There is only one way to stop a run: lend re­serves with­out limit to all qual­i­fy­ing in­sti­tu­tions. The Fed bum­bled around be­fore it fi­nally sort of did that," Wray said.

"But then it turned to phase two, which was to try to re­solve prob­lems of in­sol­vency by in­creas­ing Uncle Sam’s stake in the banksters’ fi­asco. That never should have been done. You close down fraud­sters, pe­riod. The Fed and FDIC (Fed­eral De­posit In­sur­ance Com­mis­sion) should have gone into the biggest banks im­me­di­ately, re­placed all top man­age­ment, and should have started to re­solve them," Wray said.

Re­newed ques­tions about the Fed­eral Re­serve have in­spired some young ac­tivists to or­gan­ise grass­roots protests across the U.S.

"Since its cre­ation by the U.S. Gov­ern­ment in 1913, the Fed­eral Re­serve has cre­ated so much new money out of thin air that it has de­stroyed 95 per­cent of the dol­lar’s value," Joseph Brown, a col­lege stu­dent and one of the or­gan­is­ers of a re­cent protest of the Fed­eral Re­serve Bank of At­lanta, said.

"This hid­den in­fla­tion tax ben­e­fits Wall Street and the gov­ern­ment, but hurts the poor and those liv­ing on fixed in­comes, such as se­nior cit­i­zens, the most," Brown said.

The U.S. Gov­ern­ment Ac­count­abil­ity Of­fice (GAO) audit it­self was the re­sult of at least two years of grass­roots lob­by­ing. IPS re­ported in June 2009 a wide bi-par­ti­san coali­tion of Mem­bers of Con­gress had co-spon­sored leg­is­la­tion to audit the Fed­eral Re­serve.

The audit was or­dered as an amend­ment by Sanders as part of the Dodd-Frank Wall Street Re­form and Con­sumer Pro­tec­tion Act - a major bank­ing over­haul passed by Pres­i­dent Barack Obama and the U.S. Con­gress in 2010.

"I think this (the first ever GAO audit) was a good start to un­cov­er­ing what the Fed did so that we can begin to de­ter­mine whether sim­i­lar ac­tions should ever be per­mit­ted again," Wray wrote, adding, "my pre­lim­i­nary an­swer is a re­sound­ing no."

The GAO also found ex­ist­ing Fed­eral Re­serve poli­cies do not pre­vent sig­nif­i­cant con­flicts of in­ter­est. For ex­am­ple, "the FRBNY’s ex­ist­ing re­stric­tions on its em­ploy­ees’ fi­nan­cial in­ter­ests did not specif­i­cally pro­hibit in­vest­ments in cer­tain non-bank in­sti­tu­tions that re­ceived emer­gency as­sis­tance," the re­port stated.

The GAO re­port noted on Sep. 19, 2008, William Dud­ley, who is now the Pres­i­dent of the FRBNY, was granted a waiver to let him keep in­vest­ments in AIG and Gen­eral Elec­tric, while at the same time the Fed­eral Re­serve granted bailout funds to the same two com­pa­nies.

"No one who works for a firm re­ceiv­ing di­rect fi­nan­cial as­sis­tance from the Fed should be al­lowed to sit on the Fed’s board of di­rec­tors or be em­ployed by the Fed," Sanders said.

The GAO is cur­rently work­ing on a more de­tailed re­port re­gard­ing Fed­eral Re­serve con­flicts of in­ter­est, which is due on Oct. 18, 2011.

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