Fed Pulls a Fast One

by John M. Curtis
(310) 204-8700

Copyright November 10, 2008
All Rights Reserved.                    

         Showing the first cracks in what amounts to an impending disaster, the Federal Reserve Board can’t account for $2 trillion in emergency loans made surreptitiously to unidentified banks.  When Fed Chairman Ben S. Bernanke and Treasury Secretary Hank Paulson hatched a $700 billion bailout plan, few knew that the Fed was already wheeling-and-dealing with destitute financial institutions.  Before the bailout plan was approved Oct. 2, the 12 Federal Reserve Banks listed $350 billion cash on hand, despite the March 20 $85 billion bailout of Bear Stearns, Sept. 9 $200 billion bailout of Fannie Mae and Freddie Mac and Sept. 20 $85 billion bailout of AIG Insurance, now mushrooming to $165 billion, all totaling $585 billion.  These outlays don’t include an additional $2 trillion in emergency loans to cash-strapped banks.  Taxpayer debt has exploded under the White House bailout plan.

            Treasury Dept’s Office of Printing and Engraving can only account for $8 billion printed for the Federal Reserve in 2008.  Yet the Fed has reportedly spent nearly $3 trillion buying up so-called “toxic” assets.  Treasury Dept. refuses to release the names of the troubled financial institutions or, for that matter, what the government received in the way of assets or preferred stock in exchange for buying up bad debt.  “The collateral is not being adequately disclosed, and that a big problem,” said Dan Fuss, vice chairman of Boston-based Loomis Sayles & Co, co-managing $17 billion in bonds.  “In a liquid market, this wouldn’t matter, but we’re not.  The market is very nervous and thin,” urging the Treasury and Fed to come clean with the names of financial institutions receiving bailout money.  Taxpayers have a right to know to the amount and to whom the loans are being made.

            Newly minted President-elect Barack Obama promised transparency with regard to the government’s $700 billion bailout plan.  What he didn’t realize is that Bernanke’s Fed wheels-and-deals outside the radar of government oversight.  “It’s your money; it’s no the Fed’s money,” said billionaire investor Ted Forstmann, senior partner in Forstmann Little & Co., dumbfounded by the Fed’s reluctance to divulge which banks asked and received the Fed’s cash.  “Make out government open and transparent so that anyone can ensure that out business is the people’s business,” said Obama Sept. 22.  It’s not all that clear whether he referred to the $700 billion Troubled Asset Relief Program [TARP] or some other government program.  There’s no end in sight for how the $700 billion ballooned into $2 trillion and counting.  Without some transparency at the Fed, there’s no check-or-balance.

            Fed Chairman Bernanke doesn’t have a blank check to drive taxpayers or the national debt into insolvency.  No institution operating under the Constitution can operate outside the law.  No matter how dire the crisis, the Fed can’t simply place an unlimited order to the Treasury’s Office of Printing and Engraving to manufacture endless steams of cash.  Printing unending amounts of cash could lead to dangerous currency devaluations, causing more harm to the economy.  “We need transparency.  We need oversight,” Paulson told the Senate Banking Committee Sept 23.  “We need protection.  We need transparency.  I want it.  We all want it,” urging congress to pass the $700 billion bailout.  Neither Congress nor the administration ever demanded transparency from the Federal Reserve, the nation’s most secretive agency responsible for the country’s money supply.

            In exchange giving banks cash, the Fed has purchased collateralized debt obligations, including preferred stock, equities and subprime mortgage backed securities known as derivatives.  While an incomplete list, the Fed admits to lending now bankrupt Lehman Bros. Holdings, Inc., Citigroup Inc. and JP Morgan Chase & Co.  Hundreds of other unnamed banks have also borrowed heavily from the Fed.  Insolvent or cash-strapped banks don’t want the public to know, fearing an exodus from depositors and drop in share prices.  “You have to balance the need for transparency with protecting the public interest,” said House Financial Services Committee Chairman Barney Frank (D-Mass.).  “Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system,” admitting, Wall Street is based on smoke-and-mirrors.

            No one knows for sure whether or not the current financial rescue plan will prevent the economy from crashing into a stubborn recession or possible depression.  If the public demands transparency from the government administering the bailout, it must also expect openness from the Fed.  Before they order endless sums of cash from the Treasury Dept., the Fed must disclose the process by which they value toxic assets under the TARP program or any other plan.  Taxpayers have a right to know how their tax dollars are spent before added to the national debt.  Frank believes the Fed should operate secretly.  He believes public disclosure could hurt stock and bond prices.  It’s possible that much of the Fed’s bad debt will wind up worthless.  No one—including the Fed—should be allowed to operate with impunity.  Bernanke and the Fed must answer to a higher authority.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

©1999-2012 Discobolos Consulting Services, Inc.
(310) 204-8300
All Rights Reserved.