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A Lesson in Transparency by the NY Fed
Chief executive officer and president of the Federal Reserve Bank of New York (and ex-Goldmanite), William Dudley, delivered a speech this afternoon that contains, with supreme gall and irony, a subsection called “Transparency.” The title of the speech was thoughtfully crafted to allow a redirect. So here we go…
[To] Dudley: Some Lessons [for the Fed] from the Crisis.”
Transparency
In some critical segments of our financial markets, both before and during the crisis, limited or ineffective disclosure undermined market discipline and this contributed to the accumulation of risk.
Does this limited or ineffective disclosure undermine market discipline when it is carried out by the Federal Reserve, or do market participants turn forever a blind eye to the accumulated risk on the Fed’s balance sheet? For how long will foreign CB’s snap up 30 year T-bonds at 4.0%?
In the years leading up to the crisis, the lack of transparency contributed to increased risk and leverage in off-balance sheet vehicles, structured credit products and in over-the-counter securities such as asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) and their associated derivatives.
These would be the same Agency MBS being created from no-doc loans issued by the FHLA for the sole purpose of reigniting the housing bubble—to the tune of $1.25 trillion–correct? The same CMBS that will eventually be refinanced by TALF 3.0—correct? Good thing they’re AAA rated by a group of cherry-picked ratings agencies.
Once the crisis was underway, the opacity of many of these vehicles, structures and securities contributed to the concerns about counterparty credit risk. This uncertainty exacerbated the erosion in market liquidity conditions and further intensified the crisis.
Fortunately, the counterparty risk to the Fed for this and other programs is now gone as it has been assumed by a combination of Treasury, FDIC and, of course, the Fed itself. Note: counterparty credit risk cannot be removed by a tautology.
This lack of transparency was present in a number of different places:
Valuation. CDOs and other securitized obligations were complex and difficult to value. This reduced liquidity, pushed down prices and increased uncertainty about the solvency of institutions holding these assets.
Prices. The lack of pricing information led to a loss of confidence about accounting marks. Sometimes identical securities were valued differently at different financial institutions.
Fortunately, the Fed’s assets are reported at par—no need to value anything here—as long as they were taken in under the AAA stamp of approval. With that out of the way, any question of insolvency cannot be addressed. So, who needs an audit?
Concentration of risk. Because there was no detailed reporting of exposures, market participants did not know much about the concentration of risk. This led to a reluctance to engage with counterparties, which, in turn, pushed up spreads and reduced liquidity further.
Well, we know where all the risk is concentrated now…in the world’s largest central bank cum hedge fund.
Thanks for the lesson on transparency, Mr. Dudley.
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Geithner aides reaped millions working for banks and hedge funds-Bloomberg
Link http://www.bloomberg.com/apps/news?pid=20601087&sid=abo3Zo0ifzJg
Looks like they are still getting paid in dollars.
Love it.
This guy is amusing. Other than Ron Paul, Grayson is the only one that seems to honor his job to the country.
Plus he is fun to watch. Always smiling. Maria Barti-whore-o had him on her show, didn't she? I seem to remember her asking him about this very topic, and then changing topics to Lehman as if to credit Big Ben with having done something right.
Naw, the real lesson of this entire crisis, the thing they'll teach in b-school case studies is: if you're going to make a leveraged, one-way bet on an asset class, make sure you're levered enough to blow up the world.
I'll see your transparency and raise you an audit.
Forwarded from Alan Grayson eMAIL:
Last week, Ron Paul and I sent a letter to the Senate Banking Committee about the Chairman of the Federal Reserve, Ben Bernanke.
Before he is confirmed for a second term, we think the Senate and American public should know who got the $2 trillion the Federal Reserve has lent out over the last two years. Only then will the Senate be able to judge whether he should keep his job.
It's important that the Senate hear from you. That's why we've launched UnmaskTheFed.com, an easy online tool to let you contact your Senators.
Visit UnmaskTheFed.com and ask your Senators to vote NO on Ben Bernanke's confirmation until the Federal Reserve comes clean on what it has done with OUR money.
It would simply be unreasonable for the Committee to confirm Bernanke to another term given how little is known about what he has actually done. Remember, Ben Bernanke didn't see the crisis coming and has added $1.2 trillion to the Fed's balance sheet through covert bailouts.
The Senate cannot hope to have a full debate over his record if nothing is public. That's why I'm asking them to refuse to move forward until Bernanke releases the following:
Information that Bloomberg reporter Mark Pittman has requested via a Freedom of Information Act Request on the Bear Stearns rescue and that the Federal Reserve is contesting in the courts.
Information I requested in February on which institutions received the additional $1.2 trillion, how much each institution received, and what was promised in return.
All Federal Reserve documents that went to Attorney General Andrew Cuomo's office relating to the Bank of America/Merrill Lynch merger in which potentially illegal and coercive activity might have occurred, as well as all Federal Reserve documents relating to the lawsuit pursued by Merrill Lynch shareholders in the U.S. District court for the Southern District of New York.
Transcripts of all Federal Open Market Committee meeting minutes up to and including that of September 2009.
Full disclosure of all terms and conditions of all off-balance sheet Fed transactions in the past three years.
It's the Senate's responsibility under the Constitution to properly question and debate any of the President's nominees. Without these documents, I don't see any way they can live up to that responsibility. Help me make sure they do.
We deserve to know what the Fed did with OUR money. Click here to visit UnmaskTheFed.com and tell your Senators to vote NO on Ben Bernanke's confirmation until the Fed comes clean.
Thanks for what you do,
Alan Grayson
Member of Congress
Alan is a new favorite of mine, I hope he doesn't disappoint in the long term. What gives me some faith though is the nature of his constituency. If I;m remembering correctly, I think he comes from the heart of old people country in South Florida. Hell hath no fury like a geriatric golfer scorned?
You don't know the half of it. He actually majored in old people. From wikipedia:
After writing his master's thesis on gerontology, he founded the Alliance for Aging Research, and served as an officer of the organization for more than 20 years.
UNBELIEVABLE. This lends itself well to a hell of a lot of things I've been contemplating. Grayson just got a huge upgrade in my book. Throughout the history of this nation, politicians can be divided into several groups. First, you've got your outright shills, snakes oil salesman, and hoodwinks. Second, we have the combo type that will rob you blind, fuck your secretary, your wife in the ass, all while doing coke off Cheney's dick (think John Ensign) and put on a nice pretty face while they do it. Third we have the mostly confused do-gooders that get pressured out of making the right call on the most important decisions (think your traditional flake) because of their general incompetence. Lastly, we have Grayson's class. A unique phenomena. Here is a man who is supported by a large and near invincible group of constituents. You can't threaten old people, because they will call the bluff and say fuck you, I'm getting my gun. Grayson is also rich enough already, so he can't be bought. But lastly, and most importantly, he is simply fearless. If Grayson has a tattoo of anything on his body, I bet it is a simply three letter strip on his balls that says "FEAR NO MAN". Balls? Check. Money? Check. Support? Check. We can only speculate on his motivations, but whatever his goals are, I can predict he will pursue them like a rabid animal.
Houston, we have an Alan
Teddy Roosevelt
Andrew Jackson
Go, Grayson!
nice article. well done.
He likes transparency? Oh good, then he should come out in favor of HR1207, audit the fed, right?