Racketeering 102: Fed's Lacker Threatens With Mutually Assured Destruction If Fed Audited

Tyler Durden's picture

It was a four short months ago that the Clearing House Association, in a court filing, threatened with untold destruction if the Fed was ordered to submit to an audit that would expose all their dirty laundry in the form of undervalued assets used as collateral by the Federal Reserve. We recall the direct threat used back then:

the names of our member banks who borrow emergency funds are publicly
disclosed, the likelihood that a borrowing bank's customers,
counterparties and other market participants will draw a negative
inference is great. Public speculation that a financial institution is
experiencing liquidity shortfalls - which would be a natural inference
from having tapped emergency funds - has caused bank customers to
withdraw deposits, counterparties to make collateral calls and lenders
to accelerate loan repayment or refuse to make new loans. When an
institution's customers flee and its credit dries up the institution
may suffer severe capital and liquidity strains leaving it in a
weakened competitive position.

It is fitting that as attempts to expose the Fed's shady practices accelerate on all fronts, and include direct legal approaches as well as subpoena demands by various politicians, that a Fed President would once again come out today, and recap the good old Mutual Assured Destruction treatise that both Wall and Main Street have gotten used to since the beginning of the bailouts. Somehow financial M.A.D. makes an appearance every time the bankers demand something and have no other rational justifications. So why not just feed the stupid plebs something about the Apocalypse that is certain to transpire should the financial oligarchs not get their way. Today was no exception.

Enter Richmond Fed president Jeffrey Lacker. His words, from prepared tesimony to the Richmond Risk Management Association:

Some observers argue that the financial reform agenda should include
changes in the role and governance of the Federal Reserve. One proposal
would extend the GAO's authority to audit Fed operations to include
monetary policy decisions. Other proposals would alter our governance
structure by making Reserve Bank directors and/or presidents political
appointees. I know it might sound self serving for a Fed insider to
object to such changes, but I believe such moves would present very
serious risks to the effectiveness of monetary policy and ultimately to
economic growth and stability.
Looking across time and across
countries, there is abundant evidence that economic policy and
macroeconomic performance are generally better when the central bank's
monetary policy decisions are shielded from the political pressures of
the moment. For an illustrative case, one need only look to the 1970s
in the U.S., when political influence led to high and volatile
inflation that disrupted economic growth. The governance of the Federal
Reserve System balances accountability, with ultimate authority resting
in Washington, and independence, with the participation of
non-political leaders from throughout the country. While the
performance of our economy in the last two years has clearly been unsatisfactory, and policy mistakes may have contributed to our
problems, the Fed's balanced, hybrid governance structure has, I
believe, given us a good record over the better part of three decades.
Disrupting that balance would pose another long term challenge for our

While Mr. Lacker's testimony is indeed self-serving, it is also patently flawed. There is nothing in the proposed Fed Transparency law that would imperil the Fed with direct political intervention, and nothing that would impact its monetary policy decision-making appartus. Perhaps it is about time someone highlighted the actual truth behind the various Ron Paul et al proposals, which seek not contemporaneous information of decision-making to the GAO or otherwise, but a delayed, 6 month-lagged disclosure. How this impairs monetary policy independence is incomprehensible.

Furthermore, the claim that the Fed's "balanced, hybrid governance structure has given us a good record over the better part of three decades" is very much subject to a recount. If Mr. Lacker deems that Fed's actions over the past three decades, which culminated with the implosion of the biggest credit and housing bubbles this country has ever seen, courtesy of self-serving (that phrase again) monetary flaws, are indicative of a "good record" then we certainly agree. We also would recommend that the Fed president immediately seek a medical prescription for Geodon or, if that particular medicine will not be covered by the soon enacted "new and improved" nationalized healthcare system, any other over-the-counter antipsychotic medication that is freely available.

The biggest problem with the Fed is its continuous insistence that the kleptocratic oligarchy always knows not only what is in everyone's best interest, but is so much smarter than all, that stupid peasants getting advance knowledge of just how impaired the major TBTF institutions are, would immediately risk bank runs. Once again, it never dawns upon these enlightened gentlemen, that such rumor-based "bank runs" are merely a byproduct of never having the sufficient information to make informed decisions about these very companies in real time. And when the shit does hit the fan (as it always eventually does under the Fed's "aegis") the outpouring of panic is enough to bring the system down in a matter of hours as September 18, 2008 demonstrated.

Yet if American citizens are not allowed to get a glimpse into the true state of the banking system, which consists of publicly traded institutions for the most part, but also are the recipients of trillions of dollars of direct taxpayer cash and guarantees, then there never will be a right time to attain such information.

It is, and has always been, in everyone's best interest to have as much information about each and every financial institution, be it small regional banks, TBTF failures such as Citi, Fixed Income monopolists, or the nexus of all: the Federal Reserve. And until such information is freely available to all, not just provided to SIGTARPs and other investigatory queries, which all operate underneath the radar of full disclosure, the system will continue to be on edge, and constantly ready to collapse at a minute's notice, the second it becomes clear that the Fed, contrary to its desires, is unable to conduct the first ever successful experiment involving a planned and controlled economy.

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deadhead's picture

The Fed guys are simply whacky.

An audit has nothing to do with monetary policy and alleged "independence".  In fact, the Fed is not independent of the Congress (and Executive Branch) because they basically tell Congress what to do vs the other way around.

This is the same strategy that young kids have tried over the years: "i hold my breath til I die".  

Go ahead, kid, hold your breath. 

faustian bargain's picture

The 'independence' they seek is independence from responsibility and accountability.

Cistercian's picture

 They want/demand licence to continue to loot and rob the people.

 Since their actions amount to the apocalypse in slow motion anyway I say we audit them.And withdraw all deposits from the scum they "helped".

 Their evil reign of terror MUST BE STOPPED!!!!!

MarketTruth's picture


And BTW, the Fed's balance sheet looks worse than a broken hedge fund. Is this something you want to be invested in (per se?)

Wake up Neo.....




And buy gold/silver.

Anonymous's picture


Why does that MAD statement BY ITSELF not result in bank runs? I don't get it. I only keep enough $ in my large-bank account to cover my monthly bills (because my local credit union doesn't have online bill paying and I'm not going back to using stamps. Yet).

Cursive's picture


Exactly.  We know the banksters are trying, either purposefully or inadvertently through greed, to take this economy down anyway, so why not threaten us?  Most people don't have the will to make self-centered brats show their hand.

Dr. Richard Head's picture

This economy will go down either way, whether or not they are trying to do so or are doing so by ignorance.  A system dependent upon debt will require continual debt increases to just survive.  This is the nature of fiat.  Call their bluff and stick it in their arse with strategic defaults. 

Hell, JP Morgan is the first to announce their bonus pool of $9.3B for investment bankers ahead of CITI, BofA, and others soon to follow.  How much did JP get during TARP and TALF?  $25B? 

When will the American people turn into Iceland revolutionaries?  Will there be that tipping point?  I am about to tell JP Morgan that can take their $4,360 and stick it in their ears.  0.0% revolving credit isn't good enough for me.  Where is my negative interest rate?  Where is my tax-funded bonus for 09?  F' these ad hoc pirates.


Anonymous's picture

JPM did not want the $25 billion. And paid it back as soon as they were "allowed" to -- with interest plus $1+ billion of value on JPM warrants.

So for this, after paying back all government funding and then some, they are suppose to ask the government how much is ok to pay their people?? Let the shareholders decide, not government.

If you don't want the government providing capital to the banks or you think the terms of the capital provided were inappropriate, direct your wrath at government (who was calling all the shots). Voting out your elected representative(s) in November would be one logical way to directly register your discontent that would catch government's attention. If you think government is too influenced by the persuasiveness of banks, again, this November will provide you a great opportunity to change that.

If you just want to complain, leave the people running government in place. If you are a JPM shareholder, you can also vote your proxy accordingly in a couple of months.

mnevins2's picture

"If you just want to complain, leave the people running government in place. If you are a JPM shareholder, you can also vote your proxy accordingly in a couple of months."

Translated: "leave us alone with the billions that we are now earning - due to the backstopping of our financial schemes and loose monetary policy!

We EARNED this money by working real, real hard to make lots of money for ourselves. So what if our efforts are destroying society, that the national deficit is around $2T and unemployment is around 17% - we EARNED this money and so STFU!!!

Now, peasant, pass the grey poupon!!!

Hungry? Out of bread? Well, there's always cake for you!!!"

Sorry, but society doesn't think that you guys "EARNED" anything and your waving at windmills with your smarmimess only makes "society" madder. The sooner you figure that out, the better off ALL OF US will be.





Anonymous's picture

1. Tell the government you love to STOP "backstopping" and the "loose monetary policy" you are upset about. These are government actions, not JPM actions. Under your logic, if the government stops the backstopping /loose monetary policy, then JPM will not make much money and pay will go down. Fine, tell the government to STOP.

2. $2 trillion deficit is a government action. Tell them to STOP spending and printing money. JPM can not make them stop (JPM couldn't even stop them from forcing money on them).

3. In the 1980s I thought we defeated the form of government that was big on setting pay rates. You seem to crave that ideology and want to have "society" (whoever that is) determine what is "earned." You know there is an active Socialist Workers Party looking for new recruits all the time - check it out. You will feel at home there.

Marley's picture

Are you back with that Socialist thingy?

Anonymous's picture

It does seem reasonably akin to the principles being espoused.

Marley's picture


Fascism is a political ideology that seeks to combine radical and authoritarian nationalism with a corporatist economic system, and which is usually considered to be on the far right of the traditional  left-right political spectrum. - wiki

Currently espousing traditional democratic traditions with respect to life, liberty, and the pursuit of happiness, is met with populous rhetoric to be called  "socialist."


I just say tax the rich and you go appy.

Anonymous's picture

The bottom 50% of the population pay virtually no (ok 3%)of income taxes and you want to crank them up on the top. Wow.

The politics of have drifted decidedly left the past 20 years (since Reagan). I would prefer the government the country started with. A republic (not democracy) of fifty states loosely united with a federal governement that had narrow, specific ("enumerated") rights. Sadly, now Wash DC has invaded innumerable nooks and crannies of everyone's life. The states just hope they can survive the burdens of the federal government.

I fully support letting citizens individually pursue life, liberty and pursuit of happiness (one reason I do not like the healthcare bill). One's pursuit of happiness may result in shear misery -- but I think we need to protect the right to succeed (unlimited upside) and the right to fail (unlimited downside).

P.S. Wiki - a giant bathroom wall.

Marley's picture

I beleive we've played this game before, sources please on the tax burdens.  And clear this up please, are you saying that since Reagan, politics have become liberal?  And what impact did the Patriots Act have on everyone's life?

KevinB's picture

Currently espousing traditional democratic traditions with respect to life, liberty, and the pursuit of happiness, is met with populous rhetoric to be called  "socialist."

Let's see now.. I work 50 hours a week, 50 weeks a year, that's 2500 hours, or about 30% of the entire year. Put another way, that's 30% of my life. You're suggesting that the government tax 50% of my income? That's 15% of my life put to work for government. That's your idea of my right to my "life"? 

The government wants to tell me I must purchase health insurance. That's your idea of liberty?

The government (especially in NYC) wants to tell me where I can smoke, what I can eat, etc. That's your idea of the pursuit of happiness?

Keep smoking that bud, dude. Looks like you enjoy it.

Marley's picture

I'll waste alittle more of my lunch time, I'm at work and yeah it's Sunday, responding to you.  Where did I suggest that the government tax 50% of your income?  I had to pay for my second child's birth out of pocket because the health insurance provider called it a prior existing condition.  I'm an ex-smoker, I know it's a bitch.

Stevm30's picture

Fascism, as least as practiced by the NAZI's, is socialism...

There is no difference.

estaog's picture

LOL you best be trolling. We can tell them to stop doing things. We can even threaten to vote them out of office. But who are they going to listen to: average people or the guys dishing out billions in campaign contributions. Do you seriously think average people have any capacity to influence the US government's policy?

Have you heard of lobbyists before?

"From 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made political contributions totalling $1.725 billion and spent another $3.4 billion on lobbyists -- a financial juggernaut aimed at undercutting federal regulation."


Francis Dollarhyde's picture

Tell the government to stop, eh? Just like that? And they'll listen to us instead of the 7th largest contributor to Barack Obama's campaign? You're funny when you pretend JPM and the government are two different entities.

Anonymous's picture

Attempt to exercise influence over the one you have the most control over - the government - which is the primary source of the problem (they do not HAVE TO listen to the lobbiest, but they do because they are weak people).

Government will not begin to change even at the margin unless you vote them out of office.

Alternatively, stop complaining if there is just nothing you can do about it.

MsCreant's picture

Why does the complaining bother you? This is a loaded question.

Anonymous's picture

It is so unproductive and so easy to do. I think action is much better. We are a nation of whiners. Just trying to call people to action and focus on primary causes which one might be able to influence vs secondary causes and symptoms. Vote for a change in November.

WaterWings's picture

Vote for a change in November.

Uh yeah. That's what they told us last time. And the time before that. Voting is consent to be governed. Don't consent - let the disobedient inner-child reign - it is our Duty.

milbank's picture

The illusion almost all Americans have is that we have a choice, "a two party system."

You don't even get the chance to vote for anyone who is running for Federal office unless they have been vetted and chosen by the corporations/banks/"Powers That Be."  Despite all that has transpired over the last 20 years where both parties have controlled the White House and the Congress, Americans still can't wrap their brains around the idea that the "Two Party System" is a false choice.  Even if McCain won, do you think there would have been a different approach?  Obama was chosen to carry water for this term.  Do you Palin would have been chosen if McCain was supposed to win.  Remember, Palin wasn't McCain's choice, he was forced into it.  These guys running for President are merely stooges of those who actually run this country.   The difference in the parties regarding abortion and gay marriage etc. is great for the Powers That Be in that it gives the illusion that there are differences in the parties on something the PTB has no "skin in the game."  Where they do have "skin in the game," they own the game and the players they put out front for the electorate to vote for.  In terms of what really matters, it doesn't matter whether it's "ultra liberal" Barney Frank or "ultra conservative" Phil Gramm (former Senator who authored the bill that repealed Glass Steagall and now works for UBS), their owners and their goals are the same.

Haywood Yablomi's picture

Anonymous 195386 has no idea what they're talking about.  at 40X leverage, what percentage of underlying asset depreciation wipes out shareholder equity?  huh?  huh?  I'm waiting....

How many trillion dollars in notional derivatives does JPM have?  huh? huh?  what percentage can sour before shareholder equity is wiped out?  Still waiting...

JPM didn't want that $25B?  Maybe true, cause that becomes a fucking rounding error when you're talking about a cesspool that large. 

Your suggestion that bonuses should be determined by BOD or shareholders is laughable.  Yeah, how hard is it to manipulate the voting results (seen some interesting stats about total number of votes vs. total number of shares outstanding).

In fact, why don't you get a real job and PRODUCE SOMETHING asshole? 

El Hosel's picture


  Please explain if you will, I need help getting my arms around bank "earnings" reports.

 If JPM had mark to market all of their "assets "  what are we talking about as far as "earnings" ? How far above or below solvency is JPM and some of the other too bigs?


Anonymous's picture

well said HY. And had I been a JPM shareholder before the crisis, I would be ecstatic at the way the BOD and the management of JPM swallowed bear Sterns and Wamu's franchises while enjoying the taxpayers largesse of unlimited backstop guarantee from the US government. And so they would arguably deserve $9b of bonuses. But they got the chance to make the profits only because they enjoyed unlimited backstop from the taxpayers, the $25b of TARP is "optical detail" compared to that backstop, which is still implicitly present by virtue of TBTF. And mind you, the freaking mountain of derivatives linked to interests bets on JPM's books, well, that mountain would have collapsed hard today if the Fed were not buying MBS and UST. And who would pay for the losses on the MBS on the Fed's books? the US taxpayers!

Anonymous's picture

Was just responding to Richard Head's (oh sorry, Dr. Richard Head) complaint how JPM received government capital (which they paid back ++) and now is making lots of money some of which is getting passed on to employees.

So you seem very concerned that JPM's shareholder equity could get wiped out. A noble concern for someone who is not a shareholder or customer of JPM. If you are worried about the government's current or potential future dealings with JPM, I would suggest a change in government personnel this November. The folks in government are inept.

Re: JPM's history of manipulating shareholder votes, I await your proof. Best I can tell, JPM shareholders are pretty happy folks, so I am not sure why JPM would feel the need for "manipulation." I think you just don't like many large public companies.

Fortunately, starting with nothing, I have been very blessed with a good job and making good investments, living well below my means for multiple decades while the majority of Americans of have lived well above their means (I frequently lived below THEIR means). I am sympathetic to those in need and to back that up by willing to bet that I pay more in taxes AND give more to charity (both of which on an absolute basis AND percentage of income) than anyone else on this post. So I do not view myself as the corrupt, self-centered type many of you think of about folks like me who think capitalism is a very good thing (even if it has some potential unpleasant side effects -- it just beats all other ideologies).

Truncating economic outcomes is a great way to chase capital and talent to some other place where it will not be truncated and better appreciated.

jeff montanye's picture

can you seriously call what has happened since the bear stearns' hedge funds went banko "capitalism"?  really?!  seems a lot more like fascism or socialism for the very rich to me.

Anonymous's picture

Agreed - we have strayed mightly from capitalism. Time to go back.

MsCreant's picture

Anon, I have a screen name for you if you wanted to join us with an identity-- Cherry Picker.

Cherry Picker,

You did not address taxpayer backstopping keeping that Zombie alive. And any asset related to real estate is a total unknown right now in terms of what it is worth. JPM has none of those, right?

You can't address it because then you have to admit the company is technically insolvent (not that it is special in that regard). You want to blame the government exclusively. That's because corporations have no reponsibility for how they make their money, and who they hurt, right?

You cling to that story that "government forced them" pretty tight. JPM, poor underdog. Guess that is how you sleep at night. They had to take the money because the government was changing the rules regarding appropriate reserves. The TBTFs did not have enough reserves to meet the new requirements. I guess you could call that force. Someone else would call it tightening standards. Someone else would call that closing the barn door after the horses got out.

Anonymous's picture

If you do not want the government to back stop -- tell the government to stop back stopping. Vote accordingly.

I guess you are saying you want the government to keep back stopping because you are fearful of the consequences if they stop.

Just pick one - I want them to back stop or I do not want them to back stop.

MsCreant's picture

I would like to see the anti-trust laws enforced and the corporations broken up. I want RICO brought to bear on all parties involved in the banking fraud that is our system. Did you know if you are an insolvent bank you are not supposed to accept deposits anymore? Examiners are supposed to shut them down? Failing to do this is punishable by law! You have me there, all that would be gov.

I think I am angry with the legislative branch, angry with the administration, etc. You know who I am angriest with, the most disappointed with? Our judicial branch, our cops, and our prosecutors. They need to put the fear of God into all these other characters and they won't. If we needed to clean house, that is where we would start. But so many of these officials are appointed.

Where have you gone Elliot Spitzer? A nation turns its lonely eyes to you...woo, woo, woo.

What's that you say, Mrs. Robinson, Jiltin' Spitzer has left and gone away
(Hey, hey, hey...hey, hey, hey)


I have often wondered if, with the spying technology available, they can blackmail almost all of them? I particularly wondered this with Bush. Dad an ex-spook and all. Did not seem too farfetched. My husband is ex low level NSA. He rolls his eyes and says, "You can intercept anything."

Dear Anon, I ask you to consider the possibility that between the fact that politicians need campaign funding, that those with money have greater ability to lobby (even the clean kind) than those who don't, and this spying issue I brought up above, that it is possible that the government is genuinely captured, and the action that is needed is not voting.

For instance, in my state, there are NO PAPER BALLOTS. I complain everytime. The polling operaters tell me I am the only one who complains, everytime.

I don't trust the voting process.

I fear we are in a great deal of trouble.

I will continue to complain, talk, think, hope to God there is another option than the one I already know is necessary. When enough people reach the same conclusions I have, or if something happens politically that looks like it is really going to work, maybe change will happen. But moving alone is futile.

So I watch and wait, hope for the best, and plan for the worst. I think there are a growing number out here like me.

Cognitive Dissonance's picture


He's telling you the system is broken, proceed to the next election and use the broken system to fix the system or shut up, no alternative views or processes allowed except that which the machine affords the population.

Not only is that a Catch 22 but it's Catch 22 thinking, the ultimate F**k You by you. This assumes the process, the structure, can be "fixed" from within using the structures systems and process. The only way to get inside to fix it is to be corrupted or dependent upon the system, thus rendering yourself incapable if fixing the system even if you still wanted to. The ultimate human BORG mentality.

As you have been talking about for months, the system can not be fixed from within. Until the majority come to the same conclusion, until they realize that there is not "The One" that can be (allowed by the system to be) elected to fix the system and then actually fix it, we are in store for more of the same ole same old.

WaterWings's picture

Aaaaaaah, I have no words to describe the melting despair.

Anonymous's picture

I love that you brought this up. In keeping with the, "Could the banks be spying on politicians and using information that could discredit them to keep the heat off Wall St." theme:

Spitzer : Attempted to clean up Wall St., destroyed by a prostitution scandal.

Blagojevich: Arrested within 24 hours of announcing that the State of Illinois would no longer do business with Bank of American

Sanders: S.C. very vocal in opposition to the bail outs and categorically refused any federal aid for his state, ruined by a prostitution scandal.

Coincidence? Perhaps .....

ghostfaceinvestah's picture

Have they refinanced their TLGP debt with no-TLGP debt yet?

Didn't think so.

Anonymous's picture

Tell the government to STOP offering TLGP debt!!! This is will solve your reasonable concern. But this is not a JPM problem -- it is a government problem.

Herd Redirection Committee's picture

Yes, because as soon as we tell them we will feel so much better,  and even if they don't listen,  hey atleast we tried, right?  What more could be expected from us?

Now, I understand some people sold their principles to the highest bidder a long time ago, but the rest of us retain some semblance of principles, and we know the Gov is corrupt and serving the Oligarchy.

Hence, complaining is just playing right into their hands, because by doing so we give credence to the quaint notion that it is those in government that are in control, and making the decisions!

Waterfallsparkles's picture

What about the 25 Billion subsidy to buy Bear Stearns for less than the value of their Office Building?

Anonymous's picture

So it is JPM's fault the government GAVE JPM a subsidy to buy Bear Stearn's?? Absurd. JPM is not the problem in that transaction.

There is a theme here folks - government is inept.

jeff montanye's picture

the government may be inept but they are not the source of the decision:  they are following the instructions from the people who are profiting from the decision.  if you think the people who made sure aig's counterparties were paid off at 100% are the government's functionaries you are willfully deluded.

Anonymous's picture

Government is the source of the problem. They do not have to choose to be influenced by the banks you dislike.

Replace the government personnel who so dutifully answer to the banks you dislike. At the end of the day, the government signed off of paying AIG counterparties. Even if they were unduly influenced in doing so, they did it. Replace those weak, inept government personnel. Make a big change in November 2010.

If you are saying no one in government can withstand the influence of the banks, then you / we are hopeless. But I would not waste time complaining then.

MsCreant's picture

Let's all be quiet about it then.

Stevm30's picture

Sorry, JPM DID take the money.  Why didn't Jamie Dimon walk out of that room with Paulson, Geithner, Bernanke, and Bush, saying: "not on my watch"?  Because he needed the money.  Or, because he was scared of the big, bad government, and is a coward.  Either way, he TOOK the money.  Now, I agree the Government shouldn't have been involved.  But nobody FORCES you to take money.  What would big bad Paulson have done if one or more of them said no?

We'll never know.

Anonymous's picture

Your are probably correct in suggesting JPM was afraid of the government if they did not take the money. The night the 6 or 7 big banks got called to Washington, it was made clear they were not leaving until everyone signed. Government can make one's life very difficult if they want to. The government convinced them that if the stronger banks did not take the money, it would create a potential run on the weaker banks who may have needed the money. It is called coercion.

johnnyBoy's picture

the NY Fed gave the money to Chase and Jamie Dimon was (is) on the board of the NY Fed.   Nice deal he must have negotiated, eh!