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Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP
- AIG
- Alan Greenspan
- American International Group
- Arthur Burns
- BAC
- Bank of America
- Bank of America
- Ben Bernanke
- Ben Bernanke
- Bloomberg News
- Bob Ivry
- CDS
- Charlie Gasparino
- Citigroup
- Counterparties
- Credit Crisis
- Credit Default Swaps
- default
- Deutsche Bank
- Equity Markets
- Federal Reserve
- Goldman Sachs
- goldman sachs
- Gretchen Morgenson
- Hank Paulson
- Hank Paulson
- Home Equity
- JPMorgan Chase
- Ken Lewis
- Kohn
- Loss Severity
- Mark Pittman
- Market Manipulation
- McFadden Act
- Merrill
- Merrill Lynch
- New York Times
- Nomination
- None
- Paul Volcker
- Pittman Children's College Fund
- Private Equity
- Swagel
- TARP
- Tim Geithner
- Wells Fargo
- White House
Below is the latest issue of The Institutional Risk Analyst. This one is for Mark. -- Chris
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Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP
December 7, 2009
On Saturday, joined by hundreds of friends, family and
colleagues on a snowy December day in Yonkers, NY, we celebrated the life of
Mark Pittman. Readers of The IRA who wish to express their thanks to Mark and
show support for his family may make contributions to the Pittman Children's
College Fund, c/o Dr. William Karesh, 30B Pondview Road, Rye, NY 10580.
Bob Ivry from Bloomberg News gave a
remembrance of Mark, including reading the letter that his daughter Maggie Pittman posted on
zerohedge to dispel rumors
that her dad might have been murdered. Some members of the zerohedge family
thought that Mark was killed by the banksters
for his diligent pursuit of the disclosure of the Fed's many
bailout loans to Wall Street firms.
Ivry also told a great story of how, when asked by a
younger reporter why she should give Pittman her scoops instead of giving
them to CNBC's Charlie Gasparino, Mark replied: "I'm taller than
Charlie and can see above the bullshit." We miss Mark a lot.
Coming together with the friends of Mark Pittman ended a grim
week. Many of us in the financial community were wading hip-deep through
barnyard debris as we watched Federal Reserve Chairman Bernanke dodge and weave in
front of the television cameras during his Senate confirmation hearing. We have
to believe that Mark would have been pleased as Senators on both sides of
the aisle asked questions that came directly from some of his reporting -- and a
few of our own suggestions.
To us, the confirmation hearings last week before the Senate Banking Committee only reaffirm
in our minds that Benjamin Shalom Bernanke does not deserve a second
term as Chairman of the Board of Governors of the Federal Reserve System. Including our
comments on Bank of America (BAC) featured by Alan Abelson this week in
Barron's, we have three reasons for this view:
First is the law. The bailout of American International Group (AIG) was clearly a violation of
the Federal Reserve Act, both in terms of the "loans" made to the insolvent insurer
and the hideous process whereby the loans were approved, after the fact, by
Chairman Bernanke and the Fed Board. The loans were not adequately collateralized.
This is publicly evidenced by the fact that the Fed of New York (FRBNY) exchanged debt claims
on AIG itself for equity stakes in two insolvent insurance underwriting
units. What more need be said?
As we've noted in The IRA previously, we think
the AIG insurance operations are more problematic than the infamous financial
products unit where the credit default swaps pyramid scheme resided.
And we doubt that any diligence was performed by
Geither and/or the FRBNY staff on AIG prior to the decision taken by
Tim Geithner
to make the loan. We'll be talking further about AIG in a
future comment.
Of interest, members of the Senate Banking Committee who want
more background on the AIG fiasco, particularly who did what and when, need to read the
paper by Phillip Swagel, "The Financial Crisis: An Inside View," Brookings
Papers on Economic Activity, Spring 2009, The Brookings Institution.
We hear in the channel that Fed officials were
furious when Swagel, who served at the US Treasury with former Secretary Hank
Paulson, published his all-to-detailed apology. We understand that several
prominent members of the trial bar also are interested in the Swagel document.
Last week the Senate Banking
Committee spent a lot of time talking with Chairman Bernanke about why
payouts were made to AIG counterparties like Goldman Sachs (GS) and
Deutsche Bank (DB), but the real issue is why Tim Geithner and the
GS-controlled board of directors of the FRBNY were permitted to make
the supposed "loans" to AIG in the first place. The primary legal duty
of the Fed Board is to supervise the activities of the Reserve Banks.
In this case, Chairman Bernanke and the rest of the Board seemingly got
rolled by Tim Geithner and GS, to the detriment of the Fed's
reputation, the financial interests of all taxpayers and due process of
law.
Martin Mayer reminded us last week
that the Fed is meant to be "independent" from the White House, not the
Congress from which its legal authority comes by way of the
Constitution. Nor does Fed independence mean that the officers of the
Federal Reserve Banks or the Board are allowed to make laws. None of
the officials of the Fed are officers of the United States. No Fed
official has any power to make commitments on behalf of the Treasury,
unless and except when directed by the Secretary. Given the losses to
the Treasury due to the Fed's own losses, this is an important point
that members of the Senate need to investigate further.
The FRBNY not
only used but abused the Fed's power's under Section 13(3) of the Federal Reserve
Act. In AIG, the FRBNY under Tim Geithner invoked the "unusual and exigent"
clause again and again, but there is a serious legal question whether the
then-FRBNY President and the FRBNY's board had the right to commit trillions without any due diligence
process or deliberate, prior approval
of the Fed Board in Washington, as required by law. The financial
commitments to GS and other dealers regarding AIG were made always on a
weekend with Geithner "negotiating" alone in New York, while Chairman
Bernanke, Vice Chairman Donald Kohn and the rest of the BOG were
sitting in DC without any real financial understanding of the substance
of the transactions or the relationships between the people involved in
the negotiations.
Was Tim Geithner technically qualified or
legally empowered to "make deals' without the prior consent of the Fed Board? We
don't think so. Shouldn't there have been financial fairness opinions re: the
transactions? Yes.
We understand that the first order of business in
any Fed audit sought by members of the Senate opposed to Chairman Bernanke's
re-appointment is to review the internal Fed legal memoranda and FRBNY board
minutes supporting the AIG bailout. These documents, if they exist at all,
should be provided to the Senate before a vote on the Bernanke nomination. Indeed, if
the panel established to review the AIG bailout and related events investigates
the issue of how and when certain commitments were made by the FRBNY, we
wouldn't be surprised if they find that Geithner acted illegally and that
Bernanke and the Fed Board were negligent in not stopping this looting of the
national patrimony by Geithjner, acting as de facto
agent for the largest dealer banks
in New York and London.
The second strike against Chairman Bernanke is
leadership. In an exchange with SBC Chairman Christopher Dodd (D-CT),
Bernanke said that he could not force the counterparties of AIG to take a
haircuts on their CDS positions because he had "no leverage." Again, this
goes back to the issue of why the loan to AIG was made at all.
Having made the first error,Bernanke and other Fed
officials seek to use it as justification for further acts of idiocy. Chairman Dodd look
incredulous and replied "you are the Chairman of the Federal Reserve," to which
Bernanke replied that he did not want to abuse his "supervisory powers." Dodd
replied "apparently not" in seeming disgust.
We have been privileged to know Fed
chairmen going back to Arthur Burns. Regardless of their politics or
views on economic policies, Fed Chairmen like Burns, Paul Volcker and
even Alan Greenspan all knew that the Fed's power is as much about
moral suasion as explicit legal authority. After all, the Chairman of
the Fed is essentially the Treasury's investment banker. In the
financial markets, there are times when Fed Chairmen have to exercise
leadership and, yes, occasionally raise their voices and intimidate
bank executives in the name of the greater public good. AIG was such as
test and Chairman Bernanke failed, in our view.
Chairman Bernanke does not seem to
understand that leadership is a basic part of the Fed Chairman's job
description and the wellspring from which independence comes. The
handling of AIG by Chairman Bernanke and the Fed Board seems to us
proof, again, that Washington needs to stop populating the Fed's board
with academic economists who have no real world leadership skills, nor
operational or financial experience. Just as we need to end the de
facto political control of the banksters over America's central bank,
we need also to end the institutional tyranny of the academic
economists at the Federal Reserve Board.
The third reason that the Senate should vote no on Chairman
Bernanke's second four-year term as Fed Chairman is independence. While Bernanke
publicly frets about the Fed losing its political independence as a result of
greater congressional scrutiny of its operations, the central bank shows no
independence or ability to supervise the largest banks for which it has legal
responsibility. And Chairman Bernanke has the unmitigated gall to ask the
Congress to increase the Fed's supervisory responsibilities. As we wrote in The
IRA Advisory Service last week:
"Indeed, if you want a very tangible example of why the Fed
should be taken out of the business of bank supervision, it is precisely the
TARP repayment by Bank of America (BAC). The responsible position for the Fed
and OCC to take in this transaction is to make BAC raise more capital now, when
the equity markets are receptive, but wait on TARP repayment until we are
through Q2 2010 and have a better idea on loss severity for on balance sheet and
OBS exposures, HELOCs and second lien mortgages, to name a few issues.
Apparently allowing outgoing CEO Ken Lewis to take a victory lap via TARP
repayment is more important to the Fed than ensuring the safety and soundness of
BAC."
One close observer of the mortgage channel, who we hope to
interview soon in The IRA, says that given the recent deterioration of mortgage
credit, it is impossible that BAC has not gotten its pari passu portion
of the losses which are hitting the FHA. The same source says that using
conservative math, FHA has another $75 billion in losses to take, with zero left
in the FHA insurance fund. Worst case for FHA is double that number, we're
told. How could the Fed believe that BAC, which is the biggest
owner of mortgages and HELOCs, is immune from this approaching storm?
Because the Fed is cooking the books of the largest banks.
The observer confirms our view that
trading gains on the books of banks such as BAC are due to the Fed's open market
purchases, which drove up prices for MBS and other types of toxic waste. In
effect, the Fed's manipulation of the prices of various toxic securities is
giving the largest US banks and their auditors a "pass" on accounting
write-downs in Q4 2009 and for the full year - assuming that MBS prices do not
drop sharply before the end of the month.
Question: Is not the Fed's manipulation of securities prices
and the window-dressing of bank financial statements not a vioatlion of
securities laws and SEC regulations?
Of note, in her column on Sunday about the widely overlooked issue of
second lien mortgages, "Why Treasury Needs a Plan B for
Mortgages," Gretchen Morgenson of The New York Times
writes that "Unfortunately, there is a $442 billion reason that wiping out
second liens is not high on the government's agenda: that is the amount of
second mortgages and home equity lines of credit on the balance sheets of Bank
of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks - the very
same companies the Treasury is urging to modify loans that they service - have
zero interest in writing down second liens they hold because it would mean
further damage to their balance sheets."
Thus the Fed is not only allowing insolvent zombie banks
to repay TARP funds before the worst of the credit crisis is past, but
the "independent" central bank is engaged in a massive act of accounting fraud
to prop up prices for illiquid securities and thereby help banks avoid another
round of year-end write downs, the banks the Fed supposedly regulates. This act
of deliberate market manipulation suggests that the Fed's bank stress tests
were a complete fabrication. Only by artificially propping up prices for
illiquid securities can the Fed make the banks look good enough to close
their books in 2009 and, most important, attract private equity investors back to the table.
Of note, the perversion of accounting rules in the name of
helping the largest global banks is also well-underway in the EU. Our
friends at CFO Zone published a comment on same last week that deserves
your attention: "International Accounting Standards Board has
'disgraced itself,' says critic"
What is really funny, to us at least, is
that we hear in the channel that BAC is ultimately going to give the CEO slot to
a BAC insider, consumer banking head Brian Moynihan, who testified before
Congress on the Merrill Lynch transaction in November. Just imagine
how the Fed Board, Chairman Bernanke and the Fed's Division of
Supervision & Regulation are going to look when, after all the hand wringing
about aiding BAC's CEO search by allowing the TARP repayment, the post is
finally given to an insider!
Former colleagues describe Moynihan as a close associate of Ken Lewis.
If the objective of forcing Lewis' departure was change in the culture
in the CSUITE at BAC, installing one of his trusted henchmen, in this case left over
from the Fleet Bank acquisition, seems a retrograde step.
All we can say about the treatment of the
BAC TARP repayment issue and the Fed's handling of the supervision of large
banks generally is that it is high time
for the Congress to revisit the McFadden Act of 1927. In particular, we need
to look again at making further changes to the Fed to ensure that it is entirely
subordinate to the public interest and that never again will private financial institutions
such as GS or BAC be in a position to dictate terms to the central
bank. Whether you are talking about the loans to AIG or the mishandling of BAC's
TARP repayments, the Fed under Chairman Bernanke seems to have acted irresponsibly and contrary to the
law.
For all of the above reasons, we think that the Senate should reject the re-nomination of Ben Bernanke and ask
the President to nominate a new candidate as Chairman and also nominate two additional
candidates for Fed governor to fill the other two long vacant seats.
Questions? Comments? info@institutionalriskanalytics.com
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Having worked for a Big 4 Accounting firm, I was shocked on my first audits of Fortune 500 companies. Time after time all they did with our material objections was "book budget.
The 'opinions' are less than worthless for all but the most careful, honest, objective corporations demanding accurate financial records, in good times and bad. There are some of them but in desperate times, I wouldn't want to bet on the numbers of any company certified by the CPAs.
http://neweconomicperspectives.blogspot.com/2009/12/geithner-as-our-last-action-hero.html
This is a link to 3 articles by William Black of RTC investigative fame. Black is on record as saying that the deficit in the banking system is such that they don't dare look and that the entire matter is classic criminal lending. This means the entire matter makes Watergate look like a few lost school papers in comparison.
It is kind of amazing that as soon as the official word is everything is okay, Kuwait sells its interest in Citi while Citi is under $5 a share. From what I recall, all this sovereign wealth fund rescue of Citi occurred late 2007 and early 2008. Early 2008, Citi was priced at $26.71 on the close of 1/15/08. I wonder how they made money when the stock is under 20% of its price at that time? Did they get repriced? In any case, selling at less than 20% of entry price doesn't look like they are expecting Citi to recover, but are getting out while the getting is good.
BAC was buying back its own stock while it was in excess of $50 a share. It just sold well over 1 billion shares at $15 and change. Hell of a way to do business and clearly not a company being run in favor of shareholders. It appears that signals are being sent out that BAC is in better shape than we believe or it is being implied to people that it is in better shape than it is. Also, if the signal is being sent out that it is solvent when it isn't solvent, this is a clear case of fraud. HELOC's don't have any worth in foreclosure, as one might as well be calling a credit card loan as a home loan. If FNMA is broke, Citi, BAC, WFC and quite possibly JPM are all with it, TARP or no TARP.
What question this begs is who is being protected? If Black is correct, there are some people in high places that need to be sent to stay with some people in low places, namely Sing Sing or whatever prison they have in the east. Men spend their lives in prison all the time for robbing banks of a few thousand while these banks have been looted to the tune of hundreds of billions. Clearly the rush is so the insiders in the banks can take their next slice of loot. I sense that this entire game is one of speculation on borrowed money, money they are going to have one hell of a time getting back. The banks in Japan are up to their necks in stock and they can't ever get out of the noose because their necks are the ones in it. If they could sell out and take their gains, that mess would be over, but they are the elephants in the market. Goldman is going to pay something like $20 billion this year and I venture their necks are in the market to the tune of many times that and theirs are the necks now in the noose. For the next 30 years, we will be propping GS and these other outfits while their heads entire lay around on the beaches or rot in prison.
All very good. Fed should be abolished - audited whatever. How about leaving this guy in this position so we can hold him accountable when we start seeing the consequences of all the decisions he made. He needs to be kept there since our great american tradition is to only hold the incumbent responsible - It is considered such bad form to blame the past administration.
Re: BAC's TARP repayment, I bet the real reason they are pushing for BAC to repay ASAP is that Obama wants the money to fund more stimulus (to top up the economy heading into the mid-terms) without having to go back to Congress hat in hand. If BAC goes belly up in 2010, they'll worry about that when the time comes. It'll be another precious crisis not to be wasted.
Whalen....
Thank you for the report.
This points towards accountability and justice ?
It would go a long way if somehow the govt. could backtrack
to the 100% AIG awards....
But would this not render at least several institutions
unable to pay even if justice was rendered ?
The other point being....ok so what if a lot of the guilty could be filtered out ....
What would be salvaged ?
Thanks for not only providing top notch analysis but for also providing such a stalwart voice of reason within IRA.
As usual, another great piece. Thanks for sharing it with us, Mr. Whalen, sir.