Federal Reserve Bank of New York

The New York Fed's Brian Sack, better known by everyone as the head of the Plunge Protection Team, is gone.

In the not quite 100 years since the founding of your institution, America has exchanged central banking for a kind of central planning and the gold standard for what I will call the Ph.D. standard. I regret the changes and will propose reforms, or, I suppose, re-reforms, as my program is very much in accord with that of the founders of this institution. Have you ever read the Federal Reserve Act? The authorizing legislation projected a body “to provide for the establishment of the Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper and to establish a more effective supervision of banking in the United States, and for other purposes.” By now can we identify the operative phrase? Of course: “for other purposes.” As you prepare to mark the Fed’s centenary, may I urge you to reflect on just how far you have wandered from the intentions of the founders? The institution they envisioned would operate passively, through the discount window. It would not create credit but rather liquefy the existing stock of credit by turning good-quality commercial bills into cash— temporarily. This it would do according to the demands of the seasons and the cycle. The Fed would respond to the community, not try to anticipate or lead it. It would not override the price mechanism— as today’s Fed seems to do at every available opportunity—but yield to it.

Back in late 2006 and early 2007 a few (soon to be very rich) people were warning anyone who cared to listen, about what cracks in the subprime facade meant for the housing sector and the credit bubble in general. They were largely ignored as none other than the Fed chairman promised that all is fine (see here). A few months later New Century collapsed and the rest is history: tens of trillions later we are still picking up the pieces and housing continues to collapse. Yet one bubble which the Federal Government managed to blow in the meantime to staggering proportions in virtually no time, for no other reason than to give the impression of consumer releveraging, was the student debt bubble, which at last check just surpassed $1 trillion, and is growing at $40-50 billion each month. However, just like subprime, the first cracks have now appeared. In a report set to convince borrowers that Student Loan ABS are still safe - of course they are - they are backed by all taxpayers after all in the form of the Family Federal Education Program - Fitch discloses something rather troubling, namely that of the $1 trillion + in student debt outstanding, "as many as 27% of all student loan borrowers are more than 30 days past due." In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding). That this is happening with interest rates at record lows is quite stunning and a loud wake up call that it is not rates that determine affordability and sustainability: it is general economic conditions, deplorable as they may be, which have made the popping of the student loan bubble inevitable. It also means that if the rise in interest rate continues, then the student loan bubble will pop that much faster, and bring another $1 trillion in unintended consequences on the shoulders of the US taxpayer who once again will be left footing the bill.

Fed chairman Ben Bernanke is covered in a long profile by Roger Lowenstein in the Atlantic. The sympathetic account takes the reader blow-by-blow through the criticism that he has received from virtually all quarters during his tenure as Fed chair. What Lowenstein hones in on are the reviews and criticisms of Bernanke’s performance in “resurrecting the economy” — the interest rate policy, his interpretation of the dual mandate, quantitative easing, Operation Twist, etc. But for a piece that clocks in at 8,287 words, Lowenstein pays scant attention to the emergency actions taken to save the financial system itself.

All you need to read.

The added weight on the gross national debt as well as the dis-incentive for people to seek better education would prove to be one of the greatest risk for America as a whole.

We have a "let's pretend" economy: let's pretend the unemployment rate actually reflects the number of people with full-time jobs and the number of people seeking jobs, let's pretend the Federal government borrowing 10% of the GDP every year is sustainable without any consequences, let's pretend the stock market actually reflects the economy rather than Federal Reserve monetary intervention, and so on. We also have a "let's pretend" education/student-loan game running: let's pretend college is "worth" the investment, and let's pretend student loans are about education. There are three dirty little secrets buried under the education/student-loan complex's high-gloss sheen: 1. Student loans have little to do with education and everything to do with creating a new profit center for subprime-type lenders guaranteed by the Savior State. 2. A college diploma's value in the real world of getting a job and earning a good salary in a post-financialization economy has been grossly oversold. 3. Many people are taking out student loans just to live; the loans are essentially a form of "State funding" a.k.a. welfare that must be paid back. We've got a lot of charts that reflect reality rather than hype, so let's get started. Despite all the bleating rationalizations issued by the Education Complex, higher education costs have outstripped the rest of the economy's cost structure. Funny how nobody ever asks if there is any real competitive pressure in the Education Complex; there isn't, and why should there be when students can borrow $30,000 a year?

German lawmakers are to review Bundesbank controls of and management of Germany’s gold reserves.  Parliament’s Budget Committee will assess how the central bank manages its inventory of Germany’s gold bullion bars that are believed to be stored in Frankfurt, Paris, London and the Federal Reserve Bank of New York, according to German newspaper Bild.  The German Federal Audit Office has criticised the Bundesbank’s lax auditing and inventory controls regarding Germany’s sizeable gold reserves – 3,396.3 tonnes of gold or some 73.7% of Germany’s national foreign exchange reserves. There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany's central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany’s gold reserves. The eurozone's central bank system is massively imbalanced after the ECB’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31% bigger than the German economy, after a second tranche of three-year loans. The concern is that were the eurozone to collapse, Bundesbank's losses could be half a trillion euros - more than one-and-a-half times the size of the Germany's annual budget. In that scenario, Germany’s national patrimony of gold bullion reserves would be needed to support the currency – whether that be a new euro or a return to the Deutsche mark.  The German lawmakers are following in the footsteps of US Presidential candidate Ron Paul who has long called for an audit of the US’ gold reserves. It is believed that some 60% of Germany’s gold is stored outside of Germany and much of it in the Federal Reserve Bank of New York.

Nearly two years after his catastrophic foray into Op-Ed writing, here is Tim Geithner's latest, this time making the hypocritical case to "not forget the lesson from the financial crisis"... which he himself ushered on America as head of the New York Fed. Frankly we are quite sure it is not even worth reading this drivel: the unemployed man walking has been a total disaster during his entire tenure (at both the New York Fed where he supervised all the banks that subsequently fell, and the Treasury), and we are fairly confident that reading anything written by this pathological failure will cost collective IQs to drop by 10 points at a minimum. Hey Tim: is there a risk the US can get downgraded? Any risk?

$15 Trillion Dollar Fraud … Or Nigerian Style Scam?

Since nobody else has any interest in downtown NY real estate, Goldman's Bill Dudley, currently incidentally in charge of the New York Fed, has decided to step up. "The Federal Reserve Bank of New York (New York Fed) today announced that it has acquired the building at 33 Maiden Lane for $207.5 million from Merit US Real Estate Fund III, L.P. and established a new, wholly owned limited liability company called Maiden & Nassau LLC to serve as owner of the building. The acquisition provides a cost-effective, long-term alternative to the current practice of leasing space in this and other buildings and allows for greater control over maintenance, operation and security of the building." As a reminder, the 9th floor of 33 Liberty is where the ever elusive, but always present Plunge Protection Team, pardon the "markets group" at the Federal Reserve is housed (more here). And although in recent days it is no secret that the bulk of Fed open market stock order are routed via that one certain HFT powerhouse out of Chicago, it is always a good idea to keep all the market manipulating facilities under one roof. And so, the Fed now will have full domain over everything that transpires under its own roof. And since the building likely has an extended basement, it provides Dudley, and his muppet Ben Bernanke with a convenient location where to store the soon to be confiscated 107 tons of Greek gold.

One thing is for certain, the litigation is beginning to shift from minor players to major players at the core of the Financial Crisis. Investors take note, this is a major shift and needs to be monitored as it will have major implications for market dynamics going forward.

• New Greek demands threaten debt deal (FT)
• Greek Finance Minister Heads to Brussels; Loan Talks Stall (WSJ)
• Talks Stalled on Greek Bailout as Venizelos Heads to Brussels (Bloomberg)
• US banks near historic deal on foreclosures (FT)
• Obama: Europe needs "absolute commitment" on debt crisis (Reuters)
• Fed's Lacker sees no need for more easing for now (Reuters)
• Europe compromise urged at summit (China Daily)
• China to Punish Illicit Bank Lending, Shanghai Securities Says (Bloomberg)
• Monti Meets Obama Amid ’Spectacular Progress’ (Bloomberg)
• Draghi’s First 100 Days Presage Greek Help (Bloomberg)

The last time the Fed tried to dump Maiden Lane 2 assets via a public auction in a BWIC manner, it nearly crashed the credit market. This time, the FRBNY, headed by one ex-Goldman Sachs alum Bill Dudley, has decided to go back to its shady, opaque ways, and transact in private, with no clear indication of the actual bidding process or transaction terms, and sell $6.2 billion in Maiden Lane 2 "assets" to, wait for it, Goldman Sachs, the same firm that would benefit in the first place if AIG's assets imploded (remember all those CDS it held on AIG which supposedly prevented it from losing money if AIG went bankrupt?). One wonders: does Goldman have a put option on the ML2 portfolio if the market experiences a sudden and totally impossible downtick some day? But all is well - we have assurance from the Fed that the sale happened in a "competitive process." Luckily, that takes care of any appearance of impropriety.

And so we've come full circle. The WSJ is reporting that the Federal Reserve Bank of New York will be seeking bids by the middle of this week for roughly $6 Billion dollars worth of residential mortgage backed securities currently held in Mainden Lane II. This would be on the heels of a $7 Billion dollar sale on January 19th to Credit Suisse.