Guest Post: Bernanke: The Man, The Legacy And The Law

Tyler Durden's picture

Submitted by Finance Addict

Bernanke: The Man, The Legacy And The Law

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. Here’s one snippet:

Under the Federal Reserve Act, the Fed is authorized to make loans under “unusual and exigent circumstances” as long as the loans are “secured to the satisfaction of the Federal Reserve banks,” meaning, as long as the Fed does not expect to suffer any losses. A fair argument can be made that in the depths of the crisis, some of the Fed’s emergency loans violated this dictum. 

For some reason Lowenstein chooses not to actually discuss any of these arguments.

Did the Fed actually break the law?

Let me start by saying that this is a remarkable time to be a central banker. In fact, 2008 was the most extraordinary year of my 29 years at the Federal Reserve Bank of New York. If you had told me a year ago that we at the Fed would create a special purpose vehicle to hold assets acquired to facilitate the merger of JPMorgan Chase and Bear Stearns, rescue AIG at the eleventh hour, and eliminate tail risk in a $300 billion portfolio of Citigroup assets, I would have thought you were mad. But of course, all those things have happened in just the last ten months. 

-Thomas C. Baxter Jr., General Counsel of the Federal Reserve Bank of New York in a speech to the London School of Economics on January 19, 2009 (PDF)

The Fed did all of this and more. Was it actually allowed to?

Section 13(3) of the Federal Reserve Act says that then the right number of voting members are present and in agreement, then the Fed can to lend to any “individual, partnership or corporation” as long as certain conditions are met.

  1. The circumstances must be “unusual” and “exigent”.
  2. The loan must be secured with satisfactory collateral.
  3. The Fed must have evidence that the party in need “is unable to secure adequate credit accommodations from other banking institutions.”

Writing for the North Carolina Banking Institute, Thomas Porter (PDF) found that the Fed’s actions in the case of Bear Sterns were “legally defensible”. However, he also implies that it began to skate on thin ice when it used similar methods (making a collateralized loan to an SPV) to bail out AIG and its counterparties:

While the Fed’s initial response to rescue Bear were legal under § 13(3), subsequent actions raise questions about whether the Fed continued to meet the “unusual” standard required under § 13(3). It seems clear that § 13(3) was a loophole provision included in the Federal Reserve Act to help the Fed move swiftly and decisively in response to significant threats; however, it is unlikely that it was meant to form the basis of Fed action over a long horizon. At some point, continuing circumstances cease to be unusual. At what point? 

Meanwhile, Alexander Mehra identifies other concerns in a paper published in the University of Pennsylvania Business Law Journal. He hones in on the fact that the language in Section 13(3) only allows loans to troubled parties, not asset purchases. The Fed created an SPV and then lent it money to purchase Bear Sterns’ troubled assets, but Mehra argues that this was a loan in name only. Its real purpose was to remove the assets from Bear’s balance sheet and so facilitate the sale of Bear to JP Morgan Chase.

Mehra also argues that under § 13(3) the loans had to be given directly to the party in trouble, and not to an intermediary. Other Fed crisis programs like the Commercial Paper Funding Facility and the Money Market Investor Funding Facility suffered from similar flaws. The SPV structure used to assist AIG was a problem, too. In fact, of the alphabet soup of assistance programs created by the Fed, all of the ones highlighted below are viewed by Mehra as having one or more illegal elements:

  • Bear Sterns
  • CPFF – Commercial Paper Funding Facility
  • MMIF – Money Market Investor Funding Facility
  • AIG
  • TSLF – Term Securities Lending Facility
  • PDCF – Primary Dealer Credit Facility
  • AMLF – Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
  • TALF -  Term Asset-Backed Securities Loan Facility

OK…so maybe the Fed did break the law. Does it matter?

The thing about the Fed is that it’s very hard to haul in front of the courts. As Porter reminds us, “the courts have largely shied away from developing jurisprudence that interprets monetary policy.” Put simply — like Lowenstein, no judge really wants to go there.

And there seems to be a consensus among what Thomas Frank calls the “Too Smart to Fail”, i.e. mainstream pundits, that the ends justified the mean. Lowenstein:

Even rightward-leaning economists mostly give Bernanke a pass on his actions during the financial panic itself. The fog of war was pretty intense, and he avoided losing taxpayer money.

But those who can appreciate Bernanke’s good intentions might still question why the topic of legality has not been addressed in the media, at all. Even if one supports the outcomes achieved by the Fed, was there no way to accomplish this and still remain within the bounds of the law? As Thomas Porter writes,

Over time, the role of the Federal Reserve has been defined by the precedent of its own actions.

In other words, the fact that Bernanke’s Fed may have broken the law will give license to future Feds to do the same and then to argue that there was no alternative.

Again, why has there been such little analysis of this outside of the pages of the specialist journals? Is it really of unimportant whether the central bank of the world’s leading nation follows the rule of law?

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spiral_eyes's picture

reality is transitory.

Neo1's picture

There is a way to end the fractional reserve banking fraud.

Returning to real money is the best revenge against the banksters.

The real reason you pay an income tax, is for the privilege of using a private currency.

Also known As A:  Federal Reserve Note

Demand from your bank, lawful money and the tax goes away, with a tax exemption on lawful money, all of your money is yours.

Tax Exemption:

Web search these three different phrases:

Redeemed in Lawful money  or

Redeemed in Lawful money Pursuant to Title 12 USC §411  or

deposited for credit on account or exchanged for

non-negotiable federal reserve notes of face value


This loads slow, well worth it. Side by side columns; The Republic vs THE CORPORATION

TruthInSunshine's picture

"...he avoided losing taxpayer money..."


Well, that surely relegates this Atlantic 'expose' closer to tabloid journalism of the most shitty quality (ie shitty even by tabloid standards).

I'm so glad that The Bernank's expenditures of trillions of dollars buying toxic and now marked-to-unicorn assets, just sitting on its balance sheet, along with his pledging of many trillions more in taxpayer backstopping future losses of financial/banking entities in similar fashion, hasn't resulted in any taxpayer losses. </sarcasm-bolded-and-spelled-fully-just-in-case-newbies-wouldn't-understand-an-abbreviated-/sarc>


It would be nice to see The Bernank profiled in depth by someone like Jonathan Weil, who despite working for yet another mouthpiece of the WallStreet/Manhattan/Banking TBTF Syndicate that merely strives to be a slightly more 'serious' version of cnBSc, at least appears to be given free reign by his handlers from time to time, which is the only time Bloomberg 'Press' is worth paying attention to (Tom Keene, if given the Green Light by Bloomturd, would probably do a decent job of revealing The Bernank's many, infected, pus-laden warts, also).

LowProfile's picture


Again, why has there been such little analysis of this outside of the pages of the specialist journals?

Who among J6P would understand, or even want to pay attention to this?  After all, it's baseball season!

Things won't change until the roof is on fire.

Is it really of unimportant whether the central bank of the world’s leading nation follows the rule of law?

...Not until the roof is on fire.

Random_Robert's picture

"The thing about the Fed is that it’s very hard to haul in front of the courts. As Porter reminds us, “the courts have largely shied away from developing jurisprudence that interprets monetary policy.” Put simply — like Lowenstein, no judge really wants to go there." 

-This is complete bullshit. No Judge even HAS to go there. All they have to do is uphold the basis of law that already exists:

The Coinage Act of 1792: (an act of LAW, for those following along): 

"the money of account of the United States shall be expressed in dollars or units … of the value [mass or weight] of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure … silver."

The term "dollar" is a LEGAL term- the Coinage Act of 1792 has never been repealed. 

The Federal Reserve are counterfeiters.


ClevelandJanelle6's picture

my neighbor's aunt makes $67 hourly on the laptop. She has been fired from work for ten months but last month her check was $20142 just working on the laptop for a few hours. Here's the site to read more ....

metastar's picture

Who needs laws when might makes right. Laws are for the little people. There is no law governing the FED or anyone in the upper reaches of the government.

Hence, we have a criminal, corrupt, and illegitimate government. But, who are we to resist tyranny? We haven't done that since 1776!

Coldfire's picture

Roger "Rimmer" Lowenstein, fluffer to financial fascism.

kralizec's picture

He's a legend in his own mind.

asteroids's picture

Did this bozo touch upon the concept of Moral Hazard?

SheepDog-One's picture

Well Im sure that the Central Bankster puppet masters and their puppets in the govt can always find a loophole to make all their criminal actions 'technically legal'. So what?

Village Smithy's picture

Speaking of Bernanke, looks like he's in the market this morning buying a lot of AAPL. Must have tried out his new ipad 3 last night and was really impressed! Sorry Mrs. Bernanke, you've just become another of the countless ipad widows.

DavosSherman's picture

Ridiculous. Congress broke the law in 1913, and every Congress since has looked the other way. 

DavosSherman's picture

Ridiculous. Congress broke the law in 1913, and every Congress since has looked the other way. 

hairball48's picture

Priceless once more WilliamBanzai7 !!!

Getting Old Sucks's picture

Law?  What Law?  There ain't no more law.  Oh wait, just the laws they want to enforce against those they say broke them.

Widowmaker's picture

Sure there is, the law is just monetized.  It's there alright.  Be poor and be illegal!  Be rich and the appeal comes to you.

The double standard of justice Inc is a mere illustration of how fucking entrenched fascism and socialized crime has become in the land of the free.

If you aint rich you are illegal in ways only increasing!

Vince Clortho's picture

Quick Summary of the article:

Fed = fraud

CBs = Sociopaths

Dr. Engali's picture

It's ridiculous to point out the fact that the fed broke the law ,when the fed is against the law  in of itself.

Widowmaker's picture

Let me summarize the absurdity of this sympathetic bullshit in three words.

"Bernanke against YOU."

The guy is a fucking shill, sucking faggot dick on fraud street, damning every US child to debt servitude for Fraud Inc.



Dr. Engali's picture

Tell us how you really feel. Come on let it out.

Widowmaker's picture

You're in luck, Doctor, there are years of Widowmaker-comments to read.

LowProfile's picture

Yeah, but it never gets old.

kalum's picture

May he RIH. He has turned the waning years of senior citizens into a living Hell

Bam_Man's picture

It is not easy to be simultaneously a "brilliant academic" and "clueless jackass, devoid of common sense", but amazingly Bernanke manages to pull it off.

Snakeeyes's picture

Bernanke is a one trick pony: liquidity and inflation will solve our economy. But look at prices of commodities, oil, etc. and The Fed's inflation definition.

He has been VERY successful at creating inflation, just not in salaries or house prices.

Great job Ben! Go back to Princeton.

Clowns on Acid's picture

The Fed is merely doing what all the new "social media" websites do. Just do what you want while skirting the law...if anyone questions the legality it ....just crush the dissent via Big Media (who are also a beneficiary of the Ad dollars)

Google, Facebook,, etc...They all use one's personal data to sell it to others. Legal? i doubt it...but everyone just clicks the "OK" box ....who is going to wade thru 20 pages of 4pt font of legalese and question any unlawful privacy theft?

Social media technology and its tentacles (squid?) has outpaced any privacy laws that were written largely before the onset of the Internet. As the Internet is now global, laws related to its use and privacy for users is virtually non exitent and susceptible to abuse by the social media companies.  

As the Fed shows the way of "just doing it" goes all other facets of the socio-economic fabric.

The Godless have taken over.

Yardfarmer's picture

For all the opprobrium being heaped on the Hero BSBernank here, he and his cronies at JPM and the US Treasury are still very much in control of the game. Au/Ag have been effectively capped and are tanking further, the gold "writers" have been effectively discredited and their price chasing subscribers are wringing their hands in anguish and loss.

The ministry of information propaganda mill has managed perception quite adequately, reassuring the "awakening" American masses that we are in the midst of a "recovery," that jobs are flooding back into the marketplace, the housing market has bottomed, and that light is glimmering at the end of that long dark Lehman tunnel.

The infinitely credulous and deluded American public has bought this fiction, just like they always have pursuing the chimera of infinite prosperity. Nothing will ever change this. This charade has a long time to run. By the time it's all over the majority of them will wake up from the American dream to find their savings, pensions, retirement funds have vanished, that they're now living as renters in the homes they thought they "owned", and that once abundant and seemingly endless cornucopia of goods is a fenced off preserve of a privileged class.


Rubicon's picture

Never trust a man with a beard

ArrestBobRubin's picture

Golly, so shocking to think they gave a Lowenstein this ass-licker assignment.  Jews lying for Jews, a time-honored tradition.

heinrich6666's picture

Should be "homes in", not "hones in".

AGuy's picture

"Lowenstein pays scant attention to the emergency actions taken to save the financial system itself."

The Fed is just like the fireman that goes around setting homes on fire, so he can later put them out and get a medal for saving the neighborhood.

The Fed created the bubble in the first place. It was Fed Chairman Greenspan, who in 2004 told the public to load up on ARMs and who also forced banks to lower mortgages below historic lows.