One can imagine the pencil-chewing that went on, while the giveaway-artists tried to invent a term to mask simply bailing out their own interests. "Paulson's Troubled Assets Relief Program (TARP) got too much push-back. We need a better name, one the public will accept." Someone at the table finally came up with "quantitative easing' and the show was on the road. Under that moniker, Bernanke shoved 22 times the TARP funding at the banks, 16 trillion dollars, and both the public and the press swallowed it whole. Consider some history in these revelations exposed by Craig Torres in a Jan 18th, 2013 article in Bloomberg News titled Fed Slow to Grasp Crisis in 2007 as Yellen Sounded Alarm. (quotes from Bloomberg italicized for attribution):
Federal Reserve officials in August 2007 saw the beginnings of the crisis in sub-prime mortgages and concluded that the U.S. economy would be able to withstand it, even as some Fed members warned that it could trigger a downturn, transcripts from their 2007 meetings show.
"Well-capitalized banks and opportunistic investors will come in and fill the gap, restoring credit flows to nonfinancial businesses and to the vast majority of households that can service their debts," Donald Kohn, then vice chairman of the board, said in Aug. 2007 according to transcripts of the Federal Open Market Committee meetings released today in Washington.
How'd that work out for you, Donald? At the time the statement was issued, banks were flagrantly under capitalized (read that quantitative disease, if you wish) and Goldman Sachs was selling out its investors by privately shorting the sub-prime mortgage derivatives it flogged. How could the Fed possibly not know, short of blatant complicity or simply whistling past the graveyard? Here are but three guys who were on board and might have had a clue--The Big Picture, June 12, 2012, Macro Perspective on the Capital Markets, Economy, Technology and Digital Media (italicized for attribution)
- Stephen Friedman. In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap Fed loans. During the same period, Friedman, who was chairman of the New York Fed at the time, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed's rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO. During the financial crisis, Goldman Sachs received $814 billion in total financial assistance from the Fed.
- Sanford Weill, the former CEO of Citigroup, served on the Fed's Board of Directors in New York in 2006. During the financial crisis, Citigroup received over $2.5 trillion in total financial assistance from the Fed.
- Richard Fuld, Jr, the former CEO of Lehman Brothers, served on the Fed's Board of Directors in New York from 2006 to 2008. During the financial crisis, the Fed provided $183 billion in total financial assistance to Lehman before it collapsed.
$3.5 trillion divvied up among just three companies, by insiders who worked for those companies before sitting on the Fed Board. That's a game-winning double-play. These guys knew how to play Casey Stengel's game, they just happened to be on the opposing team, even though their public jerseys read Federal Reserve Bank. Back to Bloomberg:
At the next meeting, on June 27-28, Janet Yellen (San Francisco Fed Chairman) said the biggest risk to economic growth was housing, which she called the "600- pound gorilla in the room." She cited the Sacramento area, where price increases of more than 20 percent a year from 2002 to 2005 had begun to decline. Subprime mortgage delinquency rates around the California capital "rose sharply" in 2006 to become some of the nation's highest, she said.
"The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst," Yellen said. "Rising defaults in sub-prime could spread to other sectors of the mortgage market and could trigger a vicious cycle in which a further deceleration in house prices increases foreclosures."
"The Financial Crisis Inquiry Commission's 545-page report said regulators took "little meaningful action" against the threats of financial calamity.
"The prime example is the Federal Reserve's pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudential lending standards," the report says.
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