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October 8, 2008 at 14:08:11
THE FED NOW OWNS THE WORLD'S LARGEST INSURANCE COMPANY -- BUT WHO OWNS THE FED? by Ellen Brown Page 1 of 3 page(s) |
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“Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders.” – The Honorable Louis McFadden, Chairman of the House Banking and Currency Committee in the 1930s The Federal Reserve (or Fed) has assumed sweeping new powers in the last year. In an unprecedented move in March 2008, the New York Fed advanced the funds for JPMorgan Chase Bank to buy investment bank Bear Stearns for pennies on the dollar. The deal was particularly controversial because Jamie Dimon, CEO of JPMorgan, sits on the board of the New York Fed and participated in the secret weekend negotiations.1In September 2008, the Federal Reserve did something even more unprecedented, when it bought the world’s largest insurance company. The Fed announced on September 16 that it was giving an $85 billion loan to American International Group (AIG) for a nearly 80% stake in the mega-insurer. The Associated Press called it a “government takeover,” but this was no ordinary nationalization. Unlike the U.S. Treasury, which took over Fannie Mae and Freddie Mac the week before, the Fed is not a government-owned agency. Also unprecedented was the way the deal was funded. The Associated Press reported: “The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.”2 
This is extraordinary. Why is the Treasury issuing U.S. government bonds (or debt) to fund the Fed, which is itself supposedly “the lender of last resort” created to fund the banks and the federal government? Yahoo Finance reported on September 17:
“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”
Normally, the Fed swaps green pieces of paper called Federal Reserve Notes for pink pieces of paper called U.S. bonds (the federal government’s I.O.U.s), in order to provide Congress with the dollars it cannot raise through taxes. Now, it seems, the government is issuing bonds, not for its own use, but for the use of the Fed! Perhaps the plan is to swap them with the banks’ dodgy derivatives collateral directly, without actually putting them up for sale to outside buyers. According to Wikipedia (which translates Fedspeak into somewhat clearer terms than the Fed’s own website):
“The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York’s primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. . . . The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable.”
“To switch debt that is less liquid for U.S. government securities that are easily tradable” means that the government gets the banks’ toxic derivative debt, and the banks get the government’s triple-A securities. Unlike the risky derivative debt, federal securities are considered “risk-free” for purposes of determining capital requirements, allowing the banks to improve their capital position so they can make new loans. (See E. Brown, “Bailout Bedlam,” webofdebt.com/articles, October 2, 2008.)
In its latest power play, on October 3, 2008, the Fed acquired the ability to pay interest to its member banks on the reserves the banks maintain at the Fed. Reuters reported on October 3:
“The U.S. Federal Reserve gained a key tactical tool from the $700 billion financial rescue package signed into law on Friday that will help it channel funds into parched credit markets. Tucked into the 451-page bill is a provision that lets the Fed pay interest on the reserves banks are required to hold at the central bank.”3
If the Fed’s money comes ultimately from the taxpayers, that means we the taxpayers are paying interest to the banks on the banks’ own reserves – reserves maintained for their own private profit. These increasingly controversial encroachments on the public purse warrant a closer look at the central banking scheme itself. Who owns the Federal Reserve, who actually controls it, where does it get its money, and whose interests is it serving?
Not Private and Not for Profit?
The Fed’s website insists that it is not a private corporation, is not operated for profit, and is not funded by Congress. But is that true? The Federal Reserve was set up in 1913 as a “lender of last resort” to backstop bank runs, following a particularly bad bank panic in 1907. The Fed’s mandate was then and continues to be to keep the private banking system intact; and that means keeping intact the system’s most valuable asset, a monopoly on creating the national money supply. Except for coins, every dollar in circulation is now created privately as a debt to the Federal Reserve or the banking system it heads. The Fed’s website attempts to gloss over its role as chief defender and protector of this private banking club, but let’s take a closer look. The website states:
* “The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations – possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.”
* “[The Federal Reserve] is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.”
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Federal Reserve 101
Another great article by Ellen Brown for the education of all of us! by William John Cox (29 articles, 0 quicklinks, 0 diaries, 29 comments [1 recommended, 0 rejected]) on Wednesday, Oct 8, 2008 at 4:48:22 PM  (0+)
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Ellen Brown's New Book: "The Web of Debt"
Kudos to Ellen Brown for her incredibly illuminating writings. I strongly recommend that you buy and read her latest book, "The Web of Debt," if you want to know the truth about our country's money creation and banking system. It's comparable to swallowing the "red" pill in the movie, "The Matrix". You will wake up to a reality that few citizens realize or understand. by David Benton (3 articles, 0 quicklinks, 0 diaries, 6 comments) on Wednesday, Oct 8, 2008 at 6:09:06 PM (0+)
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What is More Important?
... the issues that Ellen Brown and others raise, or who won the latest presidential candidate debate on TV? Sadly, you can hear crickets after each post of a new article about the Fed and the banking system, despite the noise of the stock market crashing. People would rather know who's saying the latest nasty thing about somebody else, than wise up and learn who's picking their pockets. Who are McCain and Obama's biggest campaign contributors - Wall Street and banks. Who are Obama's chief financial advisors - descredited former Fannie May top officers. Thanks for trying Ellen. Your book was great. I wish more people would read it. by Paul Rye (7 articles, 2 quicklinks, 22 diaries, 500 comments [44 recommended, 1 rejected]) on Wednesday, Oct 8, 2008 at 6:26:21 PM (0+)
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ADDENDUM: WHO OWNS THE BANKS THAT OWN THE FED?
Thanks for the comments! Beyond merely stating that all the shareholders of the Fed are its member banks, I’ve been asked to elaborate on who actually owns those banks. Are they owned by powerful foreign banking families as has been alleged? According to a discursive article by Dr. Edward Flaherty, condensed below, the answer is no – not to any provable extent. But that does not mean that the Fed and the U.S. banking system are not controlled from abroad. The central banking system has its own “banker’s bank,” the Bank for International Settlements (BIS) in Basel, Switzerland. The BIS does control the international banking system, in part by setting capital requirements -- the requirements that have now caused the entire U.S. credit market to freeze up. But that is a subject for a later article. Dr. Flaherty wrote: “. . . Each of the twelve Federal Reserve Banks is organized into a corporation whose shares are sold to the commercial banks and thrifts operating within the Bank’s district. Shareholders elect six of the nine the board of directors for their regional Federal Reserve Bank as well as its president. . . . “The SEC requires the name of any individual or organization that owns more than 5 percent of the outstanding shares of a publicly traded firm be made public. If foreigners own any shares of [eight banks claimed by Eustace Mullins to control the New York Federal Reserve], then their portions are not greater than 5 percent at this time. With no significant holdings of the major New York area banks, it does not seem likely that foreign conspirators could direct their actions. “. . . The law stipulates a small portion of Federal Reserve stock may be available for sale to the public. . . . However, under the terms of the Federal Reserve Act, public stock was only to be sold in the event the sale of stock to member banks did not raise the minimum of $4 million of initial capital for each Federal Reserve Bank when they were organized in 1913 (12 USCA Sec. 281). Each Bank was able to raise the necessary amount through member stock sales, and no public stock was ever sold to the non-bank public. In other words, no Federal Reserve stock has ever been sold to foreigners; it has only been sold to banks which are members of the Federal Reserve System. “. . . [E]ach commercial bank receives one vote regardless of its size, unlike most corporate voting structures in which the number of votes is tied to the number of shares a person holds. The New York Federal Reserve district contains over 1,000 member banks, so it is highly unlikely that even the largest and most powerful banks would be able to coerce so many smaller ones to vote in a particular manner. To control the vote of a majority of member banks would mean acquiring a controlling interest in about 500 member banks of the New York district.” [Prof. Edward Flaherty, University of Charleston, “Who Owns and Controls the Federal Reserve?” (July 18, 1997); citations omitted.] by Ellen Brown (40 articles, 0 quicklinks, 3 diaries, 93 comments [11 recommended, 0 rejected]) on Wednesday, Oct 8, 2008 at 10:22:12 PM (0+)
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Money v. Credit
Given that banking is a necessary institution of a modern economy, and its operations have potential to serve the principles put forward in the U.S. Constitution's Preamble, then so long as effective regulation is in place and (most critically) is likewise enforced, is it not beneficial to have a private banking system competing for business, with each bank being run by uniquely creative individuals serving the needs of various local communities as they see fit within the bounds of governing regulations? In other words, some bank owners might be willing to take certain risks, whereas others might not. Of course, one would expect risks to be rewarded through rates of interest each bank can charge on loans they make. Hear me out. I am not arguing against your recommendation. I wholely agree with the need for the reconstitution of the Bank of the United States whose primary function is offering low-interest credit for projects serving the benefit of all. However, is it wise to have this institution as the sole banking agency of the land? And really, given sound regulation and enforcement, is there really much harm, in and of itself, having a taxpayer-subsidized, fractional reserve private banking system effectively capable of creating "money" through credit it sees fit to issue? I am asking this in the spirit of issues raised by Benjamin Franklin when he wrote, "A Modest Enquiry into the Nature and Necessity of a Paper-Currency" in 1729, and wondering if too strict control preventing private interests power to create money out of thin air might have an ultimately contractionary effect Honestly, though, I think these largely technical matters surrounding money creation, and private bankers' exclusive profits and subsidies received under the current arrangement, are secondary to the matter of regulating how credit is applied throughout the economy, both by a national bank and through effective measures administered in the private banking sector. Your effectively raising the need for reconstituting the Bank of the United States takes the debate where it really needs to go, I believe. Thus, the Federal Reserve as regulator of the private banking system is a separate matter, because a national bank would be run by the Treasury and capitalized by the Congress. Still, what technical matters of Congressional oversight and acceptable subsidy private banking interests receive certainly are worthy of consideration, much as you indicate. by Tom Chechatka (6 articles, 1 quicklinks, 1 diaries, 57 comments [1 recommended, 0 rejected]) on Friday, Oct 10, 2008 at 10:56:28 PM (0+)
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Reply: agree and disagree
Hi Tom, I agree that the best thing is to leave the current private system alone and just build a separate public one. The private one is collapsing of its own weight and will largely go bankrupt without government intervention. But consider what happened in New Zealand. In the 1930s, a public central bank was set up to issue credit for New Deal-style endeavors while leaving the private system in place, pulling the country out of the depression; but later, the private system usurped the public system and squeezed it out, and now New Zealand has the same banking problems we do, or is heading that way. There is nothing wrong with private banks that borrow low and lend high, doing what people think they do now; but to allow them to create "money" gives them an advantage over other corporations that ultimately leads to cartels, monopolies, and disproportionate wealth creation. by Ellen Brown (40 articles, 0 quicklinks, 3 diaries, 93 comments [11 recommended, 0 rejected]) on Saturday, Oct 11, 2008 at 11:36:26 AM (0+)
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