The Fourteenth Banker Blog

December 2, 2010

Fed Document Dump First Step To End American Deceptionalism

Filed under: Running Commentary — thefourteenthbanker @ 10:26 AM

According to the Wall Street Journal’s very abbreviated reporting on the document dump, the Federal Reserve’s loans at the depths of the crisis included the following:

  • Goldman Sachs borrowed from the Fed 84 times, to a maximum single amount of $18 Billion.  This would be in addition to the TARP bailout funds of $10 Billion and a pass through of bailout money from AIG of perhaps $12.9 Billion.
  • Morgan Stanley borrowed from the Fed 212 times up to $60 Billion. Morgan’s TARP bailout was $10 Billion
  • JP Morgan borrowed $17.7 Billion in addition to its TARP bailout of $25 Billion, and AIG pass through of some amount (they are lumped into “other”)
  • Bank of America borrowed 118 times ranging up to $11 Billion in addition to its TARP bailout of $15 Billion and Merrill’s $10 Billion, and their combined AIG pass through of $12 Billion.

There is better reporting on Huffington Post with what appears will be a live stream of updates.

  • Huffington highlights the extreme favorable terms these loans were made on.  The annual interest rate for emergency borrowing was 1/10 of 1%.
  • 18 Primary Dealers on Wall Street pledged $1.3 Trillion in non investment grade paper to secure Fed borrowings.  Rates on these loans were 1/2 of 1% per annum.
  • Nine large money market managers tapped the Fed for a total of $2.4 Trillion

Here is a graphic of the AIG pass throughs.

So these are a few highlights. What is obvious is that yes, the entire system would have collapsed without a bailout or a resolution authority and there was no time to set up a resolution authority. These firms had to borrow money from the Fed despite the fact that all other firms were borrowing from the Fed and were therefore able to make good on their interbank borrowings, counter party positions, and collateral postings. Even JPM and Goldman chose to borrow even while their clients were being propped up by the Fed. So they were all over leveraged and they were all short cash.

So call it what it is.  Wall Street on the dole. This money was cheap, almost free. For comparison’s sake, Warren Buffet invested $5 Billion in Goldman Sachs. This was equity, not debt, and was not secured. So it is not exactly comparable. But Warren negotiated a return of 10% per annum and the right to buy $5 Billion of stock at $115 per share. The profit on the stock was not locked in and I’m not sure what he did with it, but the price of Goldman stock today is $158. So if he flipped it today he would flip 43 million shares at a profit of $43 per share.  That is another $1.86 Billion in compensation. So it looks to me like that Goldman money would have cost about 25% per annum.  This is very rough math but you get the point. Less than 1% per annum paid to the Fed is a direct subsidy.

So what does that mean for today? It means these banks, their shareholders, and their bondholders owe the American people for their existence. They should act like it.






  1. I’m sure that from their superior position they gave thanks on Thanksgiving for their own brilliance and talent, and not for all the help they had in making their bonuses.

    What I wonder is if all of the fraud was prosecuted, and asset forfeiture was used… how that would impact the National Debt. But once again, around the globe, we see that the 95% must pay for the brilliance of those at the top. They really do have something to be thankful for, and it is the lawless societies we live in.

    Comment by Eric W — December 2, 2010 @ 11:01 AM | Reply

    • Roger Lowenstein did a piece on Jamie Dimon (Least Hated Banker)
      What struck me was how this otherwise seemingly down-to-earth dude still doesn’t “get” the animosity toward Wall St. Just proves to me that that kind of wealth and it’s accompanying power, totally skew how one sees the world. We wonder WTF? and they wonder what our problem is!

      Comment by Sandi — December 2, 2010 @ 4:27 PM | Reply

  2. The fact remains that the payouts shown in the graph were all legal obligations of AIG that could only be discharged in bankruptcy, The Fed had no legal right to interfere in the contracts between AIG and it’s counterparts over CDS protection AIG had sold them. The Fed need not have loaned a dime to AIG. It was the FRBNY’s choice to do so on the terms they did. Even as a lender to AIG , the FRBNY had no legal right to discharge the contracts between AIG and it’s counterparties. Certainly, the counterparties must have presented a common front if they were put on the spot about reduction in amounts due them under the CDS contracts. In fact, they already held the bulk of the money due as deposits paid over by AIG to the counterparties. They all stood pat knowing that they would collect unless AIG filed for bankruptcy.

    The other side of the coin though is most interesting. Had AIG filed bankruptcy , would those same deposits have to have been paid over to the bankrupt estate? Certainly, the counterparties to the AIG deal would have had legal insulation from such a claw back?
    What do you think 14? Then too,at least two major CDS counterparties with AIG had sold protection for CDS contracts they layed off to AIG at a pittance fee. Both these parties, and I bet others too, would still have been on the hook to those that bought CDS protection from them. Would these entities have failed from runs on their overnight and short term paper? Bet it would have happened.14,again what do you think? Then the CDS protections triggered would have gone exponential and kaput system.

    The FRB NY was stuck with the AIG bailout.

    The whole financial system is rotten to the core from lack of sovereign attention. But almost every American despises some aspect of government. So, again the people brought this on themselves through in attention to citizen duties?

    Comment by Jerry J — December 2, 2010 @ 1:28 PM | Reply

    • The Fed intentionally made the loans so that they would be passed through. The claims against AIG were not worth 100% on the dollar. Buy facilitating the transfer the Fed made a direct subsidy for the difference between what would have been collected, perhaps not much, and what was paid. We won’t ever know the value of that subsidy.

      Comment by thefourteenthbanker — December 2, 2010 @ 7:01 PM | Reply

      • Interestingly, the claims were legally worth 100 %. If I were in Blankfein’s shoes, I would have moved immediately to prepare to petition that AIG be put in involuntary bankruptcy without iron clad assurances from Geithner in front of all the parties to the CDS contracts of a 100 % intact contract. Geithner , I presume would have understood that GS and Deutsche Bank , for sure, and probably the others still owed the bulk of the risk to outside parties if AIG folded. Certainly, Geithner as a hard nosed negotiator would have assured that the CDS parties keep the collateral posted by AIG. Something made Geithner give in 100 % unless he was unaware of the possibilities from being tired out and a fearful bureaucrat rather than an aggressive buccaneer. It all depends on whether Geithner knew the AIG contracts were laid off risks. Certainly, he would have been frightened if he did not know and I would have tried to get him to poop his panties. Delicate though because overkill would weaken the bluff.
        What a novel could be done about the intricacies of Wall Street going down.

        Comment by Jerry J — December 2, 2010 @ 9:50 PM

  3. I decided to check out actual FRB fundings of these loans. I used the December 24, 2008 Consolidated Balance Sheet

    Term Auction Facility $450 bn, Other $187 bn, Commercial Paper $332 bn and Maiden Lanes as if they were loans totaled $75 bn. A grand total of $1,044 bn. Interestingly, the reserve deposit checking account of the banks at the Fed totaled $819 bn. A considerable portion of the $819 bn was due to deposit flows related to Central Bank Liquidity Swaps through foreign central banks. These were not separately stated in the FRB assets until several months later.

    Now, banks used to loan you money and simply credit your demand deposit. Had they loaned me the money, the asset would be Loan Receivable JerryJ $819 bn and Demand Deposit Payable Jerry J $819 bn. The rubber hits the road when I have my check for $819 bn presented for payment. So on a net basis with considerable slop because of the Central Bank Liquidity Swap, the FRB borrowers had actually drawn only $225 bn. In round numbers , certainly the Commercial Paper Facility was fully drawn. So the real total might be around $500 bn if we had all the data needed.

    Yet these journalists toss around trillions here and trillions there that the Fed could never cover in the real world. But all those credit lines did calm things down. BB laid on a terrific bluff.

    Comment by Jerry J — December 2, 2010 @ 1:56 PM | Reply

  4. Bloomberg is running a piece on the Federal Reserve Banks failing to disclose ” loans” to the Federal Reserve Bank’s totaling $885 bn…. those pesky Central Bank Liquidity Swaps. OK, taking it simplistically,other central banks of the world loaned the US Federal Reserve Banks $885 bn. Should all those loans to foreign banks be offset by loans to the US FRB’s ??? Were all these loans to the FRB’s the funds directly used to ” liquify” foreign banks. Frankly, is the media full of crap? Ignorant comment. There is a reasonably detailed explanation on the FRB website. Is the media incapable of understanding the full transaction?

    Here is what transpired on the books of the FRB’s. You can trace this out week after week forensically. Here in summary is what happened.

    FRB’s booked an ASSET called Central Bank Liquidity Swaps $885 bn. The credited Central Bank Reserve Deposit Liability $885 bn. Immediately, the Foreign Central Banks loaned the swap to their banks who immediately reloaned to member banks of the FRB. What happened on the FRB’s books is that the Central Bank reserve deposit went to zero and Member Bank Reserve Deposits increased $885 bn.
    The effect of all this was that US Member Banks at the FRB’s wound up increasing their cash equivalent at the FRBs called their reserve deposit account $885 bn. They must owe somebody for the other half of the transaction. Must be foreign banks for liquidity swap liability $885 bn.

    Again 14, can you fill this in a bit?

    Comment by Jerry J — December 2, 2010 @ 3:12 PM | Reply

    • Not really. There could be multiple iterations of the transactions off the Fed B/S. Perhaps these are collateral postings to the US Banks for increased counter party exposures? Perhaps Euro banks did not want to keep any reserves with other Euro banks and there is window dressing. I have no idea. It could make for some great reporting but too much for me to research.

      Comment by thefourteenthbanker — December 5, 2010 @ 3:11 AM | Reply

  5. I am separating this hypothesis out hoping for more clarity.

    OK, the banks owe the foreign banks $885 bn. What the devil could they pay off with other than a transfer from their reserve deposit account back to the central bank reserve account at the FRb where the whole thing cancels out. But , oops! When that happens it looks like the banks lost two thirds of their cash equivalents . The whole exercise was a way to increase bank apparent cash and equivalent positions. Effectively printing I heard BB say on 60 minutes. Now that hole in the banks cash and equivalents could not be permitted period in first quarter 2009. So, just put all those Fannie anmd Freddie backed Mortgages on an armored truck and send them to the FRB to reverse the apparent loss in cash and equivalents at the bank where they stay to this day. By the way, the totally launder the mortgages so that when they return to the banks they are carried at par .

    Again 14, Am I reasonably close?

    Comment by Jerry J — December 2, 2010 @ 3:22 PM | Reply

    • You are correct that it is a shell game and you would have to stop everything at a point in time, including the trucks of cash, to know where things stand.

      Comment by thefourteenthbanker — December 2, 2010 @ 6:58 PM | Reply

  6. I got a daily email from Agora Financial. The Federal Debt Commission warns of a fiscal day of reckoning! So, I looked at the December 1, 2010 Consolidated Balance Sheet of the Federal Reserve Banks. Well , for starters, the FRB’s owe the member banks $1,011 billion. This balance before the fall of 2008 averaged around $7 billion. Uhh, send the banks the cash to pay off this debt owed by the FRB’s to the member banks. Settle up back to $7 billion dammit. They owe the USG another $245 bn , send them the cash too! Settle up with Uncle Sam too!

    The banks owe the FRB’s nothing other than a receivable called ” other” $45 bn. Might not even be the banks. Of course, AIG and bear sold them near $100 bn of mortgages and CDO’s that they are doing an excellent job of collecting. Keep on collecting. But that is not the banks.

    So send the banks the cash to lend out for what it is worth in an essentially cashless system. Right now cash is being absorbed into the economy at around $ 1 billion a week for a total outstanding since 1914 of $936 bn. If they sent out cash to settle up with the banks and Uncle Sam that total since 1914 would jump to $2,192 bn. Thats plenty of cash to go around .

    The FRB’s owe the banks $1,011 bn and the banks owe the FRB’s near nothing! Print the stuff and payoff for all it is worth? THat or send back the mortgages they bought, but did not settle up on, back to the banks. All$1,022 bn of them. Settled up now.

    Who is griting whom or is every public or quasi public body griting everyone helter skelter?

    Comment by Jerry J — December 2, 2010 @ 5:37 PM | Reply

  7. Did the American people save the banks? The Federal Reserve did sell $262 billion of Treasuries from August27, 2008 through December 24, 2008. They used the proceeds to loan the banks and BHC’s $ 300 bn in the same period via TALF. During that same time frame, the US Treasury contributed assets to the FRBNY of $289 bn , which is the outstanding balance owed the US Treasury in the Special Supplementary Financing liability owed the Treasury at December 24, 2008. We do know that $50 bn of the Exchange Stabilization Fund went into the pot loaned to FRBNY. The rest is a mystery. However, these loans were to establish the Commercial Paper Loan Facility with an outstanding balance at December 24, 2008 of $332 bn. The rest of the CP facility was raised by pulling every string they could at FRBNY to the tune of around $43 bn . This much of the pulled strings can be figured out. Currency outstanding increased $54 bn. All during this period, shadow banking money was fleeing into the official banking system. THe bank vault cash net increase during this period consumed around $10 bn of the increased Federal Reserve Notes in circulation.

    As you can see the banks were not probably rescued by the American people but every Money Market Fund in the country very obviously was rescued by the American people. That and every major investment bank funding daily with overnight paper. This makes sense because we know MMF investors redeemed and put their funds in banks. That would not have happened absent a shadow banking system silent run.

    But what other assets than the Exchange Stabilization Fund did the Treasury put in the pot?

    The Federal Reserve Banks are not the American people as everyone loves to reind us but a banking cartel. The FRB’s had no obligation to rescue the Shadow Banking System from a strict constructionist viewpoint.

    There are quite a few conundrums about FRB activity during this period but it is clear that the Treasury loan to the FRBNY solved the shadow system panic.

    Comment by Jerry J — December 3, 2010 @ 3:08 PM | Reply

  8. I know what those assets would be had I been in Henry Paulson’s shoes in the fall of 2008. Illegal as hell, but necessary. Direct Treasuries issued to the FRBNY for immediate sale given that Treasuries were in such high demand. Totally off budget and returned to the Treasury before the end of the fiscal year. Maybe it will come out in a future Wikileaks. Any other guesses?

    Comment by Jerry J — December 3, 2010 @ 3:58 PM | Reply

  9. Adding to post 8. Perhaps 14 may be able to expand on this. It might just be that this transaction was entirely legal under the emergency aspects of the various laws involving Federal Reserve Banks in lieu of the fact that the useage of the assets was to save the shadow banking system entirely outside the purview of the Fed. The Commercial Paper Facility was an LLC outside actual Federal Reserve Bank normal operations . I presume that was how the Fed was able to justify non bank system aid. The Special Supplemental Financing liability of the FRBNY was apparently not liquidated in sync with repayments to the Commercial Paper Facility LLC by borrowers from the facility. It now stands at $200 bn as of December 1, 2010 . Might it just be that the $50 bn was repaid to the Exchange Stabilization Fund while the Treasuries conveyed to the FRBNY of presumably $200 bn are still retailed by FRBNY out of sheer necessity to prsent a better picture? FRBNY currently owns $374 bn of Treasuries. If they are transferred back to the Treasury FRBNY would own only $174 bn of Treasuries acquired in the normal manner. IT would not sitwell at $174 bn because outstanding Federal Reserve Note liability at FRBNY is $312bn. That would mean that Mortgage Backed securities and the Maiden Lane LLC’s would be proportionally backing currency issued by the FRBNY. Now that would really make Ron Paul howl like a Coyote.

    I see no reason why MBS’s might not be used as backing for issued currency but the conservatives in Congress might have strokes. Hell, the MBS’s are just as ” collectable” as Treasuries en masse. They are circular anyway being guaranteed by Fannie and Freddie which is a must fund by the USG, General Government itself.

    Amusing as hell to me. In fact the whole debacle is a comedy of errors.

    Comment by Jerry J — December 4, 2010 @ 12:45 PM | Reply

  10. I have a question I have been dying to pose for some time now. I have presented an accountants view of money and banking. It is nothing more than doing basic transaction analysis for both parties to a transaction and examples going down the transaction chain to see the effects on real economy financial statements. This technique almost immediately exposes the Fed as a central bank only as being utterly outmoded as an institution. When the Fed started operating in 1914, there were only currencies outstanding, along with specie . All transactions were , at some point, settled in currency within the banking system through clearing houses and at and between Federal Reserve Banks. Back then, almost no one had a demand deposit account in the general population. Thus , currency was king. Electronics has changed all that . Today , currency itself is a mere backwater for transactions the IRS hates and for poor people to buy their immediate needs. A central bank today that may only create physical currency is enormously hamstrung on policy compared to prior to WWII.

    No one comments on this inside banking. At least , I have never run across an analysis that will surely demonstrate the limits of currency creation . Hamstringing so called printing money.

    Does anyone know of any such commentary? The Federal Reserve banks as central banks operate in the era of the Studebaker. Outmoded. Monetary policy by the Federal Reserve Board could be handled by the Secretary of the Treasury. Similarly for any oversight.

    Comment by Jerry J — December 4, 2010 @ 2:57 PM | Reply

    • I think I may have seen come commentary along these lines. As the financial system has become much more complex and global, the Fed’s control is decreased. It appears that even when it can create liquidity it can’t control where it goes. The carry trades these days are to take Fed money creation and arbitrage it to other countries. So the end result is financial market manipulation and some currency valuation effect, both of which may last a very short time. Also, the lack of mark to market requirements of the Fed let it potentially overpay for assets and thus transfer money to institutions it deems needing solvency help. Meanwhile there are lots of externalities. So the tools are pretty crude. Presumably the “independence” of the Fed from the Executive branch is a benefit but lately it seems to be a tool of the financial class. As you have regularly pointed out, it can’t control the velocity of money, so sometimes the money it creates also just sits in reserve. I’m not sure what a better system might be. My thought would be to keep autonomy but increase transparency and legislate some sort of guidelines. For example, lending freely at a penalty rate rather than a subsidy rate and prohibiting certain asset purchases. Those could be done through the Treasury with much greater oversight and a periodic referendum on what they have done.

      Comment by thefourteenthbanker — December 5, 2010 @ 3:04 AM | Reply

    • Further comment. No one inside banking is going to shed light on a process they are the primary beneficiaries of.

      Comment by thefourteenthbanker — December 5, 2010 @ 3:15 AM | Reply

      • Thanks 14. What I think the conclusion is, and I have held this view now for a long time, is that the present elites will kill their own system and we wait for the system to extinguish itself. One aspect of all thia that has long interested me is that citizen is incapable of even identifying enough characteristics of systemic collapse they agree on to be able to cure the elite damage. This was just as true as Athen’s eclipsed at the end of the Pelponnesian War and declined until the Roman’s cured their problem. Different degrees of collapse though before social resolution again asserts itself. Well, things move far faster today so I see the necessary end of so called democracy as a result. The elites are on a self destructive route for all that cannot be interdicted that has repeated itself, in principle, since the agricultural state evolved from the Neolithic. They elites have the power until they choke and die of the power misuse and are replaced by new elites. Sarkar’s Social Cycle Theory seems to me to most fit what actually happens. Sarkar is Ravi Batra’s life long song and dance routine.

        The yuppie generation Globalist fad is now burning out. John Ralston Saul summarized it quite well in the first paragraph or two of his book ‘The Collapse of Globalism’.

        ” Globalization emerged in the 1970s as if from nowhere,fully grown,enrobed in an aura of inclusivity. Advocates and believers argued with audacity that , through the prism of a particular school of economics,societies aropund the world would be taken min new,interwoven and positive directions. This mission was converted into policy and law over 20 years-the 1080s and 90s-with the force of declaried inevitability.”

        These young people of the 1970’s and 1980’s are the present elites and their deterministic assumptions have proven hardly deterministic at in ways they believed so fervently in. Indeed, the whole thing smacks of just a continuation of 1960’s ideas going to their imminent death as the proponents of these ideas age anmd die off.

        Comment by Jerry J — December 5, 2010 @ 12:46 PM

  11. “these banks, their shareholders, and their bondholders owe the American people for their existence. They should act like it.”
    Well, WE should act like it. Only then would there be any hope that they would act like it.

    Comment by priscianus jr — December 8, 2010 @ 11:46 PM | Reply

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