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Bernanke Fed Bail Out Restructures World Finance Credit.

The Federal Reserve announced a $290 billion expansion of swap lines with foreign central banks today, adding facilities to acquire foreign currency in transactions with the British, European, Swiss and Japanese central banks. The move adds to the swap line of $300 billion created last fall to provide dollars to the same foreign central banks, and brings the total of such swaps run through the Federal Reserve to about $690 billion. I think there are some serious political questions related to these issues, but first I'd like to briefly discuss the recent developments and their context.

The move is another in the series since the spring and summer of 2007 when Bernanke began to use the Federal Reserve's capital accounts as a supplement to interest rate reduction in loosening credit. In the process Bernanke seems to be transforming the Federal Reserve system away from being a supplier of credit to the system and toward becoming the preferential supplier to a part of the system. This has been addressed byJames Hamilton, among others:

"The philosophy behind the pullulating new Fed facilities is precisely the opposite of that traditional concept. The whole purpose of these facilities is to redirect capital to specific perceived priorities. I am uncomfortable on a general level with the suggestion that unelected Fed officials are better able to make such decisions than private investors who put their own capital where they think it will earn the highest reward. Apart from that general unease, I have a particular concern about the motivation for the Term Asset-Backed Securities Loan Facility, whose goal is to generate up to $1 trillion of lending for businesses and households by catalyzing a revival of loan securitization. I grant that securitization was an enormously successful device for funneling vast sums into sundry loans. For example, securitization successfully turned 80% of quite shaky subprime loans into Aaa-rated assets. To put that in perspective, only five U.S. companies currently have the ability to issue Aaa-rated debt. So yes, a device that transformed weak loans into Aaa-rated debt was marvelously successful at attracting capital from all over the world into U.S. private lending."

I don't agree though, that the issue comes down to unelected officials versus the free markets, as Hamilton argues it does. I believe that the politically corrupt US system, which has been unable to agree on anything but short term so-called solutions to perhaps the deepest crisis it has ever faced, is being undermined by what used to be called corporatist or fascist technocratic administrative measures while the political institutions are distracted by dog and pony media shows. Bernanke, I think, has been using the $12.8 trillion ($42,000 per capita) facilities he has created (with Timmy Geithner) to undermine, restructure, and turn the Fed into a world central bank.

What Bernanke has been doing has caused some concern in Congress, and is going to produce hearings to take a look into what he has been up to. This activity has attracted support on both sides of the aisle. House Speaker Nancy Pelosi told Huffington Post on April 2nd that she is going to arrange hearings on the Fed's "authority" after the recess. The article identified other Congressmen involved. April 3rd, the Wall Street Journal's blog put out its own analysis. Since Congress has the power, through hearings and investigations, authorizations and appropriations, to decide what should be funded and how to fund it, the Fed's facilities appear to be doing an end run round the Constitution, both by creating the facilities themselves, and implicitly, attempting to commit the US to future indebtedness by extra constitutional and illegal methods.

Executive pay and bonusses have been elements of the dog and pony show. There are indications that the TARP program from last September is also part of the "dog and pony" show. While Congress has been tied up debating fine points, Bernanke has been pursuing an unparalled restructuring of US finance without interferencefrom anyone, no questions asked,on a far larger scale than even he and Paulsonasked for in their original 3-page enabling legislation draft, which was rejected by Congress. Doing it through the Fed has kept Congress out of the loop.

The restructuring is indicated by the transformation of the compostion of the Federal Reserve's balance sheet since 2007 and especially since September of 2008.

The Fed's Changed Balance Sheet

(from James Hamilton's econbrowser)

Changes in the Federal Reserve's Balance Sheet 2007-2009

 

There is a discussion of these changes Hamiltons econbrowser site, where this graphic comes from, and is attributed to with gratitude, please do note the way the weirdly colored parts have been added since the end of 2007,and how this has meant replacing plain vanilla Treasuries and repurchase agreements (RP's) with the toxic crap so many have been so rightly exercised about. Bernanke says these positions will unwind themselves, others at the Fed say the Treasury will have to buy them. 'AIG' indicates the insurance company's derivative portfolio on what is counted as a "net basis". Maiden Lane I is the derivative portfolio of Baer Sterns. Otherwise these color swatches represent the Fed's facilities. There is thus some relationship between the balance sheet, as represented here by Hamilton, and the $12.8 trillion ($42,000 per capita) in activities extended through the facilities. So there is leverage, either through the gearing of a reserve multiplier, or through turn-over, and there is a committment to supporting banks' derivative, or toxic asset, exposure. Foreign exchange swap lines could be turned over daily for example. Maiden Lane and AIG could be leveraged 50 to 100 times because the Fed is only counting what it calls the net position.

There are 15 of these facilities. Here is a brief description of them provided by the Federal Reserve, with their names, who can participate, what the qualifications are, etc.

Of these 15 facilities, 11 are open to "primary dealers", and a sub-set of the 11 to depository institutions. The primary dealers are banks the Fed works with to buy and sell Treasury notes and bonds through auction. They are the interface with the creditors of the United States Treasury. The largest of these are well-known, China, Japan, oil producers, Russia, etc. There are 16 primary dealers. This list is from another PDF page provided by the Fed. 5 of them are domestic banks. The other 11 (Greenwich Capital was the US arm of Royal Bank of Scotland before that bank was nationalized.) Now the US banks might be bigger, but the foreign ones have got them out numbered.

Here is the cut and paste job:

 

List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Securities LLC
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.

NOTE: This list has been compiled and made available for statistical purposes only and has no significance with respect to other relationships between dealers and the Federal Reserve Bank of New York.

 

There will for sure be some who say this is an issue of the bailout and those darn foreigners taking advantage of our generosity and open-handedness. I don't think it is anything of the sort. Dollar toxic assets have been used to undermine the world and national economies, including those of US creditors. People like to look at the world as the sum of the parts that make it up, country by country, as if each were autonomous, with its own policy. But it is well-known that this is not true. It is quite evident that what we now call "globalism" used to be called "imperialism" or "colonialism", that what we call "free trade agreements" used to be called "imperial preference" and even that what we used to call the Global War on Terrorism used to be called "Gun Boat Diplomacy", especially as applied in Iraq, Iran and so on.

Bernanke seems to be trying to create a new round of financing for the US by reviving the methods of securitization which failed so spectacularly in 2007 and 2008. Geithner's part in this process was documented by the Washington Post last week. It is not generally remembered that in the summer of 1982, while Margaret Thatcher was dispatching the Royal Navy down to the Islas Malvinas to protect the democratic and British sheep from Argentina's dictatorial and militaristic torturing generals whose soliders were trained at the School of the Americas in Georgia, that Mexico, Argentina and Brazil, kind of defaulted, because they couldn't pay their debts. The US banks, starting with Citibank and Chase, lost more money that summer and fall than they had made in their entire earlier history. And that's why we have securitization.

Non-performing liabilities and assets were moved off bank balance sheets securitized and sold on to some on else. Bernanke is trying to reorganize the regime that came into existence under Ronald Reagan and Margaret Thatcher through debt defualt and war, and which has subsequently transmogrified through successive failures (S&L Crisis 1988-92, Second Mexican Crisis, Long Term Capital, Russian Default, Asian Crisis, Internet bubble),  and military adventures like the first Gulf War, and in the process we got securitization, portfolio insurance, swaptions, off-balance sheet liabilities, synthetic derivatives, CDO's and CDS, and de-regulation. What they are trying to fix are previous fixes to what got broke 27 years ago at least.

At each of these "turning points" laws and regulations which were in place and had been ignored, were just pushed aside in favor of maintaining the appearance that everything would continue to be handled as it had been. In the absence of workable political soultions, adminstrative methods, extra-legal activities and corruption got strengthened. Bernanke has been involved with that since 1992, and Geithner from about the same time. I think the question is whether this is a country which should be run by a permanent caste of bureaucrats whose tenure and policies seem impervious to elections, or whether the country has some other, higher purpose, other than being a global empire and enforcer for a global financial power. I hope that further inquiry into this area where Bernanke and Geithner are working on behalf of the 16 primary dealers should help to shed light on such matters,

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Chris White's picture

Foreign Exchange & Derivatives

The foreign exchange swap lines I believe involve the same issues of leverage, dilution and ultra vires action on behalf of an illegal view of the institution's power, and include a wrinkle about the Fed as an emerging world central bank.

Derivatives and foreign exchange are not often thought of together, but they should be. For the major purchasers of US debt the transaction involves going from a local currency to the dollar and when the investment matures there is anotherforex transaction to repatriate the funds. The forex trade is linked to interest rate swaps intended to protect the value of the investment and to other hedging trades, all of which can involve forex transactions. Forex transactions are quite highly leveraged. Here is a Wiki entry on foreign exchange which gives some dated information about daily turnover, players in the market, (another list of banks to compare with primary dealers) and so on.

If you think forex transactions work like they do at airports or railroad stations or in individual banks, that would be an error. The Bank for International Settlements in Basel Switzerland (central bankers central bank, roots in the reparations buisness after World War I) has been working for a number of years on something called continuous linked settlement. This is outlined in this document, if the page doesn't come up right, look for continuous linked settlement in the left pane. The New York Fed (under Geithner) has worked with the BIS on this, and for the Banks which run the NY Fed has created a BIS approved clearance institution called DTCC. DTCC assimilated CLS-Bank (Continuous Linked Settlement Bank) to do its forex settlements. See here, this link provides a profile of what DTCC-CLS does in the forex area. It can be compared with the Wiki account.

This report from the BIS last year details the total outstandings in derivatives by type and so on. It is not so useful, because it is better to have type of derivative by turnover. But anyway it gives an indication of the relative scales which may be more or less meaningful. Last October some of the world's central banks conducted surveys of the foreign exchange transactions conducted on their turf daily. They do this regularly. Here are links to the report from the Bank of England and the New York Fed. Once again you can flip through these two reports and take a look at the lists of foreign exchange market participants, and compare them with the Wiki list and the primary dealers lists, knowing now that CLS Bank is doing the clearing operations for 15 currencies in London on behalf of its owners, and DTCC-CLS is doing the same thing in New York City. The foreign exchange market is the glue which holds the global derivative structure together with the securitization business and the the inter-bank credit markets which are where the plumbing blockage in financial markets is supposed to be located according to the proponents of its "just a liquidity problem."

If Bernanke's $600 billion plus forex swaps are deployed with 10 fold leverage, (what the ratios are would be good to know) the Fed can backstop $6 trillion worth of transactions daily which is where the growth curve of these things was going if you look back through the links here. But it wasn't going to stop there.

I hope you find this interesting.

I'm sure you will also be interested to know that DTCC has a fixed income division which holds mortgage-backed securities, and that it works with FNM's MERS (Mortgage Electronic Registration System) where mortgages are registered. MERS is another legal do-round acting as the agent of the holders when it has no business doing so, it is merely a registration system. They farm out foreclosures to sub-contractors. All these arrrangements offer lenders the undoubted assurance that their monies are being looked after in the most modern way possible, most human intervention has been eliminated.

One of the issues which I think you pointed to at the start of this is that these matters are not well understood in any case. But I think it should be becoming somewhat clearer that the players are not what they are assumed to be either. People think they are dealing with one kind of thing, and have unformed ideas perhaps ofwhat that thing wasbut it turns out to be a monster like this DLCC-CLS thing.

And it seems that we should be looking at for example, where the forex swaps are concerned,the gearing leverage between the swaps, the Fed facilities (for these will also involve forex transactions), the forex market as a whole on a daily basis and the totality of the universe of derivatives whose existence is mediated bank into the banks through the foreign exchange system supported by the Fed's balance sheet.

Is this what we wanted? Are we being put on the hook for almost $600 trillion worth of total derivatives via the interest rate/credit swaps and forex markets and the Federal Reserve's facilities and blance sheet operations?

I think there are a lot of people who ought to be interested in pursuing these questions, don't you? A big thank you for the opportunity to develop the thinking and information behind the summary outline I put up yesterday. I'm sure there will be great benefits to come from this and future such exchanges.

 

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We're talking

I'm short on time until 7ish but I do have a thought.  There's a great deal there. I could speculate as to the significance and use it polemically but first I'd like to comprehend the basics.  The chart above is excellent but I'd benefit from the chart before with diagram of the hypothesis and supporting arguments that let me know what Bernake and his masters might be up to.  I understand  the end point - imperialism in another disguise but what are the basic elements of that?  That's my main concern.

As for the big picture, the new imperialism being the end point, that makes perfect sense.  The "rulers" have not done well with the military option.  It's too expensive and everybody ends up disliking the U.S. for these rash adventures.  If you work with the assumption that control will not be given up lightly, then the new control is financial and the new vehicle is in the form of the scheme you outline. 

 

 

 

 

 

 

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"Furthest from him is best, whom reason hath equaled, force hath made supreme above his equals." Milton

Chris White's picture

Indeed, We Are

There are two parts to this: the first involves the facilities Bernanke designed and I assume Geithner implemented from the New York Federal Reserve Board; the second, what I think is represented by the expansion of swap lines. Both involve increasing the leverage the Fed is using in its operations, while diluting the quality of its assets, and transforming its mission.

Let's discuss the first one first, and then take up the issue of the foreign exchange swaps. As I see it, the first involves the issue of a creature agency's ability to re-interpret its mission and purpose to suit circumstances in the way it defines them, included here politically are the questions of transparency, congressional oversight, and acting "ultra vires". I believe that what Bernanke has done in the name of dealing with the financial emergency is what Bush did with the war. He is arrogating to himself prerogative powers which are not his, and no one ever intended him to have, and is using that assertion of power to create "fait accomplis." In my view the "facilities" all $12.8 trillion ($42,000 per capita) are that kind of administrative over-reach, and I think, violate what the Fed is responsible for, money supply, inflation and unemployment,primarily controlled through their reserve issuance and withdrawal, buying and selling, by auction, of government notes and bonds.

Bernanke is is using the Fed's balance sheet to support the capital structure of the international banks which are part of the reserve issuance and withdrawal operation, the primary dealers. Thus he is no longer working on money supply, inflation and employment, but is sacrificing each of those to maintain the systemic importance of the ability to market US government and government agency securities through a particular group of banking institutions.

This has meant supporting the derivative, and securitized asset operations of these banks. Please compare the Primary Dealer list with this list from the Office of the Comptroller of the Currency. The bank exposure is listed near the end of the report, around page 30, and there are some interesting charts on pages 12-13 and such. This link will take you to the Fed's balance sheet in numbers. The MBS section of the balance sheet chart represents mortgage-backed securities, which are listed in the table at around one quarter trillion dollars. Now that FNM and FRE are under government conservatorship, the ambiguity in their status as government sponsored agencies isended, and their debt is presumably to be thought of in the same way as Treasury obligations. Thus the balance sheet shows MBS replacing Treasuries. But as you know housing prices are continuing to fall, and deliquencies, according to the Fed more than 7% of mortgage holders are keeping up with the increase in unemployment.

So, I think that what the Fed has done by taking on what is called Maiden Lane and AIG in the Chart and Maiden Lane I, II and III, and AIG I and II in the table along with the MBS's are ultra vires and could be viewed as undermining the financial stability because the Fed has acted under crisis conditions in ways which have made it part of the problem and not part of the solution.

The second issue involves transforming the Federal Reserve into a kind of World Central bank via the foreign exchsnge operations which are conducted as part of its other traditional or exceptional functions. I will return to this a bit later. Hope this is useful so far.

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I have a feeling that this is brilliant

If I were smarter, I'd know it was brilliant.  There is sometihng very strange going on here.  It's grandiose and glorified but underneath it all, it's probalby just anothe rscam for the people who created derivatives and other fantasies to think that they can hold onto their fantasy money. 

One point that I did understand -- we citizens are not even an afterthought of the elite and their Mandarins. 

We pretend to vote, they pretend to get elected and we're all screwed by people who game the political process in ways that require cynicism on a new level to even comprehend.

Thank you for this.  I'll continue studying and let you know when I get it the full picture. 

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"Furthest from him is best, whom reason hath equaled, force hath made supreme above his equals." Milton

Chris White's picture

Let's Discuss

Thanks for yourcomment. I appreciate it. Let's discuss if you have time today. Yes, there's a lot to be clarified, and out of clarification should come some more pieces written in amore accessible way.

A proposal, why don't you itemize some of the thiings which cause problems,and we'll go from there.

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Dec 2007: Federal Reserve Emergency Powers Studied







Back in December 2007, I blogged some articles that indicated some highly unusual moves by central banks were in the works. These might help you pin down certain decision points I suspect you are looking for.

 

Central banks look to financial 'nuclear option'

by NBBooks

Sun Dec 16, 2007 at 07:50:53 PM PDT


Federal Reserve Emergency Powers Being Studied

by NBBooks

Mon Dec 24, 2007 at 06:46:27 AM PDT

 

 

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