Over the next few days, this is all going to get very, very clear...at least to anyone that bothers to pay attention.
The Treasury Department and the Federal Reserve are "about to announce" (they've been talking about this for many months) a massive Wall Street "bad bank" plan that is, effectively, nothing more than a recycled, $2 trillion-plus, Bush administration taxpayer giveaway to the very entities and individuals that created our economic freak show in the first place. (And, we may have reached a tipping point where even the MSM may no longer be mincing words about these truths.) They are still spinning this like it's new information when little could be farther from the truth. See: "Geithner Says He'll Soon Offer Details on Toxic-Asset Cleanup."
Among other monickers, actually all designed to do little more than confuse the public, they're calling it the "Term Asset-Backed Securities Loan Facility ("TALF"). The New York Federal Reserve Bank--by far and away the most powerful entity in our nation's economy--within the Federal Reserve System will run the program, and it will start distributing funds from it as of March 25th, according to the article link at the very top of this diary.
The problem with all of this is that the Federal Reserve System is broken. But, more about that later.
Most people aren't aware of the reality that the 12 regional Federal Reserve Banks within the Federal Reserve System, like all 25 of the Federal Reserve System Branches, are actually owned by the banks headquartered within the Branch's trading area. In the case of the New York Federal Reserve Bank, that means that Wall Street, for all intents and purposes, owns the New York Federal Reserve Branch.
As an FYI, here's a list of the 19 current "Primary Member-Dealers" in the Federal Reserve System. These are the biggest players in the U.S. when it comes to buying and selling U.S.-backed paper. If this list looks familiar to anyone, that would be due to the reality that these folks comprise the lion's share of the widely-circulated counterparties' lists of 20-25 entities that have received most of the AIG bailout money over the past few months, too:
A primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System of the United States. They are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions. They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy. Many former employees of primary dealers work at the Treasury, because of their expertise in the government debt markets, though the Fed avoids a similar revolving door policy.  
Between them, these dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public. Their activities extend well beyond the Treasury market, for example, according to the Wall Street Journal Europe (2/9/06 p. 20), all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume. Arguably, this group's members are the most influential and powerful non-governmental institutions in world financial markets.
The primary dealers form a worldwide network that distributes new U.S. government debt. For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.
Current list of primary dealers
As of February 11, 2009 according to the Federal Reserve Bank of New York the list includes:
* BNP Paribas Securities Corp.
* Bank 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.
Three notable changes to the list have occurred in 2008. Countrywide Securities Corporation was removed on July 15 due to its acquisition by Bank of America. Lehman Brothers Inc. was removed on September 22 due to bankruptcy. Bear Stearns & Co. Inc. was removed from the list on October 1 due to its acquisition by J.P. Morgan Chase. On February 11, 2009, Merrill Lynch Government Securities Inc. was removed from the list due to its acquisition by Bank of America.
It would not be a stretch to say that these are the most influential players when it comes to the management of the NY Federal Reserve Bank, as well. (No coincidence there.) Personally, I would go as far as to say that when you use the term, "Wall Street," it's these folks first, and then everyone else there is a distant second.
Essentially, what the government is doing (technically they're "proposing to do this" but they really don't need anyone's authorization) is allowing hedge funds--many of which are owned and operated by the very individuals that created our international economic nightmares--and "other investors" within our "shadow banking system" to buy distressed bank assets (many/most sellers being from the list above), almost entirely at taxpayer expense.
We're talking about people like John Paulson, CEO of Paulson and Company (not to be confused with former Treasury Secretary Henry Paulson), who almost singlehandedly brought down the British banking industry last year. It's also folks such as Stanford Kurland, Angelo Mozilo's number two guy at Countrywide Financial, perhaps the entity that originated more toxic mortgages than any other.
In a very underregulated environment, our government let them make a pantload of money going up. And, on the backs of taxpayers now--and still in a grossly underregulated environment--they fully intend to subsidize these same individuals coming down.
The government intends to "loan" 85 to 94 cents on every dollar of every purchase made by hedge funds and other investors, so that they may then buy "toxic trash for cash" (those are Joseph Stiglitz' words, not mine) from U.S. banks and other Wall Street firms. (See list above.)
There is little or no downside for these "investors." That's because these "loans" really aren't "loans." Their risk has been mitigated by you, the American taxpayer. The government, via the Treasury Department and/or the Federal Deposit Insurance Corporation ("FDIC"), is "insuring" virtually every other cent of every investor's purchase.
In other words, these funds and investors may pay Wall Street up to 100 cents on every dollar--or whatever Wall Street wants for their trash--with no concern whatsoever about incurring a loss because the government is saying to the buyers: "You cannot lose money; we will make you whole no matter what."
These are all facts. And, these facts fly in the face of virtually every Progressive economist's advice on the planet.
If there's one thing positive to say about this matter, it's that it's now self-evident, from a contextual standpoint, why Treasury Secretary Geithner has appeared so "vague" about the matter over the past seven or eight weeks, since President Obama's been in office. We're talking about a "solution" which has barely evolved since it was first announced by the Bush administration months ago; it's one that's more akin to merely sticking the $2 trillion+ under a massive playing card, and placing two cards next to it while our government plays three-card monty with the press and the U.S. taxpayer ever since. This game's been going on for quite a few months, as is evident just in Wikipedia's explanation of the TALF program (see link above), which they peg as having commenced around Thanksgiving '08:
Term Asset-Backed Securities Loan Facility
The Term Asset-Backed Securities Loan Facility (TALF) is the name of a program created by the US Federal Reserve (the Fed), announced on November 25, 2008. The facility will support the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans.
The Fed explained the reasoning behind the TALF as follows:
New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.
In short, this is neither "new" or "about to be announced."
This program has been set in stone since last Fall. Even the latest words on Bloomberg.com tacitly acknowledge this. Much of it is right here (link available at the very top of this diary):
Fed Program to Spur Loans May Start With Few Deals
Scott Lanman and Sarah Mulholland
March 13 (Bloomberg) -- The Federal Reserve's program to revive the market for securities backed by consumer loans may start with just a handful of deals, according to participants in the preparations, delaying its prospects of easing the credit crunch.
Treasury Secretary Timothy Geithner is counting on the so- called TALF, a joint program with the Fed, to expand to as much as $1 trillion to unfreeze credit markets. Any sign of failure of the effort may leave lenders less willing to boost lending for everything from car purchases to farming equipment.
...The New York Fed is administering the program, which was announced in November....Under the TALF, investors such as hedge funds would borrow $84 to $95 from the Fed for every $100 in ABS posted as collateral, meaning they will put up $5 to $16 of their own capital, depending on the type of security...
The reality is this is being further supported with ongoing TARP (not to be confused, as much as they'd like us to be confused, with "TALF") fund money, which is--except for $100 billion--being used "elsewhere." (Provided to Wall Street via other means.)
A $500 billion program is also being put in place at the Federal Deposit Insurance Corporation ("FDIC"), as it was just "announced" by Messrs. Geithner and Bernanke, as well as FDIC head Sheila Bair over the past couple of weeks. The FDIC is, essentially, just an extension of the Treasury Department, and not really much of a "bank-funded insurance program," as it was intended to be when it was first established by President Franklin Delano Roosevelt in the 1930's. Effectively, it's just another means by which the government may extend credit to banks. Read about that here: "FDIC to Guarantee Bank Debt That Converts Into Equity."
FDIC to Guarantee Bank Debt That Converts Into Equity
By Gabrielle Coppola and Jody Shenn
Feb. 27 (Bloomberg) -- The Federal Deposit Insurance Corp. plans to back new debt sold by banks that would later convert into common shares in an expansion of its Temporary Liquidity Guarantee Program.
Under the interim rule approved today at an FDIC board meeting, the agency's backing will be available to senior unsecured debt that converts into shares no later than the guarantee's expiration, which can last through June 30, 2012.
"This modification will give institutions greater flexibility to attract longer-term sources of funding that otherwise may be unavailable in today's distressed funding markets," FDIC financial analyst Steve Burton said today.
But, getting back to TALF, and adding insult to injury, according to the Bloomberg article, the TALF's "$200 billion first phase would finance AAA rated securities" for car loans, student loans, credit cards and small businesses. What this tells us is that those without "AAA" credit, or just about everyone in the U.S. with a FICO score under 720 (which comprises roughly 2/3 of the U.S. consumer public, which is mostly comprised of folks that also pay their bills, by the way), will see little benefit from this effort. In other words, as the consumer credit markets have retrenched here in the U.S., this does little or nothing to credit-enable the majority of the consumer public, where the median FICO score is 678.
One of many realities here is a statement noted in this article made by Geithner at a Senate Budget Committee hearing a few weeks ago:
...the effort "goes around the banking system to try to get the securities markets working again."
The facts are, the money ends up in the hands of the banking system and Wall Street. (See the list of firms, above, with regard to who's been in receipt of most of the funds from most of these programs, all along.) Period. So, it's little wonder that we're confused; our Senators and Congressmen are being grossly victimized by Geithner's double-speak, as well.
And, as this historical travesty becomes clearer and clearer, the closer we get to seeing it play out, we now have an acknowledgement in the press that the hedge funds and other potential investors in the "TALF" are really the ones controlling and rewriting the actual rules of these transactions in conjunction with Wall Street--because they are Wall Street more now than ever--as well. If you had any doubts about this, also from the March 13th Bloomberg article:
The Managed Funds Association, the main trade group for hedge funds, circulated a "fact sheet" on March 11 outlining 15 concerns of its members with a customer agreement provided by primary dealers, the 16 brokers who trade with the New York Fed's markets desk and help the central bank implement monetary policy...
...Attorneys for the dealers revised the contract, though many investors hadn't signed off on the terms, one participant said on condition of anonymity.
On top of this, three more very disturbing facts:
DISTURBING FACT #1: All the bloviating we're hearing about executive compensation is really just that.
While the papers are loaded with spin about how we're "clamping down" on all those executive pay raises, the truth about the TALF is exactly the opposite of this bogus hype:
Fed Eliminates Compensation Limits for TALF Program
By Scott Lanman
March 3 (Bloomberg) -- The Federal Reserve and U.S. Treasury eliminated executive-compensation limits for companies that bundle loans accepted under a new $1 trillion program, indicating the rules may have hampered efforts to start the plan.
The rules won't apply to the Term Asset-Backed Securities Loan Facility out of "desire to encourage market participants to stimulate credit formation and utilize the facility," the New York Fed said in a document on its Web site today. The government separately said it will expand the TALF to support vehicle-fleet leases and loans for business, construction and farm equipment.
The change suggests the government doesn't intend to apply compensation limits beyond firms that receive direct investments from the Treasury's $700 billion bailout fund. Officials have yet to announce whether such requirements will be imposed on firms participating in a separate effort to remove as much as $1 trillion of distressed assets from banks' balance sheets.
"Just like salesmen toward the end of the month get kind of worried if they're not meeting their quota, the Federal Reserve has got to worry," former Fed monetary-affairs director Vincent Reinhart said. Today's moves are "an attempt to make the facility more accommodating," said Reinhart, now a scholar at the American Enterprise Institute in Washington.
DISTURBING FACT #2: In addition to the reality that these programs only accommodate the credit needs of the top third of our population, at best, the truth is that much of our consumer credit infrastructure has been all but eliminated--downright gutted--in the past few months.
Citigroup's CitiFinancial unit, HSBC, GE, Wells Fargo, AIG's American General consumer finance business, Bank of America, American Express and many other firms have simply walked away, or are planning to walk away, from many--or most--of their retail lending initiatives over the past few months and into the near future. Read about it right here: "Depression Daily News: Geithner Clueless; Main St. Loses Again."
DISTURBING FACT #3: We tried this before. It didn't work! All we ended up with was a Federal Reserve Bank in New York, with $1.087.8 trillion dollars in it as of January 21, 2009, as opposed to the NY Fed's balance a year earlier, $311.9 billion as of January 23, 2008. In other words, Wall Street kept much of our government's bailout money right where it was, but under their respective names, on account at the New York Fed. The NY Fed Bank had approximately $776 billion more on account from member banks six weeks ago than it had a year prior to that. (See Chart within Federal Reserve System Wiki link at beginning of this paragraph.) And, the kicker? The NY Fed Bank was actually distributing interest on these initial government bailout payments to the entities that received them, too. (Again, see William Greider's article in the March 30th edition of The Nation: Fixing the Fed.")
In a shocking new arrangement, the Fed, with approval from Congress, has started to pay interest to the banks on their reserves. The commercial banks already enjoyed privileges and protections from the government that were unavailable to any other business sector. Now they insist on getting paid for their public subsidy.
In case you were wondering where all that taxpayer money was going--knowing that it never made it back into the consumer credit marketplace--now you know. The banks determined it was not in their best interests to add liquidity to the consumer marketplace at the time--despite protestations from both the Bush and Obama White Houses--but to just sit on this bailout money and have it earn interest as it lay parked at the NY Federal Reserve Bank, as it has for the most part up until today.
So, what's our government's solution? Well, since the first plan didn't work (because Wall Street didn't cooperate with us; and there are numerous stories about this throughout the MSM in 2008 and into this year, too), they're now going to throw much MORE money at them via an intermediary, the very underregulated "shadow banking system."
Yes, it's all about to get very, very clear to the general public. The Federal Reserve is out of control--more accurately it no longer controls the lion's share of activity in our economy which now occurs in our virtually unregulated "shadow banking system," which is comprised of hedge funds owned and managed by the very folks who exploited our system to play Russian Roulette with toxic investment vehicles.
As the articles linked above tell us, the proposed cures for this mess were orignally devised back in October and November of 2008, and then implementation of them commenced with former Treasury Secretary Henry Paulson working alongside Fed Chair Ben Bernanke, who (at the time) was working in conjunction with the director of the most powerful--by far and away--Fed Reserve Bank of New York Branch, our current U.S. Treasury Secretary Tim Geithner.
And, here we are today, concluding these Bush policies with the very same folks that initiated them--but at much greater funding levels than even they envisioned--a few months ago.
What's wrong with this picture? Just about everything!
Contrary to what we're being told by Larry Summers, this Depression is not just a frame of mind! There are many, many reasons as to why we should be asking the question: [http://www.prospect.org/...
Are things about to get "Worse than 1929?"]
As author, Boston Globe columnist, distinguished Progressive economist and urban planner Robert Kuttner now tells us, referring to what he's now calling "The Great Collapse," there are three things that are very different now than they were in 1929:
1.) When the stock market crashed in 1929, the banks were relatively healthy.
In the aftermath of the crash of 2008, the process of sorting it all out and getting banks functioning again is something that markets simply cannot do.
We are not even clear who owns what. The wise guys on Wall Street invented a doomsday machine from which there is no market escape.
In 1929 when the stock market crashed, the banking system was relatively healthy. Bank customers played these speculative games and took the losses, not banks. This time, the banks drank their own Kool-Aid.
2.) Roosevelt's biggest peacetime deficit was only about six percent of Gross Domestic Product ("GDP").
This year, the deficit will exceed 11 percent, and the recession will deepen all year. It took the truly massive deficits of World War II -- nearly 30 percent of GDP -- to finally end the Great Depression.
3.) We're a debtor nation now. In 1929, we were a major international creditor.
In 1933, we could go off the gold standard, not hold the dollar hostage to international currency trading, and concentrate on domestic recovery. If foreign currency traders feared that deficits would cause a drop in the value of the dollar, they didn't matter because we didn't owe them anything. This time, we have to worry about keeping their confidence. (The only reason why the dollar is holding its value is that the euro, for now, looks even shakier, and the Japanese and Chinese are resisting letting their currencies appreciate -- but that could also change.)
After reading this, you may have come to the same conclusion I have: a lot of our problems go back to the "broken" Federal Reserve System in this country. And, in conclusion, I'd like to bring your attention to that article by author William Greider in the March 30th edition of The Nation: "Fixing the Fed."
It's nothing short of an amazing piece, in terms of getting real historical context of what's occurring right now with regard to Bernanke and Geithner.
History is very much repeating itself.
You see, from a historical perspective, the Federal Reserve screwed up massively in 1929 and 1930, behaving almost exactly like they are right now, by responding too conservatively, and in a manner much like they are now, too--one which myopically protected Wall Street's big money interests, perhaps at the expense of just about everything else.
Greider tells us to follow the wisdom of Boston University economist Jane D'Arista.
Congress and the Obama administration face an excruciating dilemma. To restore the crippled financial system, they are told, they must put up still more public money--hundreds of billions more--to rescue the largest banks and investment houses from failure. Even the dimmest politicians realize that this will further inflame the public's anger. People everywhere grasp that there is something morally wrong about bailing out the malefactors who caused this catastrophe. Yet we are told we have no choice. Unless taxpayers assume the losses for the largest financial institutions by buying their rotten assets, the banking industry will not resume normal lending and, therefore, the economy cannot recover.
This is a false dilemma. Other choices are available. Throwing more public money at essentially insolvent banks is like giving blood transfusions to a corpse and hoping for Lazarus--or, as banking analyst Christopher Whalen puts it, pouring water into a bucket with a hole in the bottom. So far Washington has poured nearly $300 billion into the bucket, and Treasury Secretary Timothy Geithner has suggested it may take another $1 trillion or more to complete the banks' resurrection. The president has budgeted $750 billion for the task. Morality aside, that sounds nutty.
Here is a very different way to understand the problem: to restore the broken financial system, Washington has to fix the Federal Reserve. Though this is not widely understood, the central bank has lost its ability to govern the credit system--the nation's overall lending and borrowing. The Fed's control mechanisms have been severely undermined by a generation of deregulation and tricky innovations that have substantially shifted credit functions from traditional banks to lightly regulated financial markets. When the Fed tried to apply its old tools, starting in the 1980s, the credit system perversely produced opposite results--an explosion of debt the policy-makers could not restrain. In its present condition, the Fed may even make things worse....
...In this crisis the central bank has so far flooded credit markets and financial institutions with trillions of dollars in new liquidity and loan guarantees, which may help to stabilize credit markets. But the Fed has been unable to engineer what the economy desperately needs--renewed lending to companies and consumers that can finance renewed growth. The confused purpose of monetary policy stands in the way. The Fed could not restrain credit expansion when it was exploding, and now it cannot stimulate credit expansion when it is frozen.
This analysis is drawn from the work of Jane D'Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit. (Read her recent essay, "Setting an Agenda for Monetary Reform.")
In her essay, D'Arista tells us that we won't fix anything if we don't effectively regulate the grossly unregulated shadow banking system first. I'd strongly suggest you read Greider's complete article and Ms. D'Arista's essay which is linked to it. It's powerful stuff.
In the meantime, in 10 days, with a total lack of regulatory control unaddressed in this regard, whatsoever, we're going to give that very shadow banking sector access to up to $2 trillion, or more, in taxpayer funds? That is tantamount to what is nothing less than free reign over what may very well turn out to be the last large chunk of taxpayer cash available to address our nation's current economic crisis.
It is nothing less than insanity. But, then again, so was this: "TARP Oversight Panel Says It's Been Ignored By Geithner and Paulson."
Once more, and for what may be the last time--because after this there really may be nothing left--I invoke Albert Einstein's definition of the word: "The definition of insanity is repeating the same action and expecting a different result."