Dave Emory’s entire lifetime of work is available on a flash drive that can be obtained here. (The flash drive includes the anti-fascist books available on this site.)
MP3 One Segment
NB: This Flash stream contains both FTRs 740 and 741 in sequence. Each is a 30-minute broadcast.
Introduction: Recent disclosures concerning the Federal Reserve’s actions during the financial meltdown have revealed the extent to which foreign lending institutions were the beneficiaries of the Fed’s services.
Two of those institutions, Depfa and Dexia, appear to have required the Fed’s assistance partially in order to mask a gambit through which municipal bonds, were fraudulently manipulated, imperiling the financial integrity of American cities.
A great Bloomberg article follows up on the disclosure that the two banks were the largest recipients of Fed “assistance” during the 2007–2008 period of Fed emergency lending. The article notes that the use of the Fed’s “discount window” by foreign banks is a 97-year old secret that was only disclosed because the Fed was forced by congress to reveal the details of the emergency lending.
The program also discusses how Dexia and Depfa were major players in the US municipal bond market... Dexia was also one of the indicted players in a massive muni bid-rigging scandal. Dexia’s presence in this market also happened to jump six-fold in the year preceding the crisis, so it looks like they may have been banking on a bailout (like a lot of the big winners of the crisis were).
The revelations concerning the Fed’s actions are of special concern because Deutsche Bank chief Josef Ackermann has warned that the hedge funds may prove “too big to fail” and that that will lead to a bailout of those institutions as well. Note that Deutsche Bank was the recipient of Fed funds and that the U.S. government is suing Deutsche Bank for a billion dollars over their role in the subprime crisis.
Warren Buffett has echoed the sentiment that more big bailouts may be on the way for firms “too big to fail.”
Program Highlights Include: Warnings that the Obama administration’s provisions to shore up the financial industry are inadequate to prevent another meltdown; the drying up of short-term lending for European banks; European banks have a great deal of red ink on their banks; the fact that junk bond yields are at an all-time low; the lending of money to the failed Wachovia Bank (focal point of FTR #740).
1. Recent disclosures concerning the Federal Reserve’s actions during the financial meltdown have revealed the extent to which foreign lending institutions were the beneficiaries of the Fed’s services.
NB: Italicized and bold-faced excerpts are Mr. Emory’s.
IN August 2007, as world financial markets were seizing up, domestic and foreign banks began lining up for cash from the Federal Reserve Bank of New York.
That Aug. 20, Commerzbank of Germany borrowed $350 million at the Fed’s discount window. Two days later, Citigroup, JPMorgan Chase, Bank of America and the Wachovia Corporation each received $500 million. As collateral for all these loans, the banks put up a total of $213 billion in asset-backed securities, commercial loans and residential mortgages, including second liens.
Thus began the bank run that set off the financial crisis of 2008. But unlike other bank runs, this one was invisible to most Americans.
Until last week, that is, when the Fed pulled back the curtain. Responding to a court ruling, it made public thousands of pages of confidential lending documents from the crisis.
The data dump arose from a lawsuit initiated by Mark Pittman, a reporter at Bloomberg News, who died in November 2009. Upon receiving his request for details on the central bank’s lending, the Fed argued that the public had no right to know. The courts disagreed.
The Fed documents, like much of the information about the crisis that has been pried out of reluctant government agencies, reveal what was going on behind the scenes as the financial storm gathered. For instance, they show how dire the banking crisis was becoming during the summer of 2007. Washington policy makers, meanwhile, were saying that the subprime crisis would subside with little impact on the broad economy and that world markets were highly liquid.
For example, on July 23, 2007, Henry M. Paulson Jr., the Treasury secretary at the time, said the housing slump appeared to be “at or near the bottom.” Two days later, Timothy F. Geithner, then the president of the New York Fed, declared in a speech before the Forum on Global Leadership in Washington: “Financial markets outside the United States are now deeper and more liquid than they used to be, making it easier for companies to raise capital domestically at reasonable cost.”
Within about a month’s time, however, foreign banks began thronging to the Fed’s discount window — its mechanism for short-term lending to banks. Over four days in late August and early September, foreign institutions, through their New York branches, received a total of almost $1.7 billion in Fed loans.
As the global run progressed, banks increased their borrowings, the documents show. For example, on Sept. 12, 2007, Citibank drove up to the New York Fed’s window. It extracted $3.375 billion of cash in exchange for $23 billion worth of assets, including commercial mortgage-backed securities, residential mortgages and commercial loans.
THAT transaction seemed to get the Fed’s attention. At 1:30 that afternoon, Mr. Geithner spent half an hour on the phone with Gary L. Crittenden, Citi’s chief financial officer at the time, Mr. Geithner’s calendar shows. A few weeks later, Citigroup announced that it was writing off $5.9 billion in the third quarter, causing its profit to drop 60 percent from a year earlier — and that was only the beginning.
Perhaps the biggest revelation in the Fed documents is the extent to which the central bank was willing to lend to foreign institutions. On Nov. 8, 2007, Deutsche Bank took out a $2.4 billion overnight loan secured by $4 billion in collateral. And on Dec. 5, 2007, Calyon of France borrowed $2 billion, providing $16 billion in collateral.
When the crisis was full-on in 2008, foreign institutions became even bigger beneficiaries of the Fed’s credit programs. On Nov. 4 of that year, the Fed extended $133 billion through various facilities. Two foreign institutions — the German-Irish bank Depfa and Dexia Credit of Belgium — received 39 percent of the money that day.
“The striking thing was the large amount of borrowing that the New York Fed accepted during the crisis from European banks that had only a minimal presence in the U.S. and arguably posed no threat to the U.S. payment system,” said Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland. Such a thing would never have occurred 20 years ago, he added.
All of the discount-window borrowings extended to institutions during the debacle have been repaid. But the precedent was set: The Fed was the financial backstop to the world.
Since 2000 or so, the mind-set at the Fed in New York and Washington has been that the central bank must step in when there is a global crisis, Mr. Todd said, even if it appears to exceed its mandate. . . .
2. Depfa and Dexia appear to have required the Fed’s assistance in order to mask a gambit through which municipal bonds were fraudulently manipulated, imperiling the financial integrity of American cities.
A great Bloomberg article reports on the recent disclosure that the two banks were the largest recipients of Fed “assistance” during the 2007–2008 period of Fed emergency lending. The article notes that the use of the Fed’s “discount window” by foreign banks is a 97-year old secret that was only disclosed because the Fed was forced by congress to reveal the details of the emergency lending.
The article also discusses how Dexia and Depfa wee major players in the US muni market... Dexia was also one of the indicted players in a massive muni bid-rigging scandal Dexia’s presence in this market also happened to jump six-fold in the year preceding the crisis, so it looks like they may have been banking on a bailout (like a lot of the big winners of the crisis were).
A European bank that got the most Federal Reserve discount window help during the financial crisis received a total of about $300 billion in loans, guarantees and cash infusions from governments and central banks. It also owned subsidiaries implicated in bid-rigging that prosecutors say defrauded U.S. taxpayers.
Details of Fed lending released last week show that Dexia SA, based in Brussels and Paris, borrowed as much as $37 billion, with an average daily loan amount of $12.3 billion in the 18 months after Lehman Brothers Holdings Inc. collapsed in September 2008. The House subcommittee that oversees the Fed plans hearings on the central bank’s discount window lending to offshore financial institutions next month.
By lending to Dexia, the Fed kept money flowing into local government projects throughout the U.S. as well as the money market funds that invested in them. Dexia guaranteed bonds issued by entities as varied as the Texas State Veterans Land Board in Austin and the Los Angeles County Metropolitan Transportation Authority.
“If Dexia went bankrupt, it could have been a catastrophe for municipal finance and money funds,” said Matt Fabian, a Concord, Massachusetts-based senior analyst and managing director at Municipal Markets Advisors, an independent research company. “The market has extensive exposure to foreign banks.”
Overseas banks accounted for about 70 percent of discount window loans when borrowing reached its peak of $113.7 billion in October 2008, according to the Fed’s data. The discount window, established in 1914, is known as the lender of last resort.
By law, most U.S. branches of foreign banks have access to the discount window, said David Skidmore, a spokesman for the American central bank. “They are important providers of credit to U.S. businesses and households, and discount window lending during the financial crisis helped support their continued lending in the United States,” he said.
The Fed has kept discount window borrowers secret for 97 years. Last week’s disclosures were court-mandated after legal victories by Bloomberg LP, the parent of Bloomberg News, and News Corp.’s Fox News Network LLC.
Depfa Bank Plc, a German-owned bank based in Dublin, was another insurer of municipal bonds in the U.S. Depfa’s discount window borrowing peaked at $28.5 billion in November 2008.
Dexia, which borrowed $37 billion from the discount window in January 2009, said its loans from central banks peaked at 122 billion euros ($165 billion) in October 2008. That month, it also obtained up to 150 billion euros ($202 billion) in debt guarantees from France, Belgium and Luxembourg, of which it tapped a maximum of about 96 billion euros ($130 billion) in May 2009. The countries and existing shareholders provided Dexia about 6 billion euros ($8.4 billion) in capital.
Dexia stopped issuing guaranteed debt in June 2010, said Alexandre Joly, a member of the bank’s management board and head of strategy, portfolios and market activities.
“It’s apples and oranges to mix central bank loans, debt guarantees and capital infusions to come up with a big headline number,” Joly said in a phone interview from Brussels. “It’s not accurate and it can be damaging to Dexia.”
The bank availed itself of other Fed lending programs too. Its total borrowings from the U.S. central bank’s Commercial Paper Funding Facility ranked third among users of the emergency program created to support the market for short-term debt issued by banks and corporations. Dexia used the program 42 times for a total of $53.5 billion, according to data the Fed released in December.
Dexia also tapped the Term Auction Facility, the lending mechanism the Fed established in December 2007 to augment the discount window. Dexia received 24 TAF loans totaling $105.2 billion, the largest of which was $16.7 billion on Jan. 17, 2008, Fed data show. The lender used TAF about twice a month from December 2007 to September 2008, then once in August 2009 and once more in November 2009. The interest rates it paid ranged from 4.65 percent in December 2007 to 0.25 percent for the two loans in 2009.
The Fed loans have been repaid, said Ulrike Pommee, a Brussels-based Dexia spokeswoman. The bank used the Fed’s emergency lending facilities to finance U.S. assets only, Pommee said in an e-mail statement.
“We have always been very transparent in our communications about the wear and tear on us in the market during the crisis,” Pommee said.
In 2008, Dexia was hit with buyback provisions in municipal bonds, Pommee said. The bank was one of the biggest backstops of the bonds, providing letters of credit or so-called standby purchase agreements — guarantees to buy the bonds if investors wanted out. Dexia’s so-called credit enhancement made it possible for money market funds to buy the bonds.
Dexia provided $14.7 billion in standby agreements and letters of credit in North and South America, excluding Mexico, in the first half of 2008, a six-fold increase over the same period a year earlier, the bank said in its first-half 2008 report.
“This growth was the direct result of a dwindling number of market participants able to offer such financial products combined with the urgent needs of issuers to restructure their debt,” Dexia said.
Over most of the last decade, thousands of cities, counties, hospitals and universities issued long-term floating– rate bonds and paired them with interest-rate swaps to try to protect against higher borrowing costs. The strategy, which relied on banks such as Dexia to guarantee a market for the variable-rate notes, collapsed when investment firms and bond insurers lost their top-credit ratings.
Interest-rate swaps are derivatives, or contracts whose values are derived from assets including stocks, bonds, currencies and commodities, or from events such as changes in interest rates or the weather. Swaps are private contracts and the market for them isn’t regulated.
Redemptions sapped Dexia so much that the bank was “two days from bankruptcy,” Pommee said, citing the French ministry for the economy.
Interest-rate swaps have cost U.S. taxpayers billions. The Denver public school system is borrowing $800 million this week to escape a wrong-way bet on rates. A Dexia unit that had provided a standby purchase agreement on the school district’s swap declined to renew its credit protection this month. The cities of Detroit and Pittsburgh also have restructured debt after Dexia decided not to renew its insurance.
Dexia’s lifeline from U.S. taxpayers came as federal officials were investigating allegations that the bank’s subsidiaries colluded with others to defraud state and local governments.
Two former Dexia units were among more than a dozen financial firms that conspired to pay below-market interest rates to U.S. state and local governments on so-called guaranteed investment contracts, or GICs, according to documents filed in a U.S. Justice Department criminal antitrust case.
Municipalities buy GICs with money raised by selling bonds, allowing them to earn a return until the funds are needed for schools, roads and other public works.
An employee of Financial Security Assurance Holdings Ltd., one of the Dexia subsidiaries, agreed to pay kickbacks ranging from $4,500 to $475,000 to a Los Angeles investment broker called CDR Financial Products Inc. in exchange for rigging bids, according to people familiar with the case and public records.
CDR employees fed information on competitors’ bids to FSA, allowing the firm to win deals at a lower interest rate than it would have paid, according to a federal indictment, public records and the people.
Steven Goldberg, a former FSA banker, was indicted in July on fraud and conspiracy charges. He has pleaded not guilty. FSA, which hasn’t been indicted, is facing a lawsuit from the U.S. Securities and Exchange Commission. While Dexia sold the bond insurance unit of FSA, it remained exposed to legal risks because it kept another division of the company, its Financial Products segment, Dexia said in its third-quarter 2010 report.
Joly said Dexia’s funding from the European Central Bank remains at 17 billion euros today. Its borrowing from the Fed “was a temporary situation and now they’re trading just fine,” said Nat Singer of Swap Financial Group LLC in South Orange, New Jersey.
3. Deutsche Bank chief Josef Ackermann has predicted that the hedge funds may prove “too big to fail” and that that will lead to a bailout of those institutions as well. Note that Deutsche Bank was the recipient of Fed funds and that the U.S. government is suing Deutsche Bank for a billion dollars over their role in the subprime crisis.
Deutsche Bank AG Chief Executive Officer Josef Ackermann said unregulated financial companies such as hedge funds may pose a systemic risk to the economy if oversight isn’t increased.
“You have an unregulated area which becomes — as a consequence of all the regulatory changes — more and more important,” Ackermann, 62, said in an interview at the World Economic Forum in Davos, Switzerland. “You may one day wake up and realize that the systemic challenges are so big that you will have to bail out or at least help support the unregulated sector.”
Ackermann’s warning echoes comments made by former U.S. Treasury Secretary Lawrence Summers, who said this week in Davos that regulators haven’t paid enough attention to problems that could emerge in “a large, less healthy buccaneer sector.” Hedge funds have dodged the brunt of new global banking regulation aimed at avoiding a repeat of the worst global financial crisis since the Great Depression.
“If you separate utility banks from casino banking, you will one day realize that casino banks are also counterparties to corporations but also to other banks and to asset management and to governments,” Ackermann said yesterday. “It would be somewhat naïve to assume that if you have a strong regulated sector and leave the unregulated in the open, that you will never have systemic risk.”
The biggest U.S. banks such as Bank of America Corp. and Goldman Sachs Group Inc., also facing tighter scrutiny and higher capital requirements, argue they’ll be at a competitive disadvantage if hedge funds, money managers and insurers aren’t subject to similar constraints.
Representatives for the latter have fought back in meetings with government officials, saying economic stability wouldn’t be threatened if one of their firms failed. The Alternative Investment Management Association, a London-based group that represents hedge funds, released a statement today that says it’s “inaccurate” to call the industry unregulated.
“All the major jurisdictions where hedge funds operate, whether in North America, Europe or Asia-Pacific, have rigorous regulation of the industry,” the group’s CEO, Andrew Baker, said in the statement. “This already rigorous regulation is being increased by new legislation introduced since the crisis.”
The U.S. Congress in July approved the Dodd-Frank Act, which forces hedge funds to undergo routine inspections by the Securities and Exchange Commission and requires firms that manage more than $1 billion to disclose their investments, leverage and risk profile to regulators.
European lawmakers in November approved regulations requiring hedge funds to set limits on their use of leverage and avoid pay practices that encourage risk taking.
Deutsche Bank, which is scheduled to publish fourth-quarter and full-year earnings on Feb. 3, will likely pay bonuses that are in line with other competitors in the market, Ackermann said.
When asked about considerations by Credit Suisse Group AG to pay parts of bonuses with bonds that convert into equity if the company’s capital shrinks, he said the German firm sees “too many challenges” with the so-called CoCos and is not yet planning to use them for pay.
“I think we are paying the bonus which markets require,” he said. He declined to comment on whether variable pay for 2010 will be lower or higher than the year before, saying only that compensation at Frankfurt-based Deutsche Bank, Germany’s biggest bank, complies with “all the directives and recommendations” from policymakers and regulators.
Ackermann said in December 2009 that the big German financial institutions, including Allianz SE and Commerzbank AG, agreed to impose self-discipline on pay based on recommendations by the Basel, Switzerland-based Financial Stability Board.
4. Warren Buffett has echoed the view that it is too late to sidestep “too big to fail.”
Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., told the Financial Crisis Inquiry Commission that taxpayers will always be on the hook for collapses at the biggest U.S. companies.
“You will always have institutions that are too big to fail, and sometimes they will fail,” Buffett, 80, told the FCIC in a May 26 interview, according to a recording released by the panel yesterday. “We still have them now. We’ll have them after your commission report.”
The Dodd-Frank financial reform act, enacted in July, was touted by President Barack Obama as a means to ending bailouts and protecting taxpayers from firms that are “too big to fail.” Federal Reserve Chairman Ben S. Bernanke, who made more than $3 trillion of assistance available during the crisis, has said the “too-big-to-fail” issue can be eliminated only when investors believe the U.S. won’t rescue firms.
Investors were rescued in 2008 by Bernanke and then– Treasury Secretary Henry Paulson, whose relief programs cushioned declines for stockholders and bailed out bondholders at firms including American International Group Inc. Buffett, who injected $5 billion in Goldman Sachs Group Inc. at the depths of the crisis, said he was betting on the success of government intervention. . . .
5. The program closes by noting indications that another financial collapse may be coming:
- Warnings that the Obama administration’s provisions to shore up the financial industry are inadequate to prevent another meltdown.
- The drying up of short-term lending for European banks.
- European banks have a great deal of red ink on their banks.
- The fact that junk bond yields are at an all-time low.