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Bernanke's Disclosure Bombshell - The FED Took Equities As Collateral During Crisis

Is Ben Bernanke driving the QEII or the Titanic?

By Christopher Whalen


Our colleagues in the media have been diligently pouring over the latest disclosure by the Federal Reserve on rescue loans made to banks and corporations around the world in the hope of uncovering a pearl. For one thing, the details of the extensive rescue operation by the Fed following the collapse of Lehman Brothers in 2008 confirms the role of the U.S. central bank as the global lender of last resort, a job description as yet unauthorized by Congress. But there are some rather subtle revelations which do deserve investigation.

A number of writers have noticed that the fact that the Fed did not reveal these operations until now doubtless effected how the Congress finally legislated in the case of the Dodd-Frank law. “The Fed’s current set of powers and the shape of the Dodd-Frank bill over all might have looked quite different if this information had been made public during the debate on the bill,”American Institute for Economic Research fellow Walker Todd told Gretchen Morgenson in the Sunday New York Times. “Had these tables been out there, I think Congress would have either said no to emergency lending authority or if you get it, it’s going to be a much lower number — half a trillion dollars in the aggregate.”

Perhaps more important is the fact that there is now confirmation that the Fed took in equities as collateral during the market liquidity operations in 2008 and 2009.  As one of our favorite equity market observers wrote last week, the fact of the Fed financing equity positions was known in September of 2008, but as my colleague noted at the time, “you had to read between the lines.”

As it turns out, the Fed’s primary dealer credit facility or “PDCF” was essentially able to take any paper, debt or equity, proving once and for all that the Fed had abandoned any pretense at market discipline. For 25 pips over Fed funds, you could finance any equity security: “Eligible collateral will include all collateral eligible in tri-party repurchase arrangements with the major clearing banks as of September12, 2008,” said the Fed in a press release.

Previously I had heard from a number of large bulge bracket firms that there was no problem financing anything with the Fed during the crisis: office furniture, equities, whatever.  So now this latest data dump from Chairman Bernanke seems to confirm that eye-opening fact and more, namely that during the crisis dealers were using the Fed to finance equity positions as well as Treasury bonds and mortgage-backed securities.



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Reader Comments (20)

You are so close to the real heart of the scandal.

Bernanke wasn't just accepting junk collateral for the bailout money, Bernanke was buying back the fraudulent mortgage-backed securities Wall Street has been selling for years. This is why even the pretense of profitability has been abandoned. The FED already knows these equities are worthless.

See http://whatreallyhappened.com/content/ever-wonder-why-european-banks-were-so-angry-us-something-about-not-making-good-some-toxic-g
Dec 8, 2010 at 1:32 PM | Unregistered CommenterMichael Rivero
you know i understand it mike...i just have to cover all the different angles...the Fed is clearing the global bank balance sheets of toxic U.S. created MBS...and CMBS...that much is clear...
Dec 8, 2010 at 2:03 PM | Registered CommenterDailyBail
Here is a power point presentation posted at Market Ticker.


No audio but well worth a peek.
Dec 8, 2010 at 2:05 PM | Unregistered Commenterjohn
Will Americans ever join together to stop feeding this beast ? Individuals are vulnerable, in unity there is strength and effectiveness.

DailyBail: DeGraw asks: Are the Fed's crimes are too big to comprehend:
Dec 8, 2010 at 2:32 PM | Unregistered CommenterChris D
U.S. fiscal health worse than Europe's: China adviser

Dec 8, 2010 at 2:33 PM | Registered CommenterDailyBail
Ya know, if some banks were knowingly creating fraudulent paper and pawning it off on unsuspecting investors around the world, they were committing crimes. If the Fed comes and attempts to keep that crime from coming to light, and commits yet another fraud against the public, they are also committing crimes, both as accessories to the first one, and in their abuse of their office for secondary, follow-on frauds against the public. You would think this would get them in some trouble.

I never understood why the Fed said nothing back in the 80s when they lost control over the money supply, with full license given investment bankers to create their own forms of money and leverage it endlessly through derivatives. Perhaps it is no wonder that the chump change we saved in the banks received no toaster or interest. But instead of doing anything about its own loss of power, the Fed seemed content to let its investment banker alter-egos fill its role. The GOP likes to denigrate democracy as "mob rule," but isn't this a different kind of mob rule? The mobs are the billionaire investment class and they run riot in representative government and the economy with a destructive force no mob of citizen-taxpayers would ever inflect, because social benefits are also taxpayer costs, and humans are capable of shame. But the business interests have no limit to their appetite for self-dealing at the expense of the nation.

Sooner or later, this pile of cards is coming down. The government needs to decide whether they will listen to the people, who have been written off as a "mob" or the mobsters that make the Fed and the Congress their co-conspirators. It is going to be ugly, the only question is whether there is any hope at all for the people of this nation to come through it with a better government and economy.
Dec 8, 2010 at 3:03 PM | Unregistered CommenterG Street
@gstreet...nice comment..enjoyed reading that...
Dec 8, 2010 at 4:23 PM | Registered CommenterDailyBail
@chris d...that's a great link...i've posted it a few time in the past few days...
Dec 8, 2010 at 4:24 PM | Registered CommenterDailyBail
DB and commenters--

A question and a comment. Didn't we already know that the Fed's QE program involved purchasing MBS? As deCarbonnel put it, the Fed was basically giving the banks money for free.

What DB's headline here suggest, at least to a financial neophyte/outsider like me, is that the Fed was purchasing equities, as in, stocks (say COP or FCX) on exhcanges like the NYSE. If that's correct, I have a question:

Didn't Fed GC Scott Alvarez tell Rep. Grayson that this wasn't going on? I believe I watched that clip here...
Dec 8, 2010 at 4:28 PM | Unregistered CommenterCheyenne
yes...cheyenne...and i have that clip waiting...scott alvarez...but that was more about hwether the FED buys stocks or futures to goose or occasionally support the market...this disclosure is that the FED accepted equities (stocks) as collateral for loans from the FED...this had not been disclosed prior...though as whalen says, it had been surmised by those who followed this...

the collateral the FED accepted has always been one of the most interesting parts of the entire bailout story...from the first day after Bear Stearns when the first facilities were created, i have wondered about what was accepted as collateral...obviously, these were shorter duration loans, but there was still risk to the FED and it should have been disclosed...and it should never have happened...
Dec 8, 2010 at 4:39 PM | Registered CommenterDailyBail
Thanks, DB. But how exactly does one "accept equities" and then pay cash? That sounds like an open market purchase to me. Did the banks mail physical stock certificates to the Eccles Bldg. and then wait for a check? I don't mean to sound ignorant. I'm literal-minded and want a clear picture of what went down.
Dec 8, 2010 at 4:48 PM | Unregistered CommenterCheyenne
it was a standard repo agreement...only not with another bank but instead the Fed...collateral is pledged...cash is given back...at ridiculously low rates...

Furthermore, only approximately 1.3 percent of the collateral, on average, was of the type traditionally posted at the Fed's Discount Window: U.S. Treasury or Agency Debt.




Crisis-hit banks flooded Fed with junk
Dec 8, 2010 at 5:10 PM | Registered CommenterDailyBail
but still the Fed holds back disclosure...

Fed Withholds Collateral Data for $885 Billion in Financial-Crisis Loans

Dec 8, 2010 at 5:11 PM | Registered CommenterDailyBail
So what does a standard repo agreement say? I, Ken Lewis, hereby undertake my best efforts to send, via courier pigeon, mucho shares of BAC, to Big Ben. At the Chairman's discretion, he may, should circumstances so warrant, place $134.5 billion into a secret luggage compartment bound for Switzerland by way of Chiasso, Italy. Is that righjt?

My 3-year struggle with fin. blogs like this is you fuckers know so much--and write like we do too.

We don't. We need help. Can you recommend a guide or a Dummies book?
Dec 8, 2010 at 5:35 PM | Unregistered CommenterCheyenne
Blaming the victims again.


Gee, I wonder how that happened?
Dec 8, 2010 at 5:52 PM | Unregistered Commenterjohn
Great site, DB. I wouldn't have coffee with any who disagreed.
Dec 8, 2010 at 10:41 PM | Unregistered CommenterCheyenne
@cheyenne...just getting around to this comment...i've never done a repo...i'm a trader,, so i just have skills in taking money from strangers who have no clue what they're doing....i don't know repos from jack....here's what wiki says...



securities are pledged...fed gives cash or like securities in return...so what does 'pledged' mean..i'll ask chris whalen next month..liz and i are having dinner with him in indy in january...he'll know...until then, fuck the banks...
Dec 9, 2010 at 12:12 AM | Registered CommenterDailyBail
This is straight from the FRBNY website. Whoodathunk?

"PDCF credit extended by the Federal Reserve was fully collateralized. Initially, eligible collateral was restricted to investment-grade securities. In September 2008, the set of eligible collateral was expanded to match closely all of the types of instruments that can be pledged in the triparty repurchase agreement systems of the two major clearing banks."

In all descriptions of "the triparty repo market," it is said to include the use of equities as collateral. So the Fed did, too. Wow.
Dec 9, 2010 at 1:03 AM | Registered CommenterDr. Pitchfork
good find pitch...
Dec 9, 2010 at 1:11 AM | Registered CommenterDailyBail
I had no idea, but it was spelled out in black and white in the Fed's in-house magazine: "The Federal Reserve's Primary Dealer Credit Facility," _Current Issues in Economics and Finance_, 15.4 (August 2009): 1-10. (I just did a simple search at FRBNY.)

"[After TSHTF] all kinds of collateral then in use in triparty repo -- including non-investment-grade securities and equities -- became eligible for pledge in the PDCF (4, 6)."

I know it's given a haircut and collateralized and all, but still. You know this went from being a crisis funding facility to being a quid pro quo cash cow used to pump up the stock market.
Dec 9, 2010 at 1:17 AM | Registered CommenterDr. Pitchfork

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