More Power for the Fed as the Central Bank Cooks the Books

Mercury news is reporting Administration calls for giving Fed more powers .
Treasury Secretary Henry Paulson says the government must move quickly to give the Federal Reserve more powers to regulate the financial system. Paulson said today that the central bank's powers should be expanded in the wake of the near collapse earlier this year of Bear Stearns, the giant Wall Street investment firm.

He said there was a need to consider quickly how to give the Fed the power it needs to obtain information from investment banks and the responsibility to intervene to protect the overall financial system. His comments were provided by the Treasury Department as excerpts from a speech he was to give later in the day.

Fed At Fault

This is of course as disgusting as it was predictable. It is all in accordance with the Fed Uncertainty Principle .

Uncertainty Principle Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Notice the need to move "quickly". The reason to move quickly in this case is that Bush's days are numbered. Our next president, Obama, may very well have different ideas about what role the Fed should play. My position is clear: Want To Fix The Fed? Get Rid Of It .

Fed Is Cooking The Books

Please consider Fed's Bear Stearns Books Look Prime for Cooking .

Flip through the footnotes to the Fed's latest annual report, and you'll come across an open secret. The Fed doesn't follow normal accounting rules, as promulgated by any of the major standard-setting boards. Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks.

If you ever wanted to design an accounting regime to help a bank cook its books, the Fed's would be perfect. This doesn't exactly inspire faith in the U.S. financial system, at a time when a good example might help a lot.

Imagine if there were no rules specifying when a bank must bring an Enron-style special-purpose entity onto its own balance sheet. The Fed's accounting manual has none. Now picture an accounting system where a bank never had to recognize losses on any securities it holds, as long as it continues holding them. That, too, is the Fed's policy.

JP Morgan Chase & Co., which completed its purchase of Bear Stearns this month, will lend the Delaware entity $1 billion and absorb the first $1 billion of any losses. The Fed is on the hook for the rest. The central bank has hired an outside company, Black Rock Inc., to manage the sale of the assets over the next 10 years. The proceeds will go back to the Fed and then, if anything is left over, to JP Morgan after the Fed is paid.

If the Fed were a normal bank, it probably would have to put the Delaware special-purpose entity's assets and liabilities on its own balance sheet, under the Financial Accounting Standards Board's rules. The reason is that the Fed will bear most of the risk of losses. Under the Fed's 161-page accounting manual, however, there's no such requirement. That's because the manual doesn't have any rules on the subject. The Fed hasn't said yet what it will do.

Are we in a banking crisis? You bet we are, the worst one since the great depression. And the root cause of that crisis is the Fed's micro management of interest rates in conjunction with Bush wasting trillions of dollars we do not have in a senseless and in my opinion illegal war in Iraq, and Congress (both parties) that have no sense of fiscal responsibility.

Now instead of eliminating the problem, the screams are getting louder and louder to expand the powers of those causing the problem.

Ron Paul would fix this in a flash. It would be painful, but it would be short and painful. Giving the Fed more powers is guaranteed to do one thing: make the recovery process long and painful and worse.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Unfolding Financial Meltdown on Wall Street

What’s The Difference Between Lehman Brothers & Bear Stearns? Lehman’s CEO Sits On the Board Of The NY Fed


by Dr. Ellen Brown


An earlier article by this author ("The Secret Bailout of JP Morgan") summarized evidence presented by John Olagues, an expert in options trading, suggesting that JPMorgan, far from "rescuing" Bear Stearns, was actually its nemesis.1 The faltering investment bank was brought down, not by "rumors," but by insider trading based on a plan drawn up much earlier. The deal was a lucrative one for JPM, handing the Wall Street megabank $55 billion in loans from the Federal Reserve (meaning ultimately the U.S. taxpayer). So how did JPM get away with it? Olagues notes the highly suspicious fact that JPM’s CEO James Dimon sits on the Board of the New York Federal Reserve.

In his latest post, Olagues discusses the fate of Lehman Brothers, the nation’s fourth-largest investment bank and the next faltering bank expected to fail.2 Unlike Bear Stearns, which got decimated by the JPM buyout using Federal Reserve money, Lehman Brothers is probably in line for a massive bailout from the Fed. At least, that’s what its CEO Richard Fuld seems to believe. The June 4, 2008 Financial Times of London quoted him as stating, "The Federal Reserve’s decision earlier this year to lend directly to investment banks should take questions about Lehman’s liquidity off the table." Whether Lehman can come up with the "liquidity" to meet its debts is no longer an issue, because it expects to be feeding at the trough of the Federal Reserve, just as JPM did when it bought Bear Stearns at bargain-basement prices. The difference between the two "bailouts" is that Lehman Brothers, unlike Bear Stearns, will actually get the money. Why is Fuld so confident of this rescue operation? Olagues notes that Fuld, like Dimon (and unlike Bear CEO Alan Schwartz), sits on the Board of the New York Federal Reserve.

A conflict of interest? It certainly looks like it. Indeed, Olagues points to a statute defining this sort of self-dealing as a criminal offense. 18 U.S.C. Chapter 11, Section 208, makes it a felony punishable by up to 5 five years in prison for members of the Board of Directors of a Federal Reserve Bank to make decisions that benefit their own financial interests. That would undoubtedly apply here:

"Fuld, at last count, owns 1.9 million shares of Lehman, 600,000 restricted stock units and 900,000 executive stock options . . . . Although Mr. Fuld sold over $320,000,000 worth of stock at near all time highs in 2006 and 2007, received through the premature exercise of his stock options, he still has value in his present holdings of approximately $100,000,000."

Likewise, says Olagues, "James Dimon holds almost 3 million shares of J.P. Morgan stock worth over $120 million with taxes already paid and executive stock options equal in my estimate of another $70 million. His dispositions of stock equaled $140 million over the past few years." Olagues adds:

"Fuld, like Jamie Dimon, was at the luncheon on March 11, 2008 with Bernanke, Rubin, CEO of Citigroup, Geithner, President of the New York FED, Thain of Merrill Lynch, and Schwarzman. Some claim that the meeting was about Bear Stearns and how to handle the situation."

Needless to say, Bear CEO Schwartz was not invited to the luncheon. "Lehman Bros. is one of the original stock holders of the New York Federal Reserve Bank," Olagues observes. "Bear Stears does not now have any ownership in the FED banks."

The luncheon was held two days before the April 14 collapse of Bear Stearns stock that led to the bank’s demise. If the luncheon attendees were indeed discussing the Bear problem on April 11, testimony before the Senate Banking Committee in which the principals said they first heard of the problem on the evening of the thirteenth, says Olagues, was "less than truthful."

The evidence at least warrants an investigation, but who is going to hold these self-dealing Federal Reserve Board members to account? In a March 27 radio broadcast noted in The New York Post of the same day, Senator Christopher Dodd pointed out the conflict of interest and said it needed to be examined; but no mention was made of it at the April 4 Senate hearings. Why not? Olagues suggests he had gotten his marching orders by then from a major campaign contributor. New York Governor Eliot Spitzer, the former thorn in the side of the Wall Street bankers, has been summarily disposed of; and under the latest proposal of U.S. Treasury Secretary Hank Paulson, the Federal Reserve itself will soon become the chief overseer and regulator of the banks. The Federal Reserve will regulate the Federal Reserve Boards with their litany of private bank CEOs, a clear case of the fox guarding the henhouse.

So who is left to bring the banks to task? That question will be addressed in my next article. Stay tuned . . . .

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves and how we the people can get it back. Her eleven books include Forbidden Medicine and Nature's Pharmacy (co-authored with Dr. Lynne Walker and selling 285,000 copies). See www.ellenbrown.com and www.webofdebt.com.


Ellen Brown is a frequent contributor to Global Research. Global Research Articles by Ellen Brown

Time to End "Bernanke Panky?"

Deplore as he must the current minor Internet buzz about abolishing the Federal Reserve Board or impeaching its leaders, Fed Chairman Ben Bernanke must have a grudging historical sense that 75 years ago, such chastisement might have been appropriate.

Back in 2002, Bernanke, then a Fed Board member, told a Chicago meeting that the group's honoree, octogenarian economist Milton Friedman, had been correct in blaming the Fed for the Great Depression. "You're right," Bernanke told Friedman and the rest of the audience. "We [the FRB] did it. We're very sorry. But thanks to you [Friedman's analyses and teachings], we won't do it again."

So, if recent Fed policies of blowing monetary bubbles and then bailing out the most reckless Wall Street institutions in fact "do it again," albeit through a different economics, is Bernanke ready for a new round of 1932-style talk about abolishing the Fed or impeaching its leaders?

Perhaps he should be. At least three aspects of Bernanke's Fed chairmanship over the last two years -- the J.P. Morgan Chase-Bear Stearns bail-out, his subservience to Treasury Secretary Henry Paulson, and the Fed's decision in 2006 to stop publishing M3 money supply data that mocked its insistence on "anchored" inflation -- have generated major controversy.

Extra-legal Bernanke Behavior in the March J.P. Morgan Chase - Bear Stearns Bailout: Former Fed chairman Paul Volcker, a recognized pillar of U.S. finance, has opined that the Fed took "actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded principles and practices." Moreover, the statute under which Bernanke purported to act required affirmative votes from five Fed Board members, and Bernanke procured only four. Other critics contend that the bail-out was really on behalf of J.P. Morgan, which could have been pulled down by the impact on its holdings of a Bear failure. In this view, the $29 billion loaned to finance the deal was legally a usurpation of Congressional appropriations power.

Bernanke and the President's Working Group on Financial Markets: Since this outfit, CIA-like in its official but also clandestine nature was set up in 1988, rumor has made it a backstage and unauthorized financial markets participant in crisis periods. The March episode may well be another example. Treasury Secretary Paulson is the Working Group's big capo in Washington, not Bernanke. Indeed, bipartisan leaders of the Senate Finance Committee expressed open concern that Paulson had told Bernanke what to do. Furthermore, although Bernanke testified to Congress that he didn't know about the grave Bear Stearns financial situation until March 13, it turns out, from Freedom of Information Act disclosures, that he may well have known. On March 11, Bernanke and another bail-out architect, New York Fed President Tim Geithner, lunched with representatives of every big Wall Street firm except Bear Stearns. The financial website Monkeybusinessblog.com assumes that Bear people were not on hand because it was their own situation being discussed.

Bernanke, Inflation and the Suppression of M3 Money Supply Data: In November 2005, several weeks after Bernanke was named as chairman, the Fed announced that publication of the broad "M3" money supply data would be discontinued in March 2006 because it was "duplicative." It wasn't, because the M3 measurement is much broader than the other two yardsticks (M1 and M2). More importantly, over the last two years, M3 has ballooned to a 15-16 percent annual growth rate. These no longer official computations mocked Bernanke's pretenses that inflation was low and under control. Indeed, the investment firm of Stifel Nicolaus just published charts showing how closely the 2001-2008 oil price surge has related to the galloping growth in M3. Here, too, the legal question becomes: What did Bernanke know about inflation and the suppression of M3 and what was his personal involvement?

Given that the embattled chairman has the big guns in Washington and a grateful Wall Street on his side, he probably has little to fear. For example, House Financial Services Committee Chairman Barney Frank, a leading pro-bailout Democrat, told the Wall Street Journal that "I don't think that changing the agenda of the Federal Reserve is going to be high on any new president's agenda. I think people think Bernanke is doing well."

People as in "the American people" or people as in big Democratic and Republican donors? One must assume the latter. Right after the Bear gambit, Britain's Financial Times reported that U.S. poll data showed the public opposing bank bail-outs by 4:1 ("U.S. Home-owner Bail-out Hits Resistance," Financial Times, April 2).

Herein lies the warning. Search the Internet for a conjunction of Bernanke or the Federal Reserve with impeachment, you don't get much beyond one or two quirky financiers and the official website of the maverick Republican presidential contender, Congressman Ron Paul of Texas, who favors U.S. withdrawal from Iraq and abolition of the Federal Reserve Board. Paul has no use for either anointed GOP nominee John McCain or the party establishment. However, he does have support from a tenth or so of the Republican electorate. And should Paul signal his followers to back this year's presumed Libertarian presidential nominee, former Georgia Congressman Bob Barr, some pundits think the latter could take 2-3 percent of the November vote, siphoning off enough disgruntled conservatives to beat McCain.

Could the impeachment of Bernanke become a 2008 issue? I doubt it. Congressman Paul, as a member of the House Financial Services, probably knows that back in 1932, Republican Congressman Louis McFadden of Pennsylvania, a longtime Chairman of the House Banking Committee, made a fool of himself with a resolution indicting the Federal Reserve Board for its actions, and then later switched focus to impeachment. The hidden irony is that Bernanke, philosophically, must empathize with frustration with early 1930s monetary policy.

In 2008, however, a more restrained critique could be effective. If Paul and Barr de-emphasize the fringe Libertarian stuff -- marijuana legalization and such like -- and go straight for the jugular of Iraq bungling and its effect on oil prices, along with Federal Reserve misbehavior, they might have a shot at that 2-3 percent. Moreover, even if Barr drew only 1.4 percent, say, on a national basis, he could do better in five swing states -- Ohio, Florida, Colorado, Nevada and New Mexico -- where sensitivity to the housing bubble and mismanaged mortgage crisis runs especially high.

Volcker, the grand old man of U.S. monetary policy, has told audiences that he doesn't believe that incumbent Fed chairman Bernanke will be reappointed by the next president. He certainly won't be if the integrity of his behavior in office becomes a significant 2008 campaign issue.

The $200 billion bail-out for predator banks and Spitzer charges are intimately linked

By Greg Palast
Reporting for Air America Radio’s Clout

March 14th, 2008

While New York Governor Eliot Spitzer was paying an ‘escort’ $4,300 in a hotel room in Washington, just down the road, George Bush’s new Federal Reserve Board Chairman, Ben Bernanke, was secretly handing over $200 billion in a tryst with mortgage bank industry speculators.

Both acts were wanton, wicked and lewd. But there’s a BIG difference. The Governor was using his own checkbook. Bush’s man Bernanke was using ours.

This week, Bernanke’s Fed, for the first time in its history, loaned a selected coterie of banks one-fifth of a trillion dollars to guarantee these banks’ mortgage-backed junk bonds. The deluge of public loot was an eye-popping windfall to the very banking predators who have brought two million families to the brink of foreclosure.

Up until Wednesday, there was one single, lonely politician who stood in the way of this creepy little assignation at the bankers’ bordello: Eliot Spitzer.

Who are they kidding? Spitzer’s lynching and the bankers’ enriching are intimately tied.

How? Follow the money.

The press has swallowed Wall Street’s line that millions of US families are about to lose their homes because they bought homes they couldn’t afford or took loans too big for their wallets. Ba-LON-ey. That’s blaming the victim.

Here’s what happened. Since the Bush regime came to power, a new species of loan became the norm, the ‘sub-prime’ mortgage and its variants including loans with teeny “introductory” interest rates. From out of nowhere, a company called ‘Countrywide’ became America’s top mortgage lender, accounting for one in five home loans, a large chunk of these ‘sub-prime.’

Here’s how it worked: The Grinning Family, with US average household income, gets a $200,000 mortgage at 4% for two years. Their $955 monthly payment is 25% of their income. No problem. Their banker promises them a new mortgage, again at the cheap rate, in two years. But in two years, the promise ain’t worth a can of spam and the Grinnings are told to scram - because their house is now worth less than the mortgage. Now, the mortgage hits 9% or $1,609 plus fees to recover the “discount” they had for two years. Suddenly, payments equal 42% to 50% of pre-tax income. The Grinnings move into their Toyota.

Now, what kind of American is ‘sub-prime.’ Guess. No peeking. Here’s a hint: 73% of HIGH INCOME Black and Hispanic borrowers were given sub-prime loans versus 17% of similar-income Whites. Dark-skinned borrowers aren’t stupid – they had no choice. They were ‘steered’ as it’s called in the mortgage sharking business.

‘Steering,’ sub-prime loans with usurious kickers, fake inducements to over-borrow, called ‘fraudulent conveyance’ or ‘predatory lending’ under US law, were almost completely forbidden in the olden days (Clinton Administration and earlier) by federal regulators and state laws as nothing more than fancy loan-sharking.

But when the Bush regime took over, Countrywide and its banking brethren were told to party hearty – it was OK now to steer’m, fake’m, charge’m and take’m.

But there was this annoying party-pooper. The Attorney General of New York, Eliot Spitzer, who sued these guys to a fare-thee-well. Or tried to.

Instead of regulating the banks that had run amok, Bush’s regulators went on the warpath against Spitzer and states attempting to stop predatory practices. Making an unprecedented use of the legal power of “federal pre-emption,” Bush-bots ordered the states to NOT enforce their consumer protection laws.

Indeed, the feds actually filed a lawsuit to block Spitzer’s investigation of ugly racial mortgage steering. Bush’s banking buddies were especially steamed that Spitzer hammered bank practices across the nation using New York State laws.

Spitzer not only took on Countrywide, he took on their predatory enablers in the investment banking community. Behind Countrywide was the Mother Shark, its funder and now owner, Bank of America. Others joined the sharkfest: Goldman Sachs, Merrill Lynch and Citigroup’s Citibank made mortgage usury their major profit centers. They did this through a bit of financial legerdemain called “securitization.”

What that means is that they took a bunch of junk mortgages, like the Grinning's, loans about to go down the toilet and re-packaged them into “tranches” of bonds which were stamped “AAA” - top grade - by bond rating agencies. These gold-painted turds were sold as sparkling safe investments to US school district pension funds and town governments in Finland (really).

When the housing bubble burst and the paint flaked off, investors were left with the poop and the bankers were left with bonuses. Countrywide’s top man, Angelo Mozilo, will ‘earn’ a $77 million buy-out bonus this year on top of the $656 million - over half a billion dollars – he pulled in from 1998 through 2007.

But there were rumblings that the party would soon be over. Angry regulators, burned investors and the weight of millions of homes about to be boarded up were causing the sharks to sink. Countrywide’s stock was down 50%, and Citigroup was off 38%, not pleasing to the Gulf sheiks who now control its biggest share blocks.

Then, on Wednesday of this week, the unthinkable happened. Carlyle Capital went bankrupt. Who? That’s Carlyle as in Carlyle Group. James Baker, Senior Counsel. Notable partners, former and past: George Bush, the Bin Laden family and more dictators, potentates, pirates and presidents than you can count.

The Fed had to act. Bernanke opened the vault and dumped $200 billion on the poor little suffering bankers. They got the public treasure – and got to keep the Grinning’s house. There was no ‘quid’ of a foreclosure moratorium for the ‘pro quo’ of public bailout. Not one family was saved – but not one banker was left behind.

Every mortgage sharking operation shot up in value. Mozilo’s Countrywide stock rose 17% in one day. The Citi sheiks saw their company’s stock rise $10 billion in an afternoon.

And that very same day the bail-out was decided – what a coinkydink! – the man called, ‘The Sheriff of Wall Street’ was cuffed. Spitzer was silenced.

Do I believe the banks called Justice and said, “Take him down today!” Naw, that’s not how the system works. But the big players knew that unless Spitzer was taken out, he would create enough ruckus to spoil the party. Headlines in the financial press – one was “Wall Street Declares War on Spitzer” - made clear to Bush’s enforcers at Justice who their number one target should be. And it wasn’t Bin Laden.

It was the night of February 13 when Spitzer made the bone-headed choice to order take-out in his Washington Hotel room. He had just finished signing these words for the Washington Post about predatory loans:

“Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.”

Bush, Spitzer said right in the headline, was the “Predator Lenders’ Partner in Crime.” The President, said Spitzer, was a fugitive from justice. And Spitzer was in Washington to launch a campaign to take on the Bush regime and the biggest financial powers on the planet.

Spitzer wrote, “When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners the Bush administration will not be judged favorably.”

But now, the Administration can rest assured that this love story – of Bush and his bankers - will not be told by history at all – now that the Sheriff of Wall Street has fallen on his own gun.

A note on “Prosecutorial Indiscretion.”

Back in the day when I was an investigator of racketeers for government, the federal prosecutor I was assisting was deciding whether to launch a case based on his negotiations for airtime with 60 Minutes. I’m not allowed to tell you the prosecutor’s name, but I want to mention he was recently seen shouting, “Florida is Rudi country! Florida is Rudi country!”

Not all crimes lead to federal bust or even public exposure. It’s up to something called “prosecutorial discretion.”

Funny thing, this ‘discretion.’ For example, Senator David Vitter, Republican of Louisiana, paid Washington DC prostitutes to put him in diapers (ewww!), yet the Senator was not exposed by the US prosecutors busting the pimp-ring that pampered him.
Naming and shaming and ruining Spitzer – rarely done in these cases - was made at the ‘discretion’ of Bush’s Justice Department.

Or maybe we should say, 'indiscretion.'

************
Greg Palast, former investigator of financial fraud, is the author of the New York Times bestsellers Armed Madhouse and The Best Democracy Money Can Buy.

California foreclosure "surge": Up 327% from '07 levels

Another "Bushed surge"
Tom

The number of California homes lost to foreclosure in the first quarter surged 327% from year-ago levels -- reaching an average of more than 500 foreclosures per day -- DataQuick said in a report, warning that the widening foreclosure problem could "spread beyond the current categories of dicey mortgages, and into mainstream home loans."

From DataQuick's report on California foreclosures in the first three months of 2008: "Trustees Deeds recorded, or the actual loss of a home to foreclosure, totaled 47,171 during the first quarter. ... Last quarter's total rose 48.9 percent from 31,676 in the previous quarter, and jumped 327.6 percent from 11,032 in first quarter 2007." That translates into 517 foreclosures every day in the first quarter of 2008.

DataQuick president Marshall Prentice: "The main factor behind this foreclosure surge remains the decline in home values. Additionally, a lot of the 'loans-gone-wild' activity happened in late 2005 and 2006 and that's working its way through the system. The big 'if' right now is whether or not the economy is in recession. If it is, the foreclosure problem could spread beyond the current categories of dicey mortgages, and into mainstream home loans."

From The L.A. Times' Peter Hong: "Sinking home values and the collapse of flimsy mortgages sent a record number of California homes into the foreclosure process in the first three months of this year, a real estate information service reported today."

Default notices -- which mark the beginning of the foreclosure process -- increased sharply, but not as rapidly as outright foreclosures. From Bloomberg News: "California mortgage defaults more than doubled in the first quarter to the highest in 15 years as a drop in sales and prices prevented some homeowners from selling their properties to pay debt, DataQuick Information Systems said.

More: "Homeowners received 113,676 default notices in the first quarter, up 143 percent from a year ago, La Jolla, California- based DataQuick said today in a statement. The level was the highest since at least 1992, when DataQuick's statistics begin."

Despite well publicized federal efforts to reach out to homeowners in default, the odds that they will ultimately lose their homes appear to be increasing. DataQuick reports that, of the homeowners in default, "an estimated 32 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 52 percent.:

J.P. Morgan to buy Bear Stearns for $2 a share

NEW YORK (MarketWatch) -- J. P. Morgan Chase & Co. said Sunday evening that it is buying battered broker Bear Stearns for $2 a share, or $236 million, in a Federal Reserve-backed bailout unprecedented in scope and execution.