The Trillion-Dollar Shadow (audit the Fed!)

By Richard (RJ) Eskow

March 30, 2010  

What secrets are hidden in the Federal Reserve’s trillion-dollar shadow? Economic recovery depends on confidence, and confidence requires knowledge. But Senators like Chris Dodd and Judd Gregg don’t want us to have that knowledge. They don’t even want it themselves.

In Sen. Dodd’s case, he’s trying to give the Fed more authority (over consumer protection) even as he fights to keep its activities hidden. Fortunately, the final decision may not be up to him.

A judge’s recent ruling in favor of two news organizations (Bloomberg and Fox) promised to shed light on $2 trillion in concealed Fed emergency loans to major financial firms. That’s a start. But Sen. Dodd is still fighting efforts to have a full-scale audit of the Fed’s other major bailout activities, including the $1.25 trillion program to buy mortgage-backed securities. That’s been going at the rate of $10 billion per week – a massive program which ends this Wednesday.

You could argue that giving $10 billion every week to the people that wrecked our economy is like giving Viagra to sex offenders. (Remember last week’s “controversy” about that?) And that $10 billion per week goes to buy the worhtless assets of bankers who enriched themselves on loans that ranged from predatory to merely incompetent.

Who’s been able to avoid the consequences of their own bad business practices, thanks to the Fed? We don’t know yet, because Sen. Dodd promised GOP Senator Gregg there would be no audit of the bailout. Which just goes to show: Scratch a bad policy idea these days and you’re likely to find it was promoted under the guise of a false “bipartisanship.” Outside the Senate bubble, however, many progressives are aligned with conservatives like Ron Paul on the need for an audit. That makes it one of the few truly bipartisan movements out there.

Why is an audit so important? For one thing, because the Fed is a democratically-created institution, formed by an act of Congress. While it has a certain degree of autonomy, the Fed (the “bank for bankers”) is supposed to respond to the will of Congress – although it’s had a habit of disregarding orders that don’t please it, like the one Congress passed in 1994 to enact meaningful protections against predatory mortgage lending. That got a big yawn under both Democratic and Republican Administrations.

It’s not just Congress that needs to know. Shouldn’t investors learn which financial institutions made bad decisions and required massive intervention? Doesn’t concealing that information only serves to protect blundering CEOs?

That’s exactly what Tim Geithner did when he was head of the New York Federal Reserve Bank. In what appears to be a direct violation of his bank’s charter, he took junk loans of Lehman’s hands and “warehoused” them. That illustrates another reason to shine a light into those dark corners: There may be more charter violations there.

In a piece called Discount-Window Future Darkens After Court Move, the Wall Street Journal’s Michael S. Derby writes of the Federal Reserve’s fear that “more disclosure would drive away future borrowers, with institutions fearing public knowledge of their emergency loans would be a signal to markets of their weakness.”

But isn’t that exactly the point? By definition, doesn’t any institution that ran itself into a ditch have a certain “weakness”? Sure, some may have been caught in the undertow created by their reckless colleagues. Let them make that case publicly. They’ll get a receptive hearing.

The hypocrisy’s stunning when it comes to Judd Gregg and the other anti-audit right-wingers. “Free market” acolytes should have some understanding of the god they worship. Of the four requirements traditionally given for a “perfect market,” the first is “perfect information.” Concealing trillions of dollars in transactions is hardly the way to promote a well-functioning market.

Bernanke is somewhat open to the idea of an audit (although there would no doubt be some haggling over the details). He said this in Congressional testimony: “”… (W)e understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation. Accordingly, we would welcome a review by the GAO of the Federal Reserve’s management of all facilities created under emergency authorities.”

We can’t know exactly what’s hidden in the Federal Reserve’s shadow until we have that audit but, based on the intransigence of certain politicians, here’s an educated guess: An audit might well confirm that a lot of institutions really are too big to fail, and need to be broken up up now.

Congressional oversight isn’t just a privilege of power. It’s also a responsibility. When it comes to the “discount window” program, the courts have put an end to the Judd/Gregg obstructionist clique. Now the rest of the Senate must vote to shine a light into the Fed’s shadows, as the House has already done.

We need to know the truth. Congress needs to audit the Fed.

2 responses to “The Trillion-Dollar Shadow (audit the Fed!)

  1. Thanks for this article. When people seek to retain privacy over public matters, then, at least, they’re showing disrespect for their constituents, the people. It may also indicate a sing that they’ve got quite a bit to hide.

    Another key issue is the $23 trillion in cash and credit that is on the line for the bailout. Less than 1/2 has been used but it’s got to be a huge drain on the economy to have the Fed tapped out. How could that happen?

    Again, thanks for the excellent article.


    The Federal Reserve has recently and very reluctently released details of its unlawful purchase of certain securities in order to help JP Morgan Chase takeover the Wall Street brokerage firm of Bear Stearns. Unfortunately for the Federal Reserve, this was a violation of federal law, as the Fed is not authorized to purchase anything other than securities that are backed by the full faith and credit of The United States.

    Here is some basic information about three organizations that were created as part of the criminal scheme to defraud Americans that could also be considered part of a larger pattern of racketeering activity:


    Maiden Lane LLC is the first holding company bearing the name that was created when JPMorgan Chase took over Bear Stearns in early 2008. It holds an asset portfolio that JPMorgan found too risky to assume in whole, and consequently the Federal Reserve Bank of New York extended a $30 billion credit line to the limited liability company to facilitate the unwinding of these assets over time. Bloomberg, citing Bank of America analysts, reported on October 2, 2008, that the Federal Reserve might stand to lose $2 to $6 billion on the asset porfolio. A November 6, 2008, update by the Federal Reserve showed that the fair value of the assets was at $26.8 billion, meaning a book loss of $2 billion for the Federal Reserve.

    The Maiden Lane name has been used for a series of bailouts including Maiden Lane II LLC and Maiden Lane III LLC. Maiden Lane was incorporated as Delaware Limited Liability Company on April 29, 2008, and registered to do business as a foreign limited liability company in the state of New York on June 26, 2008. The registered agent of Maiden Lane LLC is the CT Corporation


    Maiden Lane II LLC is a limited liability company created when American International Group Inc. (AIG) was taken over by the U.S. government in September 2008. Since AIG’s subsidiaries hold a great many residential mortgage-backed securities that are very risky, Maiden Lane II LLC was formed to purchase these RMBS. On December 12, 2008, the Federal Reserve Bank of New York began extending credit to Maiden Lane II LLC. On the Fed’s Balance Sheet as of May 6, 2009, net portfolio holdings of Maiden Lane II LLC are 180.16 billion dollars.

    A news story dated March 16, 2009, stated Maiden Lane II used billions in bailout money to purchase toxic assets, and that AIG used billions to pay other banks, including foreign banks- France’s Societe Generale at $11.9 billion, Germany’s Deutsche Bank at $11.8 billion, and Britain’s Barclays PLC at $8.5 billion. AIG, through this fund also funneled significant bailout money to U.S. banks that had already been bailed out themselves under the Troubled Asset Relief Program. As AIG counterparties, Goldman Sachs got $12.9 billion, Bank of America got $5.2 billion, and Citigroup got $2.3 billion all at 100% on the dollar.

    The March 16, 2009 article was critical of AIG’s plan to pay in excess of $170 million as bonuses to AIG employees. This was the second in a series of LLC companies formed to deal with the bank bailouts.


    Maiden Lane III LLC is a holding company created when American International Group Inc. (AIG) was taken over by the U.S. government in September 2008. Similar to Maiden Lane II LLC, Maiden Lane III LLC aims to purchase multi-sector collateralized debt obligations (CDOs) on which the Financial Products group of AIG had written credit default swap contracts. On November 25, 2008, the Federal Reserve Bank of New York began extending credit to Maiden Lane III LLC. As of May 6, 2009, The Federal Reserve’s net portfolio holding of Maiden Lane III LLC is 26.4 billion dollars.

    Federal Reserve Chairman, Ben Bernanke, has repeatedly stated on numerous occasions that these financial deals would not cost anyone money. But the current value looks differently:

    Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed.

    Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades.

    In other words, through this criminal manipulation, these shell organizations have lost more than half of their value. This was and remains a blatantly unlawful activity.

    The Federal Reserve is in violation of Article 1 Section 7 of The U.S. Constituion which reads in part: “All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.”

    The Federal Reserve has unconstitutionally and illegally used taxpayer funds without authorization from Congress. At the time these shell “Maiden Lane” organizations were created, neither TARP or any other Congressional authorization existed for them to do so, and as of April 2010, no legislation has been put through Congress authorizing the expenditure of taxpayer funds, either through putting them at risk or via outright expense, for this purpose.

    Sections 13 and 14, of the Federal Reserve Act, make it perfectly clear that the Federal Reserve is only authorized to purchase items backed by the “full faith and credit” of the United States government. Credit-default swaps and jumbo trash mortgages most certainly do not meet these qualifications.

    There is simply no way to manipulate the facts to make the Federal Reserve’s action constitutional or legal. The federal government, as the servant government of the people, must immediately audit the Federal Reserve’s books and simutaneously initiate a criminal investigation into the actions of the Federal Reserve, as this group of private “banksters” has attempted to usurp the power of the United States House of Representatives.

    The Federal Reserve has spent several years trying to avoid disclosing these illegal activities from the Congress and the people of America. It continues to resist both Congressional demands for disclosure and multiple Freedom of Information Act lawsuits.

    It is time to hold the Federal Reserve to the rule of law. The fact that they resist any efforts at transparency is a sign that the Chairman and the entire Federal Reserve Board are involved in any number of illegal activities. We do not need meaningless fines and sanctions in return for the Federal reserve Board to tell us that they “will never do that again.” We need criminal prosecutions of those who willfully violated the criminal statutes and the U.S. constitution.

    Amending The Federal Reserve Act of 1913 (as Chris Dodd has proposed to prevent future lending bailouts) is not sufficient in that The Fed did not lend in this case, it purchased, and by buying what we now know were jumbo trash loans, it violated the letter of existing law.

    There is only one effective remedy for an institution that has proven that it will not abide the law: it must be abolished and all of the criminal wrongdoers in the organization must be prosecuted to the highest extent possible.

    We cannot have a Constitutional Republic where an unelected body of private banksters willfully, continuously and criminally violates the U.S. Constitution and other federal laws to the detriment of the American people.

    The Federal Reserve is an ongoing criminal entreprise and the principals should be prosecuted under the Racketeer Influenced and Corrupt Organizations Act (RICO).

    According to the RICO statute, any person or group who operates or manages an enterprise through a pattern of racketeering activity may be in violation of the RICO Act.

    Any group, including the members of the Federal Reserve Board, may be considered a RICO enterprise regardless of whether or not its members wear pinstripe suits.

    John Wallace

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s