Fed Document Dump Shows Failure of “Middleman” Approach

 

 

2 December 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com. 

For a long time, we have strenuously objected to calling the Black September 2008 global financial meltdown a “credit crunch,”

as if it were some kind of mysterious occurrence, whose origins / actors / motivations were somehow impossible to glean by mere mortals.

In our view, what happened should be called what it clearly was, and continues to be today:

a LOAN FREEZE to small and medium businesses especially by the entire financial sector, 

led, of course, by the TBTF wing, which continues to press for reassurances from the Federal government 

that they will NOT “suffer” the fate of Lehman Bros, 

and will be reimbursed for any and all losses they MIGHT sustain,

in the UN-likely event they DO stop the loan freeze, 

and start giving some of the HUGE amounts of money they are getting — at effectively 0 % interest — 

to potentially productive and innovative new and existing companies.

In other words, it’s blackmail of the American taxpayer by some of the wealthiest and most powerful corporations in the world.

Not only has nothing happened in the two-plus years since Black September to change our view, but it’s confirmed nearly every day, 

and today particularly by the unprecedented release of documents by the Federal Reserve 

that, to at least a certain extent, detail its actions at the most intense moments of the crisis.

Many people have already, and will continue, to point out the large number of recipients who were US subsidiaries of overseas banks.

Still others will make much of the fact the release occurred on the “hard deadline” day set by Congress for public disclosure, and not a second before.

But we think by far the most significant aspect is the extent to which the Fed felt it HAD to get involved in the commercial paper market,

the place where most corporations doing business actually get the money for their daily operations,

i.e., where they go for the funds they use to carry them through the always-crucial time between invoicing and receipt of what they’re owed.

Why focus on that ???

Because the commercial paper market is the place where the finance sector — 

whose societally beneficial activity is what, exactly, again ??? —

meets the real economy.

THIS is where the LOAN FREEZE imposed first by the TBTF institutions, and now by the smaller local and regional banks —

who themselves are struggling, given THEIR inability to get significant financing from the TBTF sector as well —

has had its most significant impact on by far the MOST important economic activity, namely, JOBS.

Put bluntly, without the steady supply of cash provided by the commercial paper market,

companies can neither pay their own bills nor, often, survive UNTIL they get paid — IF they get paid.

And when this starts to happen, at both the micro- and macro- levels, companies usually have little choice 

but to lay people off, and certainly not do any hiring, 

no matter how innovative and potentially productive their goods and services.

Thus, from our point of view, the most important part of the disclosures is that they reveal 

the extent to which corporations were forced to rely on the Fed for the money to pay suppliers and make weekly payroll. 

Indeed, the crisis in the commercial paper market, the documents show, was more extensive and lasted longer than was previously known.

During the worst moments of the financial crisis, Black September 2008, commercial paper issuers with ties to even bedrock corporations — 

Caterpillar, General Electric, Harley-Davidson, McDonald’s, Verizon, Toyota —

had to turn to the Fed after the market for short-term notes had dried up.

While most of the Fed’s commercial paper purchases were made in the first few weeks after the program opened on Oct. 27, 2008, 

the central bank had to buy nearly as much in January 2009 and only slightly less in March 2009. 

Indeed, the Fed was still supporting the market for commercial paper well into the summer of 2009 — even as the recession allegedly came to an end. 

In early October 2008, the Fed had hastily arranged to become the buyer of last resort for corporate commercial paper — 

the short-term notes that companies issue to smooth out cash flow and make sure payroll checks and vendor payments do not bounce.

That market had been under pressure since Sept 15, when Lehman Brothers filed for bankruptcy and defaulted on a substantial amount of its own short-term notes. 

The pressure became panic on Sept 16, when the Reserve Fund, one of the nation’s largest money market funds, “broke the buck” by reporting a share price below a dollar. 

Within days, the Fed set up an emergency insurance program for money market mutual funds, which helped slow the tidal wave of withdrawals.

Despite this, because money market funds are the principal buyers of commercial paper, the crisis quickly spread to that market. 

Indeed, its earlier intervention aside, on Oct. 27, 2008, the Fed itself started buying commercial paper.

The program was not aimed at rescuing the least creditworthy borrowers, 

who remained frozen out of the market, as they do today,

but was intended to buy only the best quality paper. 

The common wisdom was that its primary beneficiaries would be the top-tier banks, insurers and financial institutions, 

who normally could have sold their notes without difficulty.

In the first week, the Fed bought more than $225 billion in paper. 

In line that week were McDonald’s, Caterpillar, General Electric, Harley-Davidson, Verizon and Baxter International, the health care industry giant — 

major companies that were not generally considered vulnerable to the market meltdown.

But this key activity wasn’t limited to the US.

The European Central Bank drew heavily on the Fed’s currency swap lines to support dollar-financed money markets in Europe. 

Nine other central banks, the data show, also made use of the swap lines: 

Australia, Britain, Denmark, Japan, Mexico, Norway, South Korea, Sweden and Switzerland.

And it wasn’t just “real economy” companies that were in dire need of the Fed’s help in this area,

but the very same financial sector — including its leading TBTF wing — that almost immediately started making, literally, extortionate demands 

on the very same Federal government that was so instrumental in helping them survive.

Guess that’s what they mean by “chutzpah”.

Finance companies ranging from Ohio’s Fifth Third Bank to the best-known bank franchises of Europe and Asia, like Commerzbank and Sumitomo, 

were the primary occupants of the new lifeboat, 

along with the finance arms of the nation’s hard-pressed auto industry, and the teetering insurance American International Group. 

Indeed, from March 2008 to May 2009, the central bank extended a cumulative total 

of nearly $9 trillion in short-term loans to 18 different financial firms,

under a program called the Primary Dealer Credit Facility. 

Previously, the Fed had only revealed that four financial firms had tapped the special lending facility, 

and did not reveal their identities or the loan amounts.

The data seemed to confirm that Citigroup, Merrill Lynch and Morgan Stanley

were under severe strain in the weeks following the Lehman Brothers collapse in September 2008. 

All three firms tapped the facility on more than 100 occasions.

Citigroup was the greatest beneficiary, drawing a total of $1.8 trillion in loans, 

followed by Merrill Lynch, which used $1.5 trillion; 

Morgan Stanley, which drew $1.4 trillion; 

and Bear Stearns, which used $960 billion. 

At the height of the crisis, Merrill Lynch was sold to Bank of America, and Bear Stearns was sold to JPMorgan Chase, 

as storied Wall Street institutions crumbled under the weight of bad loans and excessive leverage.

And despite Goldman Sachs’s insistence it would have been strong enough to survive without a bailout, 

the bank borrowed money through an overnight loan program on 52 separate occasions, 

in amounts as high as $18 billion, according to the Fed data.

JPMorgan’s investment bank, by contrast, used the special lending facility meagerly. 

It turned to the Fed only three times, borrowing as much as $3 billion at one time.

The American subsidiaries of French, German, Swiss and Japanese banks also benefited. 

BNP Paribas of France borrowed on 43 occasions, for a maximum of $4.6 billion. 

UBS of Switzerland borrowed 8 times, with a maximum of $6.5 billion. 

And Mizuho Securities of Japan borrowed 108 times, with a maximum of $2.2 billion, 

according to the down-and-dirty initial analysis conducted by the New York Times.

So what does this sorry record tell us about what’s wrong with the Fed — and President Obama’s — policies NOW ???

Two significant and inter-related points stand out as having major implications for the present.

The first, and more obvious, is how outrageous it is for the very same TBTF banks, 

who benefited so crucially from taxpayer dollars,

should have had the nerve to institute almost immediately a LOAN FREEZE 

with the money they were getting from the Federal government for ~ 0 % interest.

Unless we’re missing something, the ONLY justification for their access to these various Fed “windows”

should have been to help “real economy” companies get the cash flow they needed 

to pay their bills / stay in business / and preserve and create JOBS.

The purpose of all this aid — to which they so eagerly helped themselves — should NOT have been to buck up their stock profile, 

or help out them and their investors, who previously had no problems retaining the huge pre-crisis profits for themselves.

Which brings up the second, and even MORE important point about what this pathetic story of greed and hubris tell us about today.

The fact that the Fed itself had to go so heavily into the commercial paper market itself shows it realized — 

both at the height of the crisis, and, as pointed out, for nearly a year afterwards —

that TBTF banks and other finance sector players were NOT, in fact, doing what they were supposed to be doing:

giving short-term loans to even solvent and well-established companies 

to help them cover the “bridge” period between invoicing and receipts !!!

Given this, the question must be raised:

If the banks are CLEARLY NOT doing what they’re supposed to — 

namely, greasing the wheels of commerce, to put it bluntly —

then why on earth did the Fed then — and continue to this day — 

keep on GIVING BANKS NO-INTEREST MONEY AND BEGGING THEM TO LEND IT,

which is something — as the millions of jobless in both the US and the rest of the world can attest —

THEY CLEARLY HAVE NO, ER, “INTEREST” IN DOING ???

About a year ago, we said Obama’s biggest problem is his reliance on middlemen — above all, TBTF banks — 

to carry out the tasks necessary for the successful functioning of an industrialized economy.

What today’s — involuntary, Congressionally-mandated — document dump by the Fed makes unmistakably clear

is that we were right then, and are still right about what’s going on now …

AND that Obama and the Fed STILL haven’t learned that giving banks no-interest money to lend 

IS SIMPLY NOT WORKING TO HELP THE REAL ECONOMY CREATE JOBS !!!

Consequently, they need to, at long last, assert political control over — 

and stop their insane self / destructive indulgence of — 

the TBTF banks and other players in the financial sector.

Until they do that, there is little, if any, hope the US jobs disaster is ever going to be fixed —

which is a tragedy for not just Americans, but the entire world that depends on US prosperity … for at least a little while longer.

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com