Bloomberg has a new story on its continuing efforts to pry more information out of the Fed via Freedom of Information Act requests on who borrowed what when in the runup to the financial crisis. The central bank had refused to provide details of what various needy financial firms had gotten under its single tranche open markets operations program, which was launched in March 2008. Lehman received a peak amount of $18 billion out of a total program size of $80 billion.
Now why does all this matter? Perry Merhling, in an earlier post about the single tranche open market operations, underscored that the real significance of this program, along with two others, the Primary Dealer Credit Facility and the Term Asset Backed Securities Lending Facility: the Fed had crossed the Rubicon and had decided to prop up dealers, not just banks. And as the Lehman case illustrates, it was doing so indiscriminately. Lehman was a bigger version of Bear: a subscale player that had placed virtually all of its chips on real estate in an effort to catch up with its bigger peers. Yours truly and other commentators saw that Lehman’s accounting was dubious. The Fed was supporting it without bothering to understand what was going on. The Valukas report revealed that the Fed had two people on site, while the SEC, the supposed primary regulator, had one person who was a less than full time presence. But the risk management operations of major dealers have thousands of people in them. The idea that two people from the Fed could do much that was meaningful was delusional. And even then, the Fed staffers withheld some of what they did learn from the SEC.
You can argue, as some defenders have, that these loans were collateralized and there were no losses, but that is not a sound basis for evaluating this action (if someone lent a 14 year old a car and he turned it back in undamaged, would you say that was a good decision?). The Fed, though lack of interest and unwarranted confidence that primary dealers could manage themselves, abandoned its exams of them in the 1990s. And the fact, as the Wall Street Journal mentions, foreign banks also fed at this trough:
Goldman’s loan of $15 billion at an interest rate of 1.16% on Dec. 9, 2008 , was the largest 28-day loan from the Fed. Interest rates on loans to Goldman were as low as 0.01% for $200 million on Dec. 30, 2008…
Though Goldman got the biggest single loan, its total borrowings of $53.4 billion were less than for some other financial institutions.
Credit Suisse tapped the Fed a total of 57 times for $259.3 billion, while Deutsche Bank AG got $101 billion by going to the U.S. central bank 37 times.
The good news is the FDIC is taking examination of these firms much more seriously and says it plans to have staff on site all the time (and that means more than two people). The bad news is that regulatory reform has given the Fed far more influence, and there is little evidence that it has undergone a change of heart in the wake of the crisis that its neglect helped create.
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On-site people sounds as a nice idea, but has its own risks – personality capture – unless you rotate frequently enough. But if you do rotate, you lose the insitutional knowledge (part of getting which is making friends with people at the institution).
Also, you have to ensure that your reg people are going to stay with you for a long time (to preserve the institutional knowledge of those firms), and not get poached by the firm(s). I’ve seen places at an unnamed regulator being talked-up by headhunters as a perfect starting point for a senior-career with the financial institutions.
What a piece of nonsense !
ST OMO were monetary operations designed “to address heightened liquidity pressures in term funding markets” and done as usual through primary dealers bidding at auctions. The primary dealers are *obligated* to participate in these auctions.
There has been too much discussion regarding how the Fed could have bailed out Lehman and too little discussion about the consequences of the Fed propping up Lehman for almost two years through these idiotic loans. The fed’s job was to shut Lehman down went it became insolvent. Lehman became insolvent at some point in 2006 and 2007. By propping Lehman up, the Fed was simply putting money in the pockets of Dick Fuld and his fellow crooks.
Misinformation and BS.
1) The reported total borrowings ARE MEANINGLESS. The Fed lent money through the crisis on a term basis (overnight, 28-day and 81-day) which means the only important number is the outstanding balance at any point over the borrowing horizon.
2) “The good news is the FDIC is taking examination of these firms much more seriously and says it plans to have staff on site all the time”
Still suckling at the teat of the FDIC I see. Until the FDIC manages its own responsibilities effectively, assuming that talk and rhetoric is anything more than talk and rhetoric is ‘delusional’. Even people inside the FDIC don’t believe the b.s. you’re so eager to swallow.
3) “[I]f someone lent a 14 year old a car and he turned it back in undamaged, would you say that was a good decision?”
If a writer uses a crap analogy should readers infer some meaningful insight or just assume the writer is off their game? BTW, some states allow driving permits at 14. Bad decision?
If you have ever been at meeting where high level management resolves problems, it is often distressingly simple. Neither CEO knows the details. The problem is distilled into one or two sentences. The most knowledgeable in the room are those affected the most. They bring the solution to the table. No one discusses crapo CDOs. The decision was made to pick the winners and losers, the losers not invited. The agreement is made workable by the little people.
The money lent was probably not used, it was a backstop, a show of confidence, when money substitutes became illiquid or mis-priced by the market. Most of the onions remained intact, to be peeled later. The best part is missed, the frantic exchange of securities considered distressed by the buyer and crap by the seller or more often, the re-negotiation of contracts, each side being wiser from experience.
This is a good day to make a granola comment. Go back and read Henry Liu and others as early as 2006 where they are discussing peak population; that many countries are now experiencing population declines and aging populations. And think how hard it is to put the brakes on this capitalist steam-roller. Human Doubt is a very important as it turns out. I’m glad to learn this. We have all been so skeptical that we stopped our own forward momentum. It’s possible. I mean when Credit Suisse gets a 260bn line from the Fed? Here’s a question – Why can’t we see these things coming and deal appropriately. It’s like we defy and go against our own consciences.
This story confirm to me that, lenders of last resort have made themselves perfectly useless pawns to be expended at the appointed hour in the ongoing unraveling of the worse-than-useless, leveraged Ponzi scheme they desperately prop up, and this to little useful avail.