The LawsuitAfter having read an article on Bloomberg about the Fed running a secret $2 trillion program of lending to banks and corporations, a program which is unrelated to the $700 billion TARP project, I thought it was important to bring this little known fact to life [Bloomberg article, Bloomberg TV]. In fact, I have had difficulty finding any major press outlet covering this except Bloomberg, who has requested details of the Fed lending under the U.S. Freedom of Information Act and has filed a lawsuit against the Fed. Thank god for the wonderful world of blogging, because this story has mostly been ignored by the mainstream media. Bloomberg is suing because The Fed has so far refused to divulge any information about the program, except to acknowledge its existence.
I suspect however that the Fed will win this lawsuit under the pretext that it is for the 'public interest' not to reveal exact figures of loan amounts, and who these loans went to. An interesting point raised by BestSyndication is that: "When the Fed was created there were worries that the central bank would be used to provide funds to member banks, like JPMorgan Chase, to purchase assets during economic busts.”
Maximize Profits for Shareholders
When you think about it, it makes sense that the Fed let Lehman Brothers sink on September 15th. It was acting in its own best interest, namely the interests of 51% or over of its investors. This is in line with any other corporation or bank in the capitalist system. The major stockholders of the Fed are the major banking institutions of America.
You can check on the Feds website, the owners of the Federal Reserve is not the government, but the “member banks” [Overview of Federal Reserve, p.12]. The member banks receive a 6% annual dividend for being stock owners. The government merely appoints its board of directors and the chairman (Bernanke). Exactly who owns how much of the Fed is kept secret, but if we assume that its workings are in line with the rest of the banking world, the likely scenario is that ownership is based on market capitalization or the net worth of member banks. So the story goes something like this:
1- The Fed secretly starts lending $2 trillion to its owners.
2- The Fed lets Lehman Brothers and thus the markets collapse.
3- The Fed owners go bargain hunting by buying up competitors for pennies on the dollar and thus consolidating their positions in the market (using the $2 trillion + $700 billion provided by the Fed).
This intuitively makes perfect sense, because that is how our markets work. Lesson number one in business and economics is that a company exists in order to maximize the profits of its shareholders. They are just doing what any other bank or corporation would do to maximize profits. And when you think about it, you can’t really blame the Fed or its stockholders (i.e. the banks) for the financial catastrophe that is currently happening. It is happening and it will pass when the best interests of those who control the money supply are served.
Who Will be Next?
As I mentioned in the previous post, everyone knows that GM has been severely struggling in the past few weeks and is basically begging the Fed and the government for money to continue operations. No money has been committed just yet. But GM posted a $15.5 billion third quarter loss [article]. In one quarter! How much money does the Fed need to lend them to stay afloat if they are burning money at that rate? And is GM going to be able to repay the Fed these huge sums of money with interest? Unlikely.
Again, here we see that the best interests of the shareholders of the Fed are served by letting GM go bankrupt. One of two scenarios will then happen. GM will either be allowed to restructure under bankruptcy protection, essentially allowing the company to annul most of its debt obligations, and start new ones with the Fed; or it will be seized by the government like Washington Mutual and Lehman, and its pieces sold off.
The Fed would of course lend Ford and Chrysler money to buy up pieces of GM at bargain prices. If GM collapses, it will act as a second Lehman, collapsing the already fragile markets further. The major banks will then again step in and start buying up companies and competitors for discount prices. Even Paulson said that “bank mergers may be best for the economy.” [article]
Bank Acquisitions and Failures so Far
To put things into perspective, here is a list of bank acquisitions in the US since the beginning of 2008:
04-01-2008 – Bear Sterns acquired by J.P. Morgan Chase - $2.2B
09-01-2008 – Countrywide Financial acquired by Bank of America - $4B
09-14-2008 – Merrill Lynch acquired by Bank of America - $44B
09-16-2008 – American International Group acquired by the Federal Reserve $85B
09-17-2008 & 09-26-2008 – Parts of Lehman Brothers sold off to Barcklays plc and Nomura Holdings
09-26-2008 – Washington Mutual acquired by J.P. Morgan Chase - $1.9B
10-03-2008 – Wachovia acquired by Wells Fargo - $15B
10-13-2008 – Sovereign Bank is acquired by Banco Santander SA (Spain) - $1.9B
10-24-2008 – National City Bank is acquired by PNC Financial Services - $5.58B
10-24-2008 – Commerce Bancorp is acquired by TD Bank (Canada) - $8.5B
Full list of global acquisitions and failures [wikipedia]
We might soon have to add CitiGroup to this list [article]. The company’s stock has lost 50% of its value in the last three days, and Bloomberg reports that Citigroup may get a government rescue. Or the Fed might allow the Bank of America or J.P. Morgan to buy it. Goldman Sachs has already refused [article], so we’ll have to wait and see.
I might be wrong about which company will be left to go bankrupt, but the idea is there. Whether its GM, Lehman, Chrysler, Citigroup or GE it makes no difference. The end result is what matters, and that is expansion of profits for the stakeholders.
So What Now?
The root of the problem is not the banks or the Federal Reserve, but rather the system which has allowed and even promoted this kind of activity. And I think that we are unlikely to emerge through financial crisis unless some fundamental problems within this system are resolved.
There is so much debt out there right now, that I am worried for when the interest payments on all of the outstanding debt becomes so big that the majority of borrowers entire income is spent just for the interest portion of the loan, and nothing for the principal portion. This is kind of what is happening now, but I expect that a lifeline might be thrown to the global markets to sustain it through one more bubble.
The only solution to this problem from a banks perspective is if paper money is eliminated altogether, and digital currencies become the standard for payment. Then the reserve requirements would become meaningless because money would be created through computers and backed by nothing, not even cotton paper.
The people already have very little control over money, but if this were to happen, we would have no control over our money what-so-ever. And the people with the power to push a few keys on their computer and give you a loan or issue you a payment will also be your masters. It will take a crisis of some sort for the people to accept removal of paper currency and a move to digital currency, and I really hope that the current financial crisis isn’t it…
Please see this video: Bloomberg TV - Transparency at the Fed
Further readings:
Bloomberg - Fed Defies Transparency Aim in Refusal to Disclose
Bailout Sleuth
(Good Blog which discusses some alternative apsects to the financial crisis)
Best Syndication - Bloomberg Sues Fed Under Freedom of Information Act
Russia Today - Fed refuses to disclose who got loans
LA Times Blog - Bloomberg sues to get list of banks borrowing from the Fed
Bloomberg - Citigroup May Get Government Rescue, Investors Say
Reuters -Goldman Cool to Citi Deal Even With Government Aid
I suspect however that the Fed will win this lawsuit under the pretext that it is for the 'public interest' not to reveal exact figures of loan amounts, and who these loans went to. An interesting point raised by BestSyndication is that: "When the Fed was created there were worries that the central bank would be used to provide funds to member banks, like JPMorgan Chase, to purchase assets during economic busts.”
Maximize Profits for ShareholdersWhen you think about it, it makes sense that the Fed let Lehman Brothers sink on September 15th. It was acting in its own best interest, namely the interests of 51% or over of its investors. This is in line with any other corporation or bank in the capitalist system. The major stockholders of the Fed are the major banking institutions of America.
You can check on the Feds website, the owners of the Federal Reserve is not the government, but the “member banks” [Overview of Federal Reserve, p.12]. The member banks receive a 6% annual dividend for being stock owners. The government merely appoints its board of directors and the chairman (Bernanke). Exactly who owns how much of the Fed is kept secret, but if we assume that its workings are in line with the rest of the banking world, the likely scenario is that ownership is based on market capitalization or the net worth of member banks. So the story goes something like this:
1- The Fed secretly starts lending $2 trillion to its owners.
2- The Fed lets Lehman Brothers and thus the markets collapse.
3- The Fed owners go bargain hunting by buying up competitors for pennies on the dollar and thus consolidating their positions in the market (using the $2 trillion + $700 billion provided by the Fed).
This intuitively makes perfect sense, because that is how our markets work. Lesson number one in business and economics is that a company exists in order to maximize the profits of its shareholders. They are just doing what any other bank or corporation would do to maximize profits. And when you think about it, you can’t really blame the Fed or its stockholders (i.e. the banks) for the financial catastrophe that is currently happening. It is happening and it will pass when the best interests of those who control the money supply are served.
Who Will be Next?As I mentioned in the previous post, everyone knows that GM has been severely struggling in the past few weeks and is basically begging the Fed and the government for money to continue operations. No money has been committed just yet. But GM posted a $15.5 billion third quarter loss [article]. In one quarter! How much money does the Fed need to lend them to stay afloat if they are burning money at that rate? And is GM going to be able to repay the Fed these huge sums of money with interest? Unlikely.
Again, here we see that the best interests of the shareholders of the Fed are served by letting GM go bankrupt. One of two scenarios will then happen. GM will either be allowed to restructure under bankruptcy protection, essentially allowing the company to annul most of its debt obligations, and start new ones with the Fed; or it will be seized by the government like Washington Mutual and Lehman, and its pieces sold off.
The Fed would of course lend Ford and Chrysler money to buy up pieces of GM at bargain prices. If GM collapses, it will act as a second Lehman, collapsing the already fragile markets further. The major banks will then again step in and start buying up companies and competitors for discount prices. Even Paulson said that “bank mergers may be best for the economy.” [article]
Bank Acquisitions and Failures so FarTo put things into perspective, here is a list of bank acquisitions in the US since the beginning of 2008:
04-01-2008 – Bear Sterns acquired by J.P. Morgan Chase - $2.2B
09-01-2008 – Countrywide Financial acquired by Bank of America - $4B
09-14-2008 – Merrill Lynch acquired by Bank of America - $44B
09-16-2008 – American International Group acquired by the Federal Reserve $85B
09-17-2008 & 09-26-2008 – Parts of Lehman Brothers sold off to Barcklays plc and Nomura Holdings
09-26-2008 – Washington Mutual acquired by J.P. Morgan Chase - $1.9B
10-03-2008 – Wachovia acquired by Wells Fargo - $15B
10-13-2008 – Sovereign Bank is acquired by Banco Santander SA (Spain) - $1.9B
10-24-2008 – National City Bank is acquired by PNC Financial Services - $5.58B
10-24-2008 – Commerce Bancorp is acquired by TD Bank (Canada) - $8.5B
Full list of global acquisitions and failures [wikipedia]
We might soon have to add CitiGroup to this list [article]. The company’s stock has lost 50% of its value in the last three days, and Bloomberg reports that Citigroup may get a government rescue. Or the Fed might allow the Bank of America or J.P. Morgan to buy it. Goldman Sachs has already refused [article], so we’ll have to wait and see.
I might be wrong about which company will be left to go bankrupt, but the idea is there. Whether its GM, Lehman, Chrysler, Citigroup or GE it makes no difference. The end result is what matters, and that is expansion of profits for the stakeholders.
So What Now?The root of the problem is not the banks or the Federal Reserve, but rather the system which has allowed and even promoted this kind of activity. And I think that we are unlikely to emerge through financial crisis unless some fundamental problems within this system are resolved.
There is so much debt out there right now, that I am worried for when the interest payments on all of the outstanding debt becomes so big that the majority of borrowers entire income is spent just for the interest portion of the loan, and nothing for the principal portion. This is kind of what is happening now, but I expect that a lifeline might be thrown to the global markets to sustain it through one more bubble.
The only solution to this problem from a banks perspective is if paper money is eliminated altogether, and digital currencies become the standard for payment. Then the reserve requirements would become meaningless because money would be created through computers and backed by nothing, not even cotton paper.
The people already have very little control over money, but if this were to happen, we would have no control over our money what-so-ever. And the people with the power to push a few keys on their computer and give you a loan or issue you a payment will also be your masters. It will take a crisis of some sort for the people to accept removal of paper currency and a move to digital currency, and I really hope that the current financial crisis isn’t it…
Please see this video: Bloomberg TV - Transparency at the Fed
Further readings:
Bloomberg - Fed Defies Transparency Aim in Refusal to Disclose
Bailout Sleuth
(Good Blog which discusses some alternative apsects to the financial crisis)
Best Syndication - Bloomberg Sues Fed Under Freedom of Information Act
Russia Today - Fed refuses to disclose who got loans
LA Times Blog - Bloomberg sues to get list of banks borrowing from the Fed
Bloomberg - Citigroup May Get Government Rescue, Investors Say
Reuters -Goldman Cool to Citi Deal Even With Government Aid
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1 comment:
Well thought article; what you foresaw as faith for the paper money may already be in place. I am sure that you may have read or heard about the beta testing of a new cell phone technology in Canada. This new technology will allow one to use the cell phone as a replacement to a debit or credit card. We rarely carry paper money nowadays or even if we do, it is always in limited quantity.
Imagine a society where money is just a digital value which is volatile and where the information is technology is a reality of our everyday life; the society is put at the mercy of the Banks. The financial institutions hence become a supreme power. Isn’t this much like the Imperial Regime which was once overthrown by the society in the past history?
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