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06 Nov 09

New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers

The Federal Reserve, after conferring in secret with investment banks, agreed to cover all of their losses with taxpayer money. This is how government works in the real world.

www.bloomberg.com/...news - Preview

AIG credit default swap CDO New York Federal Reserve Fed bank Goldman Sachs Timothy Geithner finance crisis government politics

Habayeb, 37, was chief financial officer for the AIG
division that oversaw AIG Financial Products, the unit that had
sold the swaps to the banks. One of his goals was to persuade
the banks to accept discounts of as much as 40 cents on the
dollar, according to people familiar with the matter.
After less than a week of private negotiations
with the banks, the New York Fed instructed AIG to pay them par,
or 100 cents on the dollar. The content of its deliberations has
never been made public.

The New York Fed’s decision to pay the banks in full cost
AIG -- and thus American taxpayers -- at least $13 billion.
That’s 40 percent of the $32.5 billion AIG paid to retire the
swaps. Under the agreement, the government and its taxpayers
became owners of the dubious CDOs, whose face value was $62
billion and for which AIG paid the market price of $29.6
billion. The CDOs were shunted into a Fed-run entity called
Maiden Lane III.
1 more annotations...
- The deal contributed to the more than $14 billion that over
  18 months was handed to Goldman Sachs, whose former chairman,
  Stephen Friedman, was chairman of the board of directors of the
  New York Fed when the decision was made.

21 Jul 09

U.S. Rescue May Reach $23.7 Trillion, Barofsky Says

www.bloomberg.com/...news - Preview

TARP Treasury Department Federal Reserve Fed bailout financial crisis government spending debt

U.S. taxpayers may be on the hook
for as much as $23.7 trillion to bolster the economy and bail
out financial companies, said Neil Barofsky, special inspector
general for the Treasury’s Troubled Asset Relief Program.

The Treasury’s $700 billion bank-investment program
represents a fraction of all federal support to resuscitate the
U.S. financial system, including $6.8 trillion in aid offered by
the Federal Reserve, Barofsky said in a report released today.
Treasury spokesman Andrew Williams said the U.S. has spent
less than $2 trillion so far and that Barofsky’s estimates are
flawed because they don’t take into account assets that back
those programs or fees charged to recoup some costs shouldered
by taxpayers.
1 more annotations...
- Barofsky offered criticism in a separate quarterly report
  of Treasury’s implementation of TARP, saying the department has
  “repeatedly failed to adopt recommendations” needed to provide
  transparency and fulfill the administration’s goal to implement
  TARP “with the highest degree of accountability.”
  
  As a result, taxpayers don’t know how TARP recipients are
  using the money or the value of the investments, he said in the
  report.

13 Jul 09

At the Fed, Nothing Succeeds Like Failure

www.cato.org/pub_display.php - Preview

Federal Reserve Fed money history economics George Selgin

What use has the Fed made of past extensions of its powers? Is it reasonable, given the Fed's record, to expect it to use new powers responsibly?
During World War I it abandoned penalty rates for "easy" money, and then began buying Liberty Bonds to support the government's war effort. Those actions helped hoist the inflation rate from close to zero in 1915 to almost 20 percent in 1920
3 more annotations...
- in the later 1920s the Fed turned to easy money again. But bankers had learned a lesson, and so refused to borrow from it even at low rates. Consequently the Fed, taking advantage of some fine print in the Federal Reserve Act, started buying large quantities of U.S. securities on the open market. The result was an unprecedented stock bubble, which the Fed only managed to prick, in late 1929, by choking-off normal business credit. During the ensuing panic the Fed, pleading impotence, stood by while the U.S. money stock lost a third of its pre-crash value.
- Although the Banking Act was supposed to prevent the Fed from becoming a mere handmaiden to the Treasury, by denying the Secretary of the Treasury and the Comptroller of the Currency their former seats on the Federal Reserve Board, its failure to do so became clear during World War II, when the Fed devoted itself to "pegging" (that is, propping-up) the price of Treasury bills. Wartime price controls hid the inflationary consequences of this policy until after 1946. But by 1951 inflation had forced the Fed to reach an "Accord" with the Treasury freeing it, on paper at least, from Treasury dominance. But the Vietnam War saw the Fed once again accommodating the Treasury, and by the mid- 1970s the inflation rate one again reached double digits.
- Why does Congress keep rewarding the Fed for its failures? The paradoxical answer is that those failures are often so catastrophic as to send members scrambling for a quick fix. The status quo is of course untenable, while radical reform takes time. So caving in to Fed's quest for more power seems like the only option. Yet this "hair of the dog" remedy only lays the groundwork for new abuses, and new crises.