Final Thoughts on the Bernanke Nomination and AIG
We posted a new item today that contains our final thoughts on the nomination of Ben Bernanke for another terms as Fed governor. We also feature an interview with Mike Krimminger of the FDIC on that agency’s impending draft rule regarding bank securitizations. The text of the Fed rant is below and you can read the Krimminger interview on our web site: http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
The Institutional Risk Analyst
Final Thoughts on the Bernanke Nomination and AIG
December 14, 2009
Last week after we published his comment on auditing the Fed, our friend Martin Mayer reminded us of a couple of more reasons for the Senate to oppose the Bernanke confirmation. Top among them, according to Mayer, is Bernanke’s appointment of Patrick Parkinson to be head of the Fed’s division of supervision & regulation, a post Parkinson comes to by way of the central bank’s division of research & statistics. Says Mayer:
“An even bigger reason to resist the reappointment of Bernanke is his appointment of Pat Parkinson to be the new head of supervision. Parkinson was Greenspan’s guru on derivatives. Of course, the great benefit of customization of derivatives is the elimination of margin, which is safe enough as long as the Fed will contribute taxpayer money whenever anything goes wrong. The Fed does not protect customers, or the safety and soundness of the institutions, or the taxpayer. Nothing MUST be protected except permission for the institutions the Fed allegedly supervises to keep their freedom to avoid the standardization that might make possible the creation of an honest market from the ruins of what Parkinson defends.”
Suffice to say that many of Parkison’s views on OTC derivatives, which you may see for youself on the Fed’s web site, are seemingly identical to the views of the lobbyists for the large OTC dealer banks. Perhaps we are missing something, but to us Parkinson seems to typify the term “regulatory capture” and specifically the tendency of the Fed’s Washington staff to serve as advocates for the large NY dealer banks, rather than serving the broad public interest. For this reason alone, we think Bernanke deserves to go back to Princeton.
Of note, on Saturday the Wall Street Journal’s Serena Ng and Carrick Mollenkamp published an important contribution to the bailout knowledge base, reporting how Goldman Sachs (GS) used OTC credit default swaps to cause the failure of American International Group (AIG). Entitled “Goldman Fueled AIG Gambles.” the article confirms our long held view that AIG could not have come up with the trading strategies that caused its failure without a little help from GS and several other dealers. Customers just don’t come up with stupid ideas like this on their own. And interesting that the Murdoch-owned WSJ published the revealing piece on a Saturday…
Phill Swagel contacted us last week and said that we were wrong in our characterization of how Fed personnel viewed his Brookings Institution paper, wherein he described the events at Treasury around the time of the AIG bailout. “I can assure you that folks at FRB are not mad about what I wrote. After all, my paper is 50+ pages of defending Fed and Treasury,” says Swagel. True enough, but we stand by our comment.
We think Swagel is too modest. His paper suggests to us at least that Treasury repeatedly abdicated its responsibility to the financial system and the country as it sought to avoid or postpone difficult political battles with the Congress. Swagel concludes that the Treasury and authorities were always behind market developments and were “reactive.” This admission of the Treasury being behind the curve is ironic when juxtaposed with Swagel’s opening revelation that a year before the crisis in the Summer of 2006 Paulson told Treasury staff that it was time to prepare for a financial system challenge.
Did the former GS CEO Hank Paulson already perceive the political issues involving a rescue of a non-bank firm before the failure of Bear, Lehman and AIG? Swagel notes in his paper the narrow role the Paulson Treasury envisioned for itself prior to Bear:
“Treasury had urged institutions to raise capital to provide a buffer against possible losses, but had not contemplated fiscal actions aimed directly at the financial sector. Instead, the main policy levers were seen as being the purview of the Fed, which had cut rates and developed new lending facilities in the face of events.”
We think all observers of the crumbling US financial system owe Phill Swagel a debt of gratitude for describing the events which occurred during his tenure at the Treasury. Too much of the history of Washington is unwritten, just as agencies like the Fed do not seem to be able to follow the law even when it is written down for them. We think every member of the Senate should read Phill Swagel’s paper before voting on the Bernanke nomination.
To us, the Swagel paper illustrates just how badly the Fed mishandled its legal responsibilities during the crisis, a key oversight issue for Congress. The bone of contention we have with Chairman Bernanke, former FRBNY President Tim Geithner, members of the FRBNY board and the Board of Governors in Washington, is governance. When the markets started to come undone in 2008, officials at the Fed did not know their place, legally or politically, and the central bank as well as American democracy suffered as a result. Like we said last week, so much for central bank independence.
Using Bernanke’s own version of events, when the decision was made by Treasury Secretary Paulson to rescue AIG (and his former colleagues and clients at Goldman Sachs and other large bank derivatives dealers), Bernanke and Geithner should have expressed their support – but then only to offer to lend Treasury the cash to accomplish the AIG rescue by the Treasury. Of note, we are working with several media organizations to get a hold of the minutes of the Federal Financing Bank (FFB) for this period. The FFB is the Treasury’s vehicle in all fiscal operations involving private counterparties.
From the perspective of Fed independence, the first failure of Bernanke, Geithner et al in dealing with Treasury Secretary Paulson was not forcing the Secretary to take political responsibility for the bailouts of AIG and even Bear, Stearns. As Martin Mayer reminded us last week, the Fed is subservient to the Congress, not the Executive Branch. The Chairman of the Fed is not supposed to be a “team player,” in the parlance of the political economists who populate the Obama Administration. Saying no to the White House is what central bank independence is really about.
The proper thing for the Fed to have done in the circumstances was to offer financial support to the Treasury to rescue AIG, even without Paulson seeking enabling legislation by the Congress, but force Paulson and President George Bush to take political responsibility for this extraordinary fiscal operation. The Fed, by stepping in front of the Treasury, committed an act of political intervention as well as intervening in the financial markets. Bernanke neatly allowed President Bush and Secretary Paulson to escape political responsibility for the AIG takeover — and left the problem for President Obama. Senate Democrats should think about that when they vote on Bernanke.
Since the rescue of AIG, the Fed under Bernanke has compounded the problem, using the central bank’s balance sheet to absorb $2 trillion in MBS, Treasuries and other toxic detritus that Wall Street cannot finance. Bernake even suggested last week that the Fed does not intend to sell its hoard, meaning that he is now using Open Market operations to directly subsidize the banks and the public markets generally. Who cares about executive bonuses when such sums of money are involved in direct corporate subsidies? As we noted in the IRA Advisory Service last week:
“First, zero interest rate policy and Fed purchases of all sorts of collateral have essentially taken the risk and duration out of the fixed income markets, forcing investors into equities of all stripes. Not only have Fed purchases so far of $1.8 trillion in Treasury, agency and MBS obligations taken duration out of the markets, according to several colleagues in the Herbert Gold Society, but by not sterilizing this duration in the options markets (as the GSEs do routinely with their purchases of collateral and MBS), the central bank has greatly reduced visible market volatility.”
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December 14th, 2009 at 1:04 pm
“. . . he is now using Open Market operations to directly subsidize the banks and the public markets generally.”
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The Fed has taken over the economy, and with it, the Federal Government. Congress no longer controls the purse strings. Does anyone need more proof than this?
December 14th, 2009 at 2:16 pm
Quote from the article: “Parkinson seems to typify the term “regulatory capture” and specifically the tendency of the Fed’s Washington staff to serve as advocates for the large NY dealer banks, rather than serving the broad public interest.”
Wait…who owns the Fed? Why is it shocking that a private company would serve its shareholders?
The journalism community should create an informal rule that all articles about the Fed should point out that the Fed is a private company owned and wholly controlled by its bank shareholders.
December 14th, 2009 at 2:37 pm
Saying that the Fed legally answers to Congress, not the Administration, and should act accordingly, completely misses the mark. Congress pursues populist monetary policies. That means maximum monetary expansion, until the consequences are too dire to continue. Hardly a prescription for good stewardship of our money supply.
Also, complaining about what was done in the depths of the crisis because of who will take the most political blame for what goes wrong betrays an inside baseball view. Those who see the management of our economy mostly as an opportunity to score political points have already had too much influence.
Should the govt have rescued AIG? If you think it should, then the Fed got the big decision right, and whether the Fed should have executed the rescue directly or indirectly is of secondary importance. If you think it shouldn’t have rescued AIG, then the Fed committed a grave error of judgment. But base your criticism on the poor judgment that led to that very important decision to bailing AIG, not on the (perhaps) poor judgment that led to the less important decision on how exactly the bailout was going to be executed.
December 14th, 2009 at 2:50 pm
“Nothing MUST be protected except permission for the institutions the Fed allegedly supervises to keep their freedom to avoid the standardization that might make possible the creation of an honest market from the ruins of what Parkinson defends.”
Pretty much sums it up. Unfortunately this statement can be applied to numerous entities that allegedly ‘supervise’.
December 15th, 2009 at 3:24 am
[...] Final Thoughts on the Bernanke Nomination and AIG Chris Whalen (hat tip reader Joseph M) [...]
December 15th, 2009 at 8:26 am
[...] Final Thoughts on the Bernanke Nomination and AIG Chris Whalen (hat tip reader Joseph M) [...]
December 16th, 2009 at 9:13 am
Whalen makes good points and makes them well. Bernanke’s actions are not equitable. They have favoritism written all over them. He chooses favorites and then conceals who they are. There is not an example of leadership in this. It is an example favorable to exploiting people’s trust and good will. Such favoritism might be good for those who deal in bundling mortgage backed securities, but lets face it, there is a huge gap in how that helps anyone who is not a party in that favored group.
Sure his actions help a President or two. But there is no genuine leadership in providing sufficient deterrent, as to discourage abuse and exploitation from happening again, on the executive level. No executive revers him for his strong hand. They only pad him on the back for his university studies and gaps in his education between the Great Depression and his appointment.
Speaking of gaps: Ask him to name 5 important laws that came out of the study of the Savings and Loan Crisis? I think you will see his character show up in his reply.
The Savings and Loan Crisis has a lot of commonality, problems stemmed from:
a) bad lending practices
b) bad bank management,
c) absentee boards of directors,
d) many banks became over-extended
e) during a real estate boom and were eventually
f) exploiting people in the nations’ trust and good will
g) imposing on American seniors and their progeny; bending over backwards
to not hold execs/corporate boards accountable.
There is a lot of long-in-the-tooth heroism expressed toward Bernanke’s studies of the Great Depression, yet nobody seems to have the fortitude to ask him about more modern studies involving corruption. What where the 5 most important laws to come out of careful study of the savings and loan problems. And why?
Fast forward to 2008-2009. Bend over backwards Ben Bernanke, going out of his way to NOT decry any inequitable thing. He provides no leadership in the moment when leaders act. He has no capacity to speak out at such times, when many other leaders would have not signed their approval, nor encouraged anyone to sign or approve it.
Without a divining sense of equity, he cannot be a good leader. He is a failure at that bridge, and lets it go up in flames with various approvals being required by the Fed, to get some of the sturdier cross-sections to burn.
If he had a sense of equitable focus, he would have been out front on some of the inflammatory controversies, making outcry and decrying the abuse during a declared economic emergency.
A good and acceptable leader during a crisis, would have handled his men. In 2008, Bernanke showed the us, he did not handle his men, and to the nation, that he was NOT actually in charge: That others were operating from behind him and he went to a cowardice repose, being frozen like the credit market itself.
No ONE can praise such a flat foot, and merit respect in nation affairs, or in business. He lets the industry make mistake after mistake, that it would provoke indignation and risk social unrest. Such a person who does this, because he is afraid of loosing favor with (lets face it) thieving executives in his industry, needs to be seen for what he is.
A push over.
The reason I believe Paulson and Bush agreed to appoint him, was because when his voice goes to quiver, he becomes malleable. Just the kind of person, Paulson likes to surround himself with. Or be near in a parallel office. People who do not speak up in their oath and duty to serve the greater common.
Why run one important office, when you can run two with some carefully disguised “support.”
From my chair, Benanke is one of the worst persons for this job to manifest in 40 years. He can be told what to do, and I believe, that is exactly what happened in 2008. I believe others were holding his hand and telling him where to sign and where to fire “the bazooka,” Paulson was often giddy about, when in the media.
“We have many weapons … oh we have the tools to fix the markets.”
A half truth told by Paulson. What he does not say is that he was managing Bernanke like a operative handles an “asset” in a field. Off-record counter-intelligence: Operation: “Jobless Recovery.”
Barry was right to call it a soft-target: If you look at the top tier of the Federal reserve, you see it is populated with 4 out of 5 dough-boys. You push the right point and they laugh. You push another button and they fold. It is so predictable that an intelligent person, can run two offices if they know what it takes to push the buttons.
- – - -
From my chair, Bernanke is a last-on-the-list, sorry excuse for leadership to come along in some time. Anyone who thinks he is the best that American has to offer, I am sorry, but I just lost all respect for you.
Yes it is true. I have read and watched financial media for 20-30 years, and come to respect some good names in the financial markets. But when one of them come to the front of the class and say Bernanke is the best we got or we should settle for sub-standard work in this office, again, I loose all that respect for that name and business associated.
Draw a line right through it, and say to myself, you have lost all you have earned with me in the prior 20 years, in that moment. (What a fool thing to say … we should settle for sub-stand work product at the Federal reserve. … ? … That just goes to show you how bad is the lobby contingent between Wallstreet and D.C. Hideous.)
Anybody support this Ben Bernanke, has the taint on them, gone diluted – have come to accepting sub-standard work product and the worst, inequitable leadership, known to this nation, since the early 1760s.
Proponents for Bernanke, irregardless of party alliance, are comparable to watching feudal governors ride in on a horse and steal sustenance from the people. And if they protest, mock them, and impose an unjust and unpleasant blindfold on that person’s prospects, or do something to injure or maim them directly. (It is a mental affectation to surround Bernanke with heroism. Sick.)
December 16th, 2009 at 9:49 am
edit: “We have many weapons … oh we have the tools to fix the markets.”