Below is the latest issue of The Institutional Risk Analyst.  This one is for Mark.  — Chris


Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP
December 7, 2009

On Saturday, joined by hundreds of friends, family and colleagues on a snowy December day in Yonkers, NY, we celebrated the life of Mark Pittman. Readers of The IRA who wish to express their thanks to Mark and show support for his family may make contributions to the Pittman Children’s College Fund, c/o Dr. William Karesh, 30B Pondview Road, Rye, NY 10580.

Bob Ivry from Bloomberg News gave a remembrance of Mark, including reading the letter that his daughter Maggie Pittman posted on zerohedge to dispel rumors that her dad might have been murdered. Some members of the zerohedge family thought that Mark was killed by the banksters for his diligent pursuit of the disclosure of the Fed’s many bailout loans to Wall Street firms.

Ivry also told a great story of how, when asked by a younger reporter why she should give Pittman her scoops instead of giving them to CNBC’s Charlie Gasparino, Mark replied: “I’m taller than Charlie and can see above the bullshit.” We miss Mark a lot.

Coming together with the friends of Mark Pittman ended a grim week. Many of us in the financial community were wading hip-deep through barnyard debris as we watched Federal Reserve Chairman Bernanke dodge and weave in front of the television cameras during his Senate confirmation hearing. We have to believe that Mark would have been pleased as Senators on both sides of the aisle asked questions that came directly from some of his reporting — and a few of our own suggestions.

To us, the confirmation hearings last week before the Senate Banking Committee only reaffirm in our minds that Benjamin Shalom Bernanke does not deserve a second term as Chairman of the Board of Governors of the Federal Reserve System. Including our comments on Bank of America (BAC) featured by Alan Abelson this week in Barron’s, we have three reasons for this view:

First is the law. The bailout of American International Group (AIG) was clearly a violation of the Federal Reserve Act, both in terms of the “loans” made to the insolvent insurer and the hideous process whereby the loans were approved, after the fact, by Chairman Bernanke and the Fed Board. The loans were not adequately collateralized. This is publicly evidenced by the fact that the Fed of New York (FRBNY) exchanged debt claims on AIG itself for equity stakes in two insolvent insurance underwriting units. What more need be said?

As we’ve noted in The IRA previously, we think the AIG insurance operations are more problematic than the infamous financial products unit where the credit default swaps pyramid scheme resided. And we doubt that any diligence was performed by Geither and/or the FRBNY staff on AIG prior to the decision taken by Tim Geithner to make the loan. We’ll be talking further about AIG in a future comment.

Of interest, members of the Senate Banking Committee who want more background on the AIG fiasco, particularly who did what and when, need to read the paper by Phillip Swagel, “The Financial Crisis: An Inside View,” Brookings Papers on Economic Activity, Spring 2009, The Brookings Institution.

We hear in the channel that Fed officials were furious when Swagel, who served at the US Treasury with former Secretary Hank Paulson, published his all-to-detailed apology. We understand that several prominent members of the trial bar also are interested in the Swagel document.

Last week the Senate Banking Committee spent a lot of time talking with Chairman Bernanke about why payouts were made to AIG counterparties like Goldman Sachs (GS) and Deutsche Bank (DB), but the real issue is why Tim Geithner and the GS-controlled board of directors of the FRBNY were permitted to make the supposed “loans” to AIG in the first place. The primary legal duty of the Fed Board is to supervise the activities of the Reserve Banks. In this case, Chairman Bernanke and the rest of the Board seemingly got rolled by Tim Geithner and GS, to the detriment of the Fed’s reputation, the financial interests of all taxpayers and due process of law.

Martin Mayer reminded us last week that the Fed is meant to be “independent” from the White House, not the Congress from which its legal authority comes by way of the Constitution. Nor does Fed independence mean that the officers of the Federal Reserve Banks or the Board are allowed to make laws. None of the officials of the Fed are officers of the United States. No Fed official has any power to make commitments on behalf of the Treasury, unless and except when directed by the Secretary. Given the losses to the Treasury due to the Fed’s own losses, this is an important point that members of the Senate need to investigate further.

The FRBNY not only used but abused the Fed’s power’s under Section 13(3) of the Federal Reserve Act. In AIG, the FRBNY under Tim Geithner invoked the “unusual and exigent” clause again and again, but there is a serious legal question whether the then-FRBNY President and the FRBNY’s board had the right to commit trillions without any due diligence process or deliberate, prior approval of the Fed Board in Washington, as required by law. The financial commitments to GS and other dealers regarding AIG were made always on a weekend with Geithner “negotiating” alone in New York, while Chairman Bernanke, Vice Chairman Donald Kohn and the rest of the BOG were sitting in DC without any real financial understanding of the substance of the transactions or the relationships between the people involved in the negotiations.

Was Tim Geithner technically qualified or legally empowered to “make deals’ without the prior consent of the Fed Board? We don’t think so. Shouldn’t there have been financial fairness opinions re: the transactions? Yes.

We understand that the first order of business in any Fed audit sought by members of the Senate opposed to Chairman Bernanke’s re-appointment is to review the internal Fed legal memoranda and FRBNY board minutes supporting the AIG bailout. These documents, if they exist at all, should be provided to the Senate before a vote on the Bernanke nomination. Indeed, if the panel established to review the AIG bailout and related events investigates the issue of how and when certain commitments were made by the FRBNY, we wouldn’t be surprised if they find that Geithner acted illegally and that Bernanke and the Fed Board were negligent in not stopping this looting of the national patrimony by Geithjner, acting as de facto agent for the largest dealer banks in New York and London.

The second strike against Chairman Bernanke is leadership. In an exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that he could not force the counterparties of AIG to take a haircuts on their CDS positions because he had “no leverage.” Again, this goes back to the issue of why the loan to AIG was made at all.

Having made the first error,Bernanke and other Fed officials seek to use it as justification for further acts of idiocy. Chairman Dodd look incredulous and replied “you are the Chairman of the Federal Reserve,” to which Bernanke replied that he did not want to abuse his “supervisory powers.” Dodd replied “apparently not” in seeming disgust.

We have been privileged to know Fed chairmen going back to Arthur Burns. Regardless of their politics or views on economic policies, Fed Chairmen like Burns, Paul Volcker and even Alan Greenspan all knew that the Fed’s power is as much about moral suasion as explicit legal authority. After all, the Chairman of the Fed is essentially the Treasury’s investment banker. In the financial markets, there are times when Fed Chairmen have to exercise leadership and, yes, occasionally raise their voices and intimidate bank executives in the name of the greater public good. AIG was such as test and Chairman Bernanke failed, in our view.

Chairman Bernanke does not seem to understand that leadership is a basic part of the Fed Chairman’s job description and the wellspring from which independence comes. The handling of AIG by Chairman Bernanke and the Fed Board seems to us proof, again, that Washington needs to stop populating the Fed’s board with academic economists who have no real world leadership skills, nor operational or financial experience. Just as we need to end the de facto political control of the banksters over America’s central bank, we need also to end the institutional tyranny of the academic economists at the Federal Reserve Board.

The third reason that the Senate should vote no on Chairman Bernanke’s second four-year term as Fed Chairman is independence. While Bernanke publicly frets about the Fed losing its political independence as a result of greater congressional scrutiny of its operations, the central bank shows no independence or ability to supervise the largest banks for which it has legal responsibility. And Chairman Bernanke has the unmitigated gall to ask the Congress to increase the Fed’s supervisory responsibilities. As we wrote in The IRA Advisory Service last week:

“Indeed, if you want a very tangible example of why the Fed should be taken out of the business of bank supervision, it is precisely the TARP repayment by Bank of America (BAC). The responsible position for the Fed and OCC to take in this transaction is to make BAC raise more capital now, when the equity markets are receptive, but wait on TARP repayment until we are through Q2 2010 and have a better idea on loss severity for on balance sheet and OBS exposures, HELOCs and second lien mortgages, to name a few issues. Apparently allowing outgoing CEO Ken Lewis to take a victory lap via TARP repayment is more important to the Fed than ensuring the safety and soundness of BAC.”

One close observer of the mortgage channel, who we hope to interview soon in The IRA, says that given the recent deterioration of mortgage credit, it is impossible that BAC has not gotten its pari passu portion of the losses which are hitting the FHA. The same source says that using conservative math, FHA has another $75 billion in losses to take, with zero left in the FHA insurance fund. Worst case for FHA is double that number, we’re told. How could the Fed believe that BAC, which is the biggest owner of mortgages and HELOCs, is immune from this approaching storm? Because the Fed is cooking the books of the largest banks.

The observer confirms our view that trading gains on the books of banks such as BAC are due to the Fed’s open market purchases, which drove up prices for MBS and other types of toxic waste. In effect, the Fed’s manipulation of the prices of various toxic securities is giving the largest US banks and their auditors a “pass” on accounting write-downs in Q4 2009 and for the full year – assuming that MBS prices do not drop sharply before the end of the month.

Question: Is not the Fed’s manipulation of securities prices and the window-dressing of bank financial statements not a vioatlion of securities laws and SEC regulations?

Of note, in her column on Sunday about the widely overlooked issue of second lien mortgages, “Why Treasury Needs a Plan B for Mortgages,” Gretchen Morgenson of The New York Times writes that “Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government’s agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks – the very same companies the Treasury is urging to modify loans that they service – have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets.”

Thus the Fed is not only allowing insolvent zombie banks to repay TARP funds before the worst of the credit crisis is past, but the “independent” central bank is engaged in a massive act of accounting fraud to prop up prices for illiquid securities and thereby help banks avoid another round of year-end write downs, the banks the Fed supposedly regulates. This act of deliberate market manipulation suggests that the Fed’s bank stress tests were a complete fabrication. Only by artificially propping up prices for illiquid securities can the Fed make the banks look good enough to close their books in 2009 and, most important, attract private equity investors back to the table.

Of note, the perversion of accounting rules in the name of helping the largest global banks is also well-underway in the EU. Our friends at CFO Zone published a comment on same last week that deserves your attention: “International Accounting Standards Board has ‘disgraced itself,’ says critic”

What is really funny, to us at least, is that we hear in the channel that BAC is ultimately going to give the CEO slot to a BAC insider, consumer banking head Brian Moynihan, who testified before Congress on the Merrill Lynch transaction in November. Just imagine how the Fed Board, Chairman Bernanke and the Fed’s Division of Supervision & Regulation are going to look when, after all the hand wringing about aiding BAC’s CEO search by allowing the TARP repayment, the post is finally given to an insider!

Former colleagues describe Moynihan as a close associate of Ken Lewis. If the objective of forcing Lewis’ departure was change in the culture in the CSUITE at BAC, installing one of his trusted henchmen, in this case left over from the Fleet Bank acquisition, seems a retrograde step.

All we can say about the treatment of the BAC TARP repayment issue and the Fed’s handling of the supervision of large banks generally is that it is high time for the Congress to revisit the McFadden Act of 1927. In particular, we need to look again at making further changes to the Fed to ensure that it is entirely subordinate to the public interest and that never again will private financial institutions such as GS or BAC be in a position to dictate terms to the central bank. Whether you are talking about the loans to AIG or the mishandling of BAC’s TARP repayments, the Fed under Chairman Bernanke seems to have acted irresponsibly and contrary to the law.

For all of the above reasons, we think that the Senate should reject the re-nomination of Ben Bernanke and ask the President to nominate a new candidate as Chairman and also nominate two additional candidates for Fed governor to fill the other two long vacant seats.

Questions? Comments?

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP”

  1. Wes Schott says:


    once again, outstanding analysis


    keep on keepin’ on

  2. ezduzit says:

    his name is really “b s” bernanke? how apropos.

  3. Winston Munn says:

    “What more need be said? ”

    How about: Book ‘em, Danno!

  4. TakBak04 says:

    Thanks Chris…

    The news about Mark Pittman’s Memorial and the rest about Bernanke and Fed is a powerful read. We out here in the hinterlands have to hope the pressure stays on about Bernanke’s role and particularly on Geithner in those long weekends while we were being told about the possible “Great Implosion.” You and others are the “good folks” in the financial community that are helping make more investigation possible, and we out here who don’t have a big voice are counting on you all.

    Again, kudo’s for your report.

  5. aaalp says:

    the letter that his daughter Maggie Pittman posted on zerohedge

    This link is dead Barry.

  6. flipspiceland says:

    All for nothing.

    BB is going to be re-confirmed not because he is the right person for the job, that much is clear.

    He is being re-confirmed because the bastards that run this country, who were not elected, Rubin, Greenspan, Lord Blankfiend, J. Dimon, Gary Gensler, and ultra-powerful others have hijacked this country from the voters, and no matter what the voters want, their “elected” reps have been told what to do. Or else.

    The difference between living in this country or some dictatorship is the disUnited States has Disneyland.

  7. carol7 says:

    Chris, thanks for great post.

    In addition to the big NO´s you mention regarding a second term for Bubblenanke:

    From the minutes of FOMC meetings it has become clear that he was a huge proponent of the almost ZIRP (1%) policy of the FED. He was a deflationist even at that time. With the 36 months of too easy money plus doing nothing about the incredible amounts of mortgage securities, he was one of the men enabling and causing the crisis!

    Plus, all his quotes, even in the months just before the crisis — great economy, only $ 50 billion impact, subprime damage contained, etc. etc. — reveal that intellectually he does not understand the financial world he lives in.

    Who would have thought that a president elected with a mantra of change we can believe in, would NOT change this fed head?

  8. Wes Schott says:

    to reinforce, from Hussman today, nothing new, but, it does point out the similar wanton disregard for the legislature and what is meant when BsB talks about the feds independence -

    “Finally, the Federal Reserve has expanded the U.S. monetary base by more than 150% since the beginning of the recession. That is not a typo. The monetary base has soared from $800 billion to over $2 trillion. Much of this has been accomplished through outright purchases of mortgage-backed securities (not repurchases) and an equivalent creation of base money. Unless these securities can be sold back out into private hands for the same value that was paid to acquire them, the Fed will have effectively forced the U.S. government to make its implicit guarantee of these agency securities explicit, without the authorization of Congress. To the extent that the underlying mortgages default, the U.S. government will be forced to issue additional Treasuries to retire the mortgage backed securities now held by the Fed. Alternatively, if the U.S. does not explicitly bail out Fannie Mae and Freddie Mac to the full extent, the Fed will have created money, with no recourse, and without the equivalent backing of assets or securities on its books. In short, the Fed is now engaging in unlegislated, back-door fiscal policy.”

  9. jmf says:

    Thanks from Germany!

    What an excellent rant to start the week…. ;-)

  10. Brad says:

    When listening to Chris Whalen, and reading IRA reports there is often a resonance of quality and good character. Today there is something a little more, good spirit in the work product. This merits our flanking support and determination. I cant help but admire natural leadership – understated strength – loyalty to friends; diligence in business. All great qualities.

    Thank you Chris. Alot of what you are saying rings true. Much more than rant, more like bedrock. Thanks again to you and Dennis at IRA

  11. speaking of the McFadden Act of 1927, this

    an anti-Mc Fadded Act screed, dressed up as an Econ 340 undergrad course, still, gives good background on the topic..

    also, this list of bon-bons, , should give one insight into the idea that ‘Banking’ isn’t what most of us *think it is..


    another fine article, thank you, much~

  12. sharkbait says:

    Great article Chris,
    A recurring theme is the illegality of the Fed’s dealings during initial phases of the financial crisis. I’m curious why Lehman Bros. was allowed to fail, while all others were merged, and or bailed out (e.g. .: GS from investment bank to bank holding Co.). I smell a story here – along w/ something rotten in (NY), to paraphrase.

    While there focus here is on confirm/non-confirm of Bernanke, let’s not forget the overall performance of the Fed against their mandate/charter. Stable employment, stable interest rates, and stable currency. Failed on all counts. Not just a Bernanke problem, and did not start w/ Greenspan. Cannot get much worse (?) : endless bubbles, ZIRP + QE, in addition to the now hugely expanded Fed balance sheet – taxpayer problem, which if “marked-to-market” anytime soon would be likely lead to another meltdown, as I believe you mentioned this AM on NPR.

    Bottom line is that America should not allow such an extra-Constitutional, quasi-governmental organization to have almost unlimited power over the entire economic system. Article 1, Section 8, Clause 5. Congress: Do your job. No checks and balances. Fed independence is – and has always been – an oxymoron. No “change” from Obama either. Status quo.

  13. Transor Z says:

    Great piece, Chris.

  14. bonghiteric says:

    I watched the exchange between Dodd and Bernanke live on Bloomberg. It blew my mind and I while I wholeheartedly agree with points #1 & #3, I think it alone encapsulates all that is wrong with Bernanke’s leadership.

    Bernanke served for eight years in an administration that had zero compunction about pushing the envelope on abuse of power. So in the face of AIG’s blowup, as the Chairmen of the Fed, with the administration’s full backing, AND Hammering Hank in the background, he claims they had, “no leverage” and back off demanding haircuts? This is either a bold-faced lie or speaks wholeheartedly to Chris’s point that academic economists have no negotiating prowess or leadership ability when dealing with the execs at the banks.

    Hank Paulson is consipicuously absent. I recall a NYT or WP article from a year or so ago detailing how Hank and Ben were tied at the hip-talking six or seven times a day trying to figure out the AIG crisis, working out the details on TARP, etc. So if Ben couldn’t carry the water in the AIG negotiations and there was a will to pay less than par then Hank could easily have put words in Geithner’s mouth to get the banks accept less. Problem is there never was a will to get the banks to accept less.

    After the ghetto beatdown that Geithner and Bernanke have been taking for the last two weeks, I’d be pretty pissed that Paulson is off in his own office avoiding the disinfecting spotlight of congressional hearings.

  15. [...] at Calculated Risk. Even more at the Big Picture.One close observer of the mortgage channel, who we hope to interview soon in The IRA, says that [...]