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Ben Bernanke

Congress To Bernanke: Hand Over Docs On BofA-Merrill Deal

Zachary Roth | June 9, 2009, 6:16PM

Congress has subpoenaed the Federal Reserve, to force it to hand over documents about its role in Bank of America's takeover of Merrill Lynch during the financial crisis last fall, reports Reuters.

Staffers for the House Oversight committee, chaired by Rep. Ed Towns of New York, had been allowed to view the documents at the Fed. But Towns has now concluded that the committee needs to have the documents in its possession. The Fed has said it will comply with the subpoena.

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Topics: Bank of America, Ben Bernanke, Edolphus Towns, Federal Reserve, Financial Crisis, House Oversight, Ken Lewis, Merrill Lynch, Wall Street

AIG

Who Are The AIG Counterparties? Here Are Some...

Zachary Roth | March 5, 2009, 4:58PM

Over at TPM, Josh has been doggedly highlighting the refusal of both AIG and the federal government to reveal the identity of AIG's counter-parties in its disastrous credit default swaps. And several lawmakers have in recent days pressed Tim Geithner and Ben Bernanke on the issue.

The question matters, of course, because AIG needed to make its most recent multi-billion dollar trip back to the public trough (that's over $160 billion in all for AIG, if you're counting) in order to pay back its creditors on those disastrous swaps -- and thereby, we're told, prevent a wider financial collapse. So identifying who those swaps were made with will tell us, in effect, who this latest portion of our money is ultimately going to.

It's worth noting, then, that, thanks to some great reporting from the Wall Street Journal and the New York Times, we do in fact have some preliminary information about who AIG's partners were on the swaps.

This Journal story from October 2008 names the following nine American and foreign banks as having bought swaps from AIG: Goldman Sachs; Merrill Lynch; UBS of Switzerland; Credit Agricole SA of France; Deutsche Bank of Germany; Barclays, and Royal Bank of Scotland Group, of Britain; and CIBC, and Bank of Montreal, of Canada.

Merrill is described by the Journal as a "big client" of the AIG unit that did the swaps.

By the end of 2007, with the value of the underlying assets plummeting, many of these banks had asked for collateral on the swaps, according to the Journal.

For instance, the paper reports that Goldman held swaps that insured about $20 billion of securities. In August 2007, Goldman demanded $1.5 billion in collateral from AIG. It ultimately got $450 million, then another $1.5 billion last October. At that point, says the Journal:

Goldman hedged its exposure by making a bearish bet on AIG, buying credit-default swaps on AIG's own debt.

That picture of Goldman's exposure jibes with a New York Times story from September 2008 about the credit default swaps, which reported that Goldman was AIG's "largest trading partner," and likewise gave a figure of $20 billion for Goldman's exposure to AIG.

The Times also implicates another domestic firm: JP Morgan (now JP Morgan Chase). In fact, it recounts that it was derivatives traders from that company that a decade ago, first brought to AIG's London-based financial products unit, run by Joseph Cassano, the ill-fated idea of doing credit default swaps.

It reports:

Ten years ago, a "watershed" moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano's unit, came calling with a novel idea.

Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as "collateralized debt obligations." C.D.O.'s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.

It's not 100 percent clear, then, that JP Morgan Chase is a current counter-party of AIG on the swaps -- but it certainly wouldn't be surprising.

That same Times story offers another hint, albeit a vague one, about the identity of the counter-parties.

While clients and counterparties remain closely guarded secrets in the derivatives trade, Mr. Cassano talked publicly about how proud he was of his customer list.

At the 2007 conference he noted that his company worked with a "global swath" of top-notch entities that included "banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities and sovereigns and supranationals."

What to make of all this? Well, here's one thing. As Josh has noted, the usual argument given against disclosing the identities of the counter-parties is that it would reduce public confidence in the banks that were named, with potentially disastrous consequences for their positions. But there's little evidence we're aware of that any of the banks named above suffered such an effect when, for instance, the Journal and the Times published their stories -- whose accuracy have not been questioned.

In fact, Geithner and Bernanke haven't deigned to explain their position in even this much detail -- so it's difficult to know whether there are factors we're not considering. But in the absence of a fuller explanation, we'll keep pressing...

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Topics: AIG, Bailout, Ben Bernanke, Federal Reserve, Financial Crisis, Merrill Lynch, Timothy Geithner, Treasury Department, Wall Street

Ben Bernanke

Report: Bernanke Threatened B Of A Over Merrill Deal

Zachary Roth | February 5, 2009, 11:45AM

We already knew, that, after it got wind of Merrill Lynch's massive fourth-quarter losses back in December, Bank of America had thought about pulling out of its deal to buy the troubled investment bank -- before being talked into it by the federal government.

But today, the Wall Street Journal adds some fascinating detail (sub. req.) about the level of hardball that the government played in making sure the deal went through.

Bush Treasury Secretary Henry Paulson and Fed chief Ben Bernanke reportedly warned B of A CEO Ken Lewis that if his firm pulled out, Merrill would collapse. They added that such a move, in the Journal's words "could undercut confidence in Bank of America, both in the markets and among government officials."

But that was just the start. Two days later, on a conference call, Bernanke told B of A that if it abandoned the Merrill deal, and came back to the Feds in the future seeking more bailout money, the government would consider removing the firm's executives and directors.

The threats, of course, seem to have worked, since Bank of America went ahead with the deal -- getting an additional $20 billion in bailout money to help digest Merrill.

Bernanke and Paulson may have been right to take such a hard line. But the episode suggests the level of control of day-to-day control that the government has had over the financial sector, since stepping in to rescue it last fall. Nationalizing the banks is still seen, in the mainstream debate as an extreme solution. But if the Feds are essentially making major operational decisions for the big banks, some would say they've been nationalized already -- it's just that no one wants to it.

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Topics: Bailout, Ben Bernanke, Federal Reserve, Henry Paulson, Treasury Department, Wall Street

Ben Bernanke

In Reversal, Fed Now Won't Release Key Doc On Asset-Buying Program

Zachary Roth | January 7, 2009, 11:08AM

Last week, we looked at the process by which the New York Federal Reserve selected four investment firms to manage its program to purchase $500 billion of mortgage-backed securities, in order to bolster the housing market.

Or at least, we tried to.

A fact sheet on the website of the New York Fed, announcing the details of the program stated that "a competitive request for proposal (RFP) process was employed" to select the four firms -- Blackrock Inc., Goldman Sachs, Wellington Management, and PIMCO. A Fed spokesman declined last week to give TPMmuckraker any information about the value of the contracts or the nature of the firms' successful bids. But he did tell us that he expected to be able to provide us with a copy of the RFP, after it had been inspected by Fed lawyers.

But now things seem to have changed. The spokesman hasn't responded to our followup calls, placed this week, about the RFP. In other words, not only will the Fed not tell us how much its paying the firms to manage our money, it won't even release the document it used to solicit bids for the contract.

As for the firms themselves, they've been just as tight-lipped. As we noted at the time, the first three referred us to the Fed, and PIMCO didn't return our calls at all.

To be clear, there's no evidence that these firms were improperly selected -- though the fact that PIMCO's founder was, as we've reported, loudly calling back in September for the government to launch just such an MBS purchase program does create some interesting optics, at the least.

But don't taxpayers have a right to know some basic details about the process by which these private investment firms -- at least one already the recipient of massive government largesse -- were hired to manage our money? We think so...

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Topics: Bailout, Ben Bernanke, Federal Reserve, Wall Street

Bailout

Firms Hired By Fed To Manage Our Assets Won't Say How Much They're Being Paid

Zachary Roth | January 2, 2009, 2:09PM

So, how much are the four firms hired to manage the Fed's mortgage-backed securities purchase program getting paid for their work, and how did they get the contracts in the first place?

They're not saying.

We called Blackrock Inc., Goldman Sachs, Wellington Management, and PIMCO to ask them about their recently announced contracts to manage a total of $500 billion worth of mortgage-backed securities, on behalf of the Federal Reserve. Spokespeople for the first three firms told us they were referring all questions to the Fed. Representatives for PIMCO -- whose founder said in September that his firm would manage a very similar Treasury program for free, out of patriotic duty -- have not responded to two messages.

A spokesman for the New York Fed told TPMmuckraker he'd get back to us with more information.

"The selection of these managers seems incredibly opaque," Jeffrey Gundlach, the chief investment officer for the invesment firm TCW, and an expert in mortgage-backed securities, told TPMmuckraker.

Indeed, the Fed has so far provided little detailed information on the process by which these firms were selected. In a fact sheet posted on their website, the Fed wrote:

Because of the size and complexity of the agency MBS program, a competitive request for proposal (RFP) process was employed to select four investment managers and a custodian ... The selection criteria were based on the institution's operational capacity, size, overall experience in the MBS market and a competitive fee structure.

We'll keep you posted on what we learn from the Fed...

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Topics: Bailout, Ben Bernanke, Federal Reserve, PIMCO, Wall Street

Ben Bernanke

What We're Doing -- And Spending -- To Stave Off A Financial Collapse

Zachary Roth | November 26, 2008, 2:54PM

With all the different programs being undertaken by the federal government to rescue the economy, it's hard to keep straight everything that taxpayers are now on the hook for.

That's especially true because the commitments are being made by several different government agencies (primarily the Treasury Department and the Federal Reserve) and even more so, because they come in a range of forms.

Some of these commitments -- for instance, the Treasury's bailout program -- represent actual spending. We could see a return on these investments, of course, depending on how the companies that we've taken on fare going forward, but there are by no means any guarantees.

Others, meanwhile, represent loans backed by collateral, meaning the government would have had to have badly miscalculated for us not to be paid back in full, probably with interest. And some are simply loan guarantees.

So putting an exact figure on exactly how much we've put up doesn't tell us much. But here's our best attempt, based on piecing together several reports, at a non-comprehensive rundown of the major components of the government's effort to stave off a financial collapse.

Spending:

- The Troubled Assets Relief Program, in which Congress allocated $700 billion to the Treasury to buy equity stakes in financial institutions.

- A Federal Reserve program, announced in October, to buy up to $2.4 trillion in commercial paper that companies use to pay bills. That figure represents what eligible issuers could sell, but the Fed has said it does not intend to buy anywhere near that amount. Earlier this week the Washington Post put the amount that it had so far put up at $266 billion.

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Topics: Bailout, Ben Bernanke, Treasury Department

Bailout

Some Pushing For More Oversight Of Federal Reserve Lending

Zachary Roth | November 25, 2008, 1:15PM

Yesterday, the Washington Post and Bloomberg News both reported on the astronomical sum of money -- the Post put it at almost $900 billion -- that the Federal Reserve is quietly lending to banks and other financial institutions hit by the financial crisis.

Unlike with the $700 billion in bailout money allocated to the Treasury Department, the Fed won't reveal basic details about the program: for instance, which institutions are getting that money, how much they're getting, or which assets are being used as collateral on the loans.

Bloomberg News filed a Freedom of Information Act (FOIA) request, in order to pry loose the information, but the Fed responded that this was "confidential commercial information", reports the Post, and argued that the Federal Reserve Bank of New York, which keeps the information, is not subject to FOIA. Bloomberg has now filed a federal lawsuit against the Fed.

Some in Congress are also concerned. Several members at a hearing of the House Financial Services Committee last week expressed skepticism about the lack of transparency. And a staffer for Rep. Scott Garrett (R-NJ), a member of the House financial services committee, told TPMmuckraker that the congressman will soon send a letter to Fed Chairman Ben Bernanke asking him to provide further details about the loans.

At that same hearing, Bernanke explained the reason for the Fed's secrecy: "There's a concern that if the name is put in the newspaper that such and such bank came to the Fed to borrow overnight for a good reason, that people might begin to worry: Is this bank credit-worthy?" he said. "And that might create a stigma, a problem, and might cause banks to be unwilling to borrow."

Tim Yeager, a former economist at the Federal Reserve Bank of St. Louis, and now a professor of finance at the University of Arkansas, bolstered that view. He told TPMmuckraker that in normal times more disclosure makes sense, but that in times of crisis like this, "if word leaked out" that banks were going to the Fed to borrow money, "there could be a liquidity run."

We've made calls to the House financial services and oversight committees, and the Senate banking and finance committees, to ask whether they have plans to look into the issue further, given the amount of taxpayer money at issue. We'll let you know what we find out.