Federal Reserve: Banking system we knew so little about

Written by Biloxi


Ben S. Bernanke, the Federal Reserve chairman, addressed the Fed’s annual symposium at Jackson Hole, Wyoming on Aug. 17, 2007. Mr. Bernanke gave this interesting speech. If Mr. Bernanke would take back his past statement, he would. Mr. Bernanke said: “It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.”

Certainly, Mr. Bernanke did exactly that: protect the global lenders and investors from the effects of their financial decisions. The Federal Reserve released thousands of pages of secret loan documents this week under a court order. For almost three years, Bloomberg LP requested details of the Fed’s support to banks during the financial crisis. The Feds shielded public view of those details. The 894 files in PDF released by the Feds reveal for the first time the names of financial institutions that borrowed directly from the central bank through the so-called discount window. Now, thanks to the release of Fed documents, the rest of us can see a Federal Reserve system that we knew little about. Here are some examples from the released documents:

JPMorgan Chase & Co. borrowed at least $5.9 billion from the Federal Reserve’s discount window over six months during the height of the financial crisis.

Goldman Sachs Group Inc. tapped the Fed’s discount window at least five times since September 2008. This released data of Goldman Sachs contradicted Goldman's President and Chief Operating Officer Gary D. Cohn testimony with the Financial Crisis Inquiry Commission last year. It will be interesting if Mr. Cohn's testimony and the Fed's released data on the company to be questioned. From Bloomberg:

Goldman Sachs Bank USA, a unit of the company, took overnight loans from the Federal Reserve on Sept. 23, Oct. 1, and Oct. 23 in 2008 as well as on Sept. 9, 2009, and Jan. 11, 2010, according to the data released today. The largest loan was $50 million on Sept. 23 and the smallest was $1 million on the most recent two occasions.

Goldman Sachs President and Chief Operating Officer Gary D. Cohn told the Financial Crisis Inquiry Commission June 30 that “we used it one night at the request of the Fed to make sure our systems were linked with their systems, and it was for a de minimis amount of money.” Peter J. Wallison, a member of the Financial Crisis Inquiry Commission, then asked, “you never had to use it after that?”

“No, and as I said, we used it on the Fed’s request,” Cohn replied.


And here is another bombshell. Much of the borrowing from the Fed came from foreign banks. In fact, the Fed bailed out Libyan-owned bank:

Questions are being raised in the United States after Federal Reserve data showed that a Libyan-owned bank borrowed 73 times from the Fed at the height of the financial crisis.

Libya-owned bank not only borrowed from the Fed but the interest rate was at 0.25%. Senator Bernard Sanders of Vermont wrote a letter to Fed chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and acting Office of Comptroller of Currency chief John Walsh to raise questions about the Libya-controlled bank bailout by the Fed:

“As a result of a provision I authored in the Wall Street Reform and Consumer Protection Act, we learned that from Dec. 20, 2007 through March 11, 2010, the Federal Reserve provided over 45 emergency loans to the Arab Banking Corp. with an interest rate as low as 0.25 per cent.


"All of these loans were backed by collateral in U.S. Treasury securities purchased by the Arab Banking Corp. In other words, at the same time that the Arab Banking Corp. was borrowing money from one arm of the U.S. government at near zero interest rates, it was also lending money to the U.S. Treasury and receiving a higher interest rate.”

Also, Senator Sanders asked why the Libya-controlled bank was even allowed to operate branches inside United States in his letter:

“Why would the U.S. government allow a bank that is predominantly owned by the Central Bank of Libya – an institution on which the U.S. has imposed strict economic sanctions –to operate two banking branches within our own borders?”

For quite some time, Federal Reserve has been shrouded in secrecy. In 2009, Congressman Ron Paul of Texas spoke at the Cato Institute in Washington, D.C concerning a bill that he lobbied for to bring transparency to the Federal Reserve. And Congressman Paul gave this interesting statement on how the Fed was lobbying against his bill:

"For once, I think its the first time, the Federal Reserve has hired a lobbyist to lobby members of Congress against this bill. And guess where the lobbyist came from? She's a hangover from Enron. She lobbied for Enron! So that's very appropriate."

The Fed's released data is an enormous breakthrough in the public interest. However, this is not good for Mr. Bernanke as he has some 'splaining to do. Congressman Ron Paul who has been the Federal Reserve critic, has announced plans to hold a hearing on the Fed's emergency loans to the branches of non-U.S. banks. So, look for Bernanke to once again be in the hot seat with Congress.