Federal Reserve Secretly Bails Out European Banks … Again

January 3, 2012

The New American

By Raven Clabough

Despite assertions from Federal Reserve officials that the United States would not play a role in bailing out European banks, that is exactly what has happened — again.

Earlier in the month, Federal Reserve Chairman Ben Bernanke (left) told the U.S. Senate that the Fed had no intention of bailing out the European banks, indicating that he “doesn’t have the intention or the authority” to do so.

Senator Bob Corker (R-Tenn.) said Bernanke made it “very clear” in closed door comments that the central bank would not be rescuing European financial institutions. “People walk away knowing he has no intentions whatsoever of furthering U.S. involvement in the crisis,” Corker said.

As it turns out, however, the Fed is in fact doing just that. The Wall Street Journal reports:

The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

The Journal outlines the reason for such secrecy:

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman’s collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

GOP presidential contender Rep. Ron Paul, a staunch Federal Reserve critic, pointed out:

The Fed’s latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is another reason why Congress needs enhanced power to oversee and audit the Fed. Under current law Congress cannot examine these types of agreements. Those who would argue that auditing the Fed or these agreements with central banks harms the Fed’s independence should reevaluate the Fed’s supposed independence when the Fed bails out Europe so soon after President Obama promised US assistance in resolving the Euro crisis.

Click here for the full report.

Is Rhode Island The New Greece?

November 4, 2011

MSN Money

By Bill Fleckenstein

First up this week I want to point out a story carried by The New York Times on Oct. 23, not because regular readers aren’t aware of the issue it brings up, but because it is a problem we are going to see facing many, many state and local governments over the next few years.
Pension tension

Headlined, “The Little State With a Big Mess,” the story is reporter Mary Williams Walsh’s chronicle of Rhode Island’s financial plight. She notes, “As Wall Street fixates on the financial disaster in Greece, a fiscal wreck is playing out right here. And the odds are that it won’t be the last. Before this is over, many Americans may be forced to rethink what government means at the state and local level.”

She is exactly right about that.

I don’t want to reprise the entire article, but the fact of the matter is that many people have been distracted by the European financial melodrama. These longer-tailed issues like pensions and Social Security — loosely termed “entitlements” — are going to be a battleground for some time. They are examples of problems that don’t matter until they do, at which point they become the only thing that matters.

When that will be, I can’t say. It could be part of the funding crisis, in which governments will have increasing trouble financing their debts. But it will most likely become a focus before then.

As anyone who is paying even a little attention probably knows, certain cities and states are already running into trouble with regard to pensions. At some point, I suspect the federal government will be forced to help many of these constituencies since, after bailing out Wall Street, it will be difficult to say no to a state government in dire straits.
Gold bubble argument still doesn’t stack up

That leads directly to the subject of money printing — the protection from which is owning gold — so I thought I would touch on comments made by James Stack in his most recent newsletter.

I have the utmost respect for Jim and his track record with the stock market. His ability to negotiate the ups and downs over the last decade has been extraordinary. That said, he wrote what I think is a very misguided article about gold.

Click here for the full report from MSN Money.

We Bail Out Banks, But Not Desperate Students

November 1, 2011

Chicago Sun Times

By Jesse Jackson

The sign at the Occupy Wall Street demonstration revealed the struggles of America’s young: “A B.A., $30,000 in student debt and no job.” Young people are graduating from college into the worst jobs market since the 1930s while carrying record levels of student debt. The sad truth of Occupy Wall Street is that for many of the young activists, Wall Street occupied them first.

Students are borrowing twice what they did a decade ago, even adjusting for inflation. Debt has doubled in just five years. Student debt is likely to exceed $1 trillion over the next year.

As states cut back on college support and grants, college tuitions have risen faster than the cost of homes, health care or energy. Americans believe a college education is key to their children’s future, so more and more borrow what they can.

Students are now graduating with average debts of over $24,000. When I speak to families in mining towns in Appalachia, I ask how many have lost a job, how many face foreclosure, how many face costly medical bills. Many hands go up. But when I ask how many worry about student loans, the biggest portion of the audience stands up. It is working families — families stretching to give their children the chance that they never had — who are taking on the greatest debt and are at the greatest risk.

The banking industry has used its clout to make these loans the harshest of all debt. They survive bankruptcy. The lenders have broad collection powers, far greater than with a mortgage or a credit card. They can garnish wages or even Social Security payments. When payments are missed, penalties are brutal. Students who graduate and then lose their job suddenly find themselves owing twice what they signed up for.

The debt constricts normal life events. Students must put off moving out from their parents’ home, buying a car or saving for a home or retirement. They delay getting married or having children.

Defaults have soared. In 2008, more than 238,000 defaulted on their loans. The number of loans that went into forbearance or deferment (when borrowers receive temporary relief from payments) rose to 22 percent in 2007.

President Obama and his wife, Michelle, struggled to pay off student debts long after they graduated. The president increased Pell grants and provided relief that would link government loan payments to income, and provide potential forgiveness for those taking public service jobs. But despite the largest increase of student aid since the GI Bill, the debts keep getting bigger.

Click here for the full article from the Chicago Sun Times.

Smash Capitalism and You Destroy Civilization

October 26, 2011

Forbes

By Art Carden

Somewhere, there are two graduate students in the social sciences who need dissertation topics. Those students should be watching the Occupy Wall Street movement with keen eyes because as it evolves, it’s going to provide us with an interesting set of applications, illustrations, and tests of different principles in the social sciences. One student should study the on-the-ground evolution of the Occupation camps themselves. Another should look at the evolution of perceptions of the Occupations and how they have changed as data on the Occupiers’ views have emerged.

Former Clinton pollster Douglas Schoen has done a valuable service by assembling a poll—which he discusses in the Wall Street Journal—that “probably represent(s) the first systematic random sample of Occupy Wall Street opinion.” According to Schoen, the Occupiers are united by “a deep commitment to left-wing policies.”

I agree with the Occupiers when we both answer “no” to a question like “should we bail out large financial institutions that have made a lot of bad investments?” The more radical Occupiers lose me with demands that we “smash capitalism” and “abolish private property.” It isn’t at all clear to me that they have thought through exactly what this would entail.

Perhaps they see this as the beginning of an anti-capitalist, anti-commercial revolution, but to a certain extent we have already had this conversation. The twentieth century was a long (and bloody) debate about alternative modes of social organization. Even in its present corrupted and cronyized form, “modern capitalism”—which Deirdre McCloskey defines loosely as “private property and unfettered exchange”—is a goose that lays golden eggs, and not merely for the super-rich. If you disagree, ask yourself how many of those claiming to speak for “the 99%” have smart phones, which Louis XIV couldn’t have bought for all the gold in France. The problems the Occupiers blame on “capitalism” were not caused by “private property and unfettered exchange.” They were caused by institutionalized interference with “private property and unfettered exchange.”

At the margin, a little more government intervention isn’t likely to make a huge difference. I expect long-run problems that won’t surface until long after its main proponents and sponsors are out of office, but ObamaCare by itself isn’t going to turn the US into North Korea. Nonetheless, we can’t discard what economics has to teach and expect civilization to endure. Ludwig von Mises, one of the twentieth century’s most prominent defenders of the classical liberal order, finished his magnum opus Human Action with this:

The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.

Things were much darker when Mises wrote that (1949) than they are today, but we are only a few years away from graduating the first class of college seniors that hadn’t yet been born when the Soviet Union collapsed. It has been said that those who do not learn from the past are doomed to repeat it. We would do well to study the intellectual, political, social, and economic history that made Mises write with such urgency and passion lest we be doomed to repeat it. Tragically, that’s exactly what will happen if those who urge us to “smash capitalism” and “abolish private property” get their wish.

Click here for the full report from Forbes.

New Euro ‘Empire’ Plot By Brussels

October 24, 2011

The Telegraph

By Patrick Hennessy and Bruno Waterfield

The proposal, put forward by Herman Van Rompuy, the European Council president, would be the clearest sign yet of a new “United States of Europe” — with Britain left on the sidelines.

The plan comes as European governments desperately trying to save the euro from collapse last night faced a new bombshell, with sources at the International Monetary Fund saying it would not pay for a second Greek bail-out.

It was also disclosed last night that British businesses are turning their back on Brussels regulations to give temporary workers full employment rights, with supermarket chain Tesco leading the charge.

Meanwhile, David Cameron is attempting to face down a rebellion tomorrow by Tory MPs in a vote over staging a referendum on Britain’s membership of the EU.

Ministers expect 60 or 70 MPs to defy the party’s high command and back the call for a referendum, while some rebels claim the final toll could be up to 100 — about a third of the parliamentary party.
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Downing Street has upped the stakes dramatically. Last night, No 10 sources insisted they would impose a three-line whip — effectively ordering all Tory MPs to fall in line.

Mr Cameron, who yesterday took personal charge of the effort to persuade MPs to back the Government, has come under intense pressure from Cabinet colleagues to try to defuse the revolt by offering concessions or a way out to rebels. Sources say a handful of parliamentary private secretaries — the lowest rung on the government ladder — might resign.

The single Treasury plan emerged in Brussels yesterday as Europe’s finance ministers tried to find a way out of the crisis engulfing the eurozone. A full-scale rescue plan could cost about £1.75 trillion.

British sources said Mr Van Rompuy, who is regarded as being close to the German government, suggested plans for a “finance ministry” to be based either in Frankfurt or Paris. The EU already has its own “foreign ministry”, headed by Baroness Ashton, the former British Labour minister, and based in Brussels.

A senior Coalition source told The Sunday Telegraph: “I am well aware of arguments in Brussels and elsewhere in favour of a single Treasury. You’d get any number of different versions of ‘Europe’ all running at very different speeds.”

A series of meetings are due to be held over the next few days on the eurozone crisis that will involve the leaders of EU member states.

They were overshadowed last night as senior sources at the International Monetary Fund indicated privately that it is not willing to further bail out Greece, whose economy has an outstanding debt of about £232 billion.

The IMF, with the EU and the European Central Bank, is assessing Greece’s debt crisis, and a joint report yesterday suggested lenders might have to agree losses of up to 60 per cent in a Greek default.

Any suggestion that the IMF would not be part of a new bail-out of Greece could spark panic in the markets and worsen the eurozone crisis.

Eurosceptic Tories, meanwhile, are arguing in favour of “repatriating” powers from the EU to Britain, including the Agency Workers Directive, imposed last year at an annual cost of £1.8 billion, which is putting at risk 28,000 temporary job contracts for those aged between 16 and 24. Tesco has asked one of its suppliers to take advantage of a loophole in the law which allows workers to “opt out”.

As Mr Cameron led the drive this weekend to neuter the Tory rebellion, Nigel Farage, the leader of Ukip, indicated his party might not field candidates at the next election against MPs who vote for a referendum.

However, there is no danger of Mr Cameron losing the non-binding vote. He can count on the “payroll vote” of more than 100 ministers, most if not all Lib Dams and nearly the entire bloc of 258 Labour MPs.

On Saturday Tory rebels were among speakers at a “People’s Pledge” pro-referendum rally in Westminster. They included David Davis, the former shadow home secretary, who called the EU a “nascent superstate”.

Click Here For The Full Report From The Telegraph

Fannie Mae and Freddie Mac Paid to Help Run TARP

October 14th, 2010

TheHill.com

By: Silia Brush

The Treasury Department has paid $437 million to Fannie Mae, Freddie Mac and private contractors to help run the Wall Street bailout program, a congressional oversight panel said in a report Thursday.

The Congressional Oversight Panel said some of the 96 private contracts for the $700 billion bailout, known officially as the Troubled Asset Relief Program (TARP), raise “significant concerns” and potential conflicts of interest that limit the public’s understanding of the program.

“The vast majority of people working on the TARP today receive their paychecks from private companies, not the federal government,” the report said.

Fannie and Freddie have received about $240 million, or more than half of the money paid to outside contractors to help administer TARP, according to the report. The two companies were bailed out by the government in 2008 and continue to rely on taxpayer support.

Fannie currently employs 600 people working on TARP, compared with Treasury’s 220 employees working on the program, according to the report, which said the companies “have a history of profound corporate mismanagement.”

Treasury Secretary Timothy Geithner and Obama administration officials have recently praised the TARP program for helping to stabilize the financial system following the worst crisis since the 1930s.

Mark Paustenbach, Treasury Department spokesman, defended the department’s use of private contractors.

“In late 2008, Treasury had to stand up a major new initiative that helped stabilize the financial markets and began the process of economic recovery,” Paustenbach said in a statement. “Treasury’s demand for skills, resources and expertise was urgent and we quickly needed qualified assistance. At the same time, our contracting process remains open and transparent.”

Click here for the full report from TheHill.com

Dems Cut Food Stamps To Bail Out Teachers

August 11, 2010

Fox News

Some House Democrats and advocacy groups are getting squeamish about the move to fund the $26 billion jobs bill by making cuts to food stamps, a federal assistance program currently depended on by nearly 41 million Americans.

Some Democrats are upset and advocacy groups are outraged over the raiding of the food-stamp cupboard to fund a state-aid bailout that some call a gift to teachers and government union workers.

House members convened Tuesday and passed the multibillion-dollar bailout bill for cash-strapped states that provides $10 billion to school districts to rehire laid-off teachers or ensure that more teachers won’t be let go before the new school year begins, keeping more than 160,000 teachers on the job, the Obama administration says.

But the bill also requires that $12 billion be stripped from the Supplemental Nutrition Assistance Program, commonly known as food stamps, to help fund the new bill, prompting some Democrats to cringe at the notion of cutting back on one necessity to pay for another. The federal assistance program currently helps 41 million Americans.

Arguably one of the most outspoken opponents on the Democratic side is Connecticut Rep. Rosa DeLauro, who has blasted the move as “a bitter pill to swallow” but still voted yes.

“I fought very hard for the food assistance money in the Recovery Act, and the fact is that participation in the food stamps program has jumped dramatically with the economic crisis, from 31.1 million persons to 38.2 million just in one year,” DeLauro said in an e-mail sent to FoxNews.com. “But I know that states across the nation and my own state of Connecticut also desperately need these resources to save jobs and avoid Draconian cuts to essential services for low income families.”

The Houston Chronicle reported Tuesday that several state advocacy groups, including the Texas Food Book Network and the Houston Food Bank, rallied for House members to strike down the legislation, which passed 247-161 in the House. Three Democrats voted against the measure, while two Republicans voted in support of it.

Democratic rank and file members, including Sen. Majority Leader Harry Reid, say the cuts won’t take effect until 2014 and will merely return food stamp benefits to pre-stimulus levels.

The Food Research and Action Center said a family of four would see benefits drop about $59 per month starting in 2014.

“While we support the education initiatives (in the bill), we adamantly oppose using food stamps to pay for them,” said James Weill, president of the Food Research and Action Center. “The rain on food stamps to pay for other things absolutely has to stop and stop now.”

According to U.S. Department of Agriculture figures, the number of people on the food stamp rolls has been growing to record levels for 18 straight months. Nearly $5.5 billion in aid went out to beneficiaries in May alone. The number of May recipients marked a 19 percent increase from a year ago and the USDA projects that next year’s enrollment will reach about 43.4 million.

Republicans, meanwhile, vocally opposed the state aid bill. Rep. Paul Ryan, R-Wis., told Fox News it rewarded “irresponsible states” and their unions.

“It is basically taxpayers from fiscally (responsible) states bailing out fiscally irresponsible states. … Medicaid funding, teacher funding, the more popular of the public unions, what this is, it’s a bailout to prevent states from doing the necessary spending prioritization that they need do,” he said.

The Obama administration pushed hard for the $26 billion bill. The White House argued that it is essential to protecting 300,000 teachers and other nonfederal government workers from election-year layoffs and will not add to the national deficit.

“If we do nothing, these educators won’t be returning to the classroom this fall, and that won’t just deprive them of a paycheck, it will deprive the children and parents who are counting on them to provide a decent education,” Obama said in the White House Rose Garden shortly before the bill passed on Tuesday.

“This proposal is fully paid for, in part by closing tax loopholes that encourage corporations that ships American jobs overseas. So it will not add to our deficit,” he said. “And the money will only go toward saving the jobs of teachers and other essential professionals…I urge members of both parties to come together and get this done, so that I can sign this bill into law.”

Click here for the full report.

Large Banks Agree To Bailout Long-Time Obama Tie

May 19, 2010

FoxBusiness.com

By Charlie Gasparino

Some of the nation’s largest banks have agreed to contribute enough money to save Chicago-based ShoreBank, the community lender with strong ties to the Obama administration, FOX Business has learned.

The banks have agreed to contribute $140 million to bail out the bank, while the federal government will donate tens of millions more, according to people close to the talks. In addition to major Wall Street firms like Goldman Sachs (GS: 139.48, 2.07, 1.51%), which agreed to contribute $20 million to the bailout effort, as well as Citigroup (C: 3.83, 0.11, 2.96%) and JPMorgan (JPM: 39.461, 0.441, 1.13%), General Electric’s (GE: 17.27, 0.04, 0.23%) GE Capital will also contribute $20 million to the rescue effort. All the firms have either received massive government assistance during the financial crisis or, in the case of Goldman Sachs, are facing multiple regulatory investigations into their business practices.

The bailout has been controversial. Senior Obama adviser Valerie Jarrett served on a Chicago civic organization with a director of the bank, and President Obama himself has singled out the bank for praise in lending to low-income communities.

But the bank has made its share of bad bets, and some of the Wall Street firms that have given money have said they’ve received political pressure to contribute to the bailout of a business that under normal circumstances would have been left to fail.

It’s still unclear how much the federal government will contribute to save the bank because it’s unclear exactly how much is needed to save the institution, which without the bailout would have been taken over by the FDIC.

Click here for the full report.

Outgoing AIG Counsel To Get Several Million Dollar Severance

December 29, 2009

Wall Street Journal

By Serena Ng and Joann S. Lublin

American International Group Inc. is preparing to pay its outgoing general counsel Anastasia Kelly several million dollars in severance after she resigned over federal pay curbs, according to people familiar with the matter.

AIG determined that its top in-house lawyer was entitled to the money under the company’s severance plan, whose terms say certain executives can resign and collect severance if their pay is reduced significantly, the people said. The move comes amid recent scrutiny of Ms. Kelly’s actions in a December pay dispute involving her and four other senior executives. AIG’s board engaged an outside law firm, Orrick, Herrington & Sutcliffe LLP, this month to review Ms. Kelly’s actions after she advised other executives on what they could do to protect their rights to collect severance benefits. Ms. Kelly also helped them arrange for outside counsel, a spokesman for her has previously said.

The executives notified the insurer on Dec. 1 that they were prepared to resign and collect severance benefits if their pay was cut significantly by the U.S. pay czar, who was reviewing pay packages for a group of 75 AIG executives at the time. The four others, who work at AIG’s insurance and financial-services units, later withdrew their notices, leaving only Ms. Kelly’s outstanding. She subsequently told the company she would resign, according to a person familiar with the matter.

The law firm’s investigation looked into whether Ms. Kelly performed her duties properly as the firm’s general counsel and as an executive who would be affected by the pay czar’s determinations, according to people familiar with the matter. The attorneys gave the AIG board’s compensation committee a verbal report earlier this month, people familiar with the matter said.

One person familiar with the report said the law firm’s findings “can be interpreted in a number of ways.” The committee concluded Ms. Kelly’s conduct shouldn’t prevent her from receiving severance, people familiar with the matter said.

The severance plan was put in place before the government bailed out AIG last year. Earlier this month, U.S. pay czar Kenneth Feinberg capped annual cash salaries for most executives at $500,000, and Ms. Kelly’s pay stood to be reduced significantly, say people familiar with the matter. Ms. Kelly has been at AIG since 2006 and was appointed vice chairman this year. The company is expected to name a new general counsel soon.

Click here for the full report.