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Karl, on the Fed’s quest for secrecy – a few legal arguments…
The Real Issue Behind Fed Secrecy: Lying
Courtesy of Karl Denninger at The Market Ticker
Henry Blodget writes an interesting piece over at Businessinsider in which he cites Paul Kasriel of Northern Trust:
Today, we have federal deposit insurance Therefore, the probabilities and magnitude of depositor runs on banks are much reduced compared with 1933. Yet, we can see “runs” by stockholders and other creditors of banks if there is a suspicion of financial problems. If the Fed is required to publish the names of financial institutions to which it has extended credit and this publication induces financial institutions to refrain from borrowing from the Fed, one can only speculate if this would be the tinder for another liquidity conflagration in the coming months.
How about a little honesty from commentators in the mainstream media?
"Liquidity conflagrations" happen when people discover they have been lied to.
Anyone remember Bear Stearns? "We’re well capitalized" on CNBC? "Everything is fine"? Cramer’s pumping of them on his show as "safe"?
Market participants in fact knew everything was not fine. There were statements flying around (that turned out to be true) that some counter-parties had begun refusing to novate deals with Bear.
It was the discovery of the lie that caused the run on Bear Stearns and its ultimate collapse.
Likewise with Lehman. Remember Dick Fuld’s "I’m gonna burn the shorts" comment, again, on CNBC and elsewhere in the National Media?
The truth got out: they were having liquidity problems. Once again, as soon as people discerned that they were being lied to, Lehman’s fate was sealed.
The problem The Fed has is that as the supposed "risk regulator" for the American Banking System it has absolutely refused to do its job of prudential regulation and still is. Instead of demanding that its member banks hold capital against all unsecured lending it has "blessed" models rather than markets. But at the same time it has declared "haircuts" against collateral that make clear that so-called "face value", or "par", is a farce.
The Fed is supporting institutionalized lying – that is, the intentional mis-marking of assets. If The Fed was an honest regulator and monitor of market risk it would insist that no bank carry an asset at a value materially higher than its "haircut" off par at the window. After all, the penalty rate for discount window use already discourages banks from coming there; the "haircuts" must (and I argue do) reflect what The Fed actually believes about the quality of these alleged "baskets" of asset classifications.
If The Fed believes that these asset classes have this sort of haircut from face value in the market how does it justify allowing any bank under its jurisdiction holding such "assets" at a higher value on their balance sheet?
The claim that people shouldn’t worry about a bank that needs an emergency loan at a penalty rate and with a haircut that in some cases is 30% or more below declared "balance sheet value" is criminal idiocy, and any argument that such emergency facilities should be kept secret so that the public does not know when such an extreme emergency exists is, I would argue, an act in furtherance of racketeering.
After all The Fed isn’t lending with its own money – those are our dollars that are being lent out and their actions confer obligation on the taxpayer. The Fed’s legitimacy and backstop are predicated on the back of the American Taxpayer – a privilege, not a right. That privilege comes with the responsibility to justify in each and every case, in a transparent, fully-disclosed fashion, their actions.
The discount window exists as an emergency facility. That’s made clear not only by the fact that its use has a penalty rate, but that there are also haircuts on assets "deposited" there as collateral that dramatically exceed where these assets are being carried on bank balance sheets. You only go there and take your haircut and pay the penalty rate if you can’t borrow in the interbank and other ordinary commercial markets – an event that occurs because your book of credit has deteriorated to the point that you’re on the edge of outright failure.
When your house is on fire it’s too late to argue that we should not let any of your neighbors see the fire trucks. The correct question to ask is why you were playing with both matches and gasoline in your living room an hour ago!
Bloomberg’s FOIA is spot on and the District Court’s decision is exactly correct. The brief filed in defense of The Fed by The Clearinghouse Association reads like something you’d expect out of Tony Soprano’s family – specifically:
"The Clearing House believes, based on the experiences of its members, that publicly releasing information about a financial institution’s participation in the Emergency Programs can cause significant competitive harm. It is difficult to imagine information that is more competitively sensitive or harmful to a financial institution than information that it has lost the independent ability to fund itself fully in the marketplace."
Yes, and it is difficult to imagine a piece of information that more-fully fills the requirements for the immediate filing of an 8-K of "significant events" as well, wouldn’t you agree?
Let’s see what we find there….
1. Item 1.01 Entry into a Material Definitive Agreement
a. Filing of Exhibits
b. Considerations Regarding Business Combinations
Isn’t a discount window loan (or participation in these "facilities") a material definitive agreement? If, without their use, the firm would be at risk of collapse, the answer is obviously YES.
6. Item 2.03 Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant
Uh, that one’s pretty obvious. A direct financial obligation clearly exists once you go to the window, right? A new obligation under an emergency "rescue" facility that did not exist before. It is quite clear that under the law this requires an 8-K.
7. Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement
You mean like the imposition of night mark-to-market requirements on that collateral by The NY Fed that didn’t exist before you tendered it, and which constitute an "extraordinary" or "emergency" action (per the Clearinghouse’s own brief!) Another 8-K requirement.
9. Item 2.06 Material Impairments
That’s a big 10-4; what do you call a 30% haircut off your booked value on a given "asset"? I call that very material.
14. Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
That might apply too.
Looks to me like this "disclosure" being complained about is more akin to an attempt to cover up outrageous and repeated failures to comply with US Securities laws.
Or do those laws only apply to "little people" like Martha Stewart?
The decade-long record of Fed secrecy must end and those who have refused to follow the law and file public disclosures as required by existing law must be held to account.
