Bernanke Gives Finger To The Law (Again)
Courtesy of Karl Denninger at The Market Ticker
Kudos to Zerohedge and Jim Bianco on this one.
The Fed has repeatedly claimed they would not monetize the debt, as has Tim Geithner. Two videos:
And then this one (9 minutes into it)
That’s pretty clear.
So how does this get explained?
These would be Fannie securities, which, I remind you, are not guaranteed by any agency of the US Government, nor are they full faith and credit obligations of same; they all bear a disclaimer substantially identical to this on the prospectus:
So what did The Fed do? A half hour later, this:
Uh huh. The same Fannie’s that were sold a half-hour before.
Now I want to reproduce Section 14 of The Federal Reserve act once again (the salient portion):
Purchase and Sale of Obligations of United States, States, Counties, etc., and of Foreign Governments
(b)
- To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners’ Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, and obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System. Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market.
- To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.
Again, note the prospectus. It explicitly disclaims such a full faith and credit guarantee. Further, Fannie Mae (formally Federal National Mortgage Association) is a shareholder owned corporation chartered by Congress in 1968 explicitly lacking any such full faith and credit guarantee.
Claims that Fannie is a government "agency" from a legal perspective are, from everything I can determine, factually false.
Fannie was originally chartered in 1938 as a government agency under FDR’s "New Deal". However, in 1968 Fannie was converted into a private shareholder-owned District of Columbia corporation in order to remove its activity from the federal balance sheet, and the prospectuses issued were required to have the legal disclaimer of agency status and full faith and credit added to them.
More to the point, US Code Title 12, Section 1717 says:
(B) The other such separated portion shall be a body corporate to be known as Federal National Mortgage Association (hereinafter referred to as the “corporation”), which shall retain the assets and liabilities acquired and incurred under sections 1718 and 1719 of this title prior to such date. The corporation shall have succession until dissolved by Act of Congress. It shall maintain its principal office in the District of Columbia or the metropolitan area thereof and shall be deemed, for purposes of jurisdiction and venue in civil actions, to be a District of Columbia corporation.
Now if you can somehow come up with Fannie being a government "Agency" (when the black-letter law says it is a District of Columbia corporation) then you win the "Rabbit out of a hat" award.
You might also make the claim that this purchase was "open market", and I’m sure that The Fed will claim it is. Whether they first told certain dealers they were going to make that purchase is a further question, but as you can see, it is (or should be anyway) immaterial as Fannie Mae is not a government agency, but rather a shareholder-owned District of Columbia corporation and thus their paper should be ineligible for purchase by The Fed anyway.
Indeed, USC Title 12, Chapter 13, SubIII Sec 1716b makes clear that the partition that took place in 1968 leaves Ginnie Mae as a government agency, while splitting Fannie off as a private corporation.
So, this leaves me with the same question I’ve had before and adds a few more, specifically:
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Under what authority is The Fed buying this paper at all, given the rather clear declaration that Fannie Mae is a private corporation and not a government agency, and in addition its paper does not bear the requisite full-faith-and-credit guarantee?
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Did The Fed tell the "lead managers" they were going to buy this paper prior to its sale, thereby allowing these dealers to purchase and then roll over this paper at a "guaranteed profit"?
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Assuming that some tortured claim can be made that Fannie is an "Agency" (despite what certainly looks to be clear proof to the contrary) how does The Fed (and Treasury) square the claim that "The Fed will not monetize (the) debt" with the fact that it literally announced this purchase thirty minutes after the offering?
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Again, if the claim that Fannie is an "Agency" can somehow be made, how is this scheme of announcing a purchase a mere 30 minutes after the sale a true "open market" operation and not a charade and shell game to get around The Fed’s stricture preventing direct purchase?
The world, however, is voting already – with its feet. The dollar is sinking fast as our government refuses to enforce the law and whether Geithner and Bernanke claim they are not monetizing debt traders and governments know they’re lying.
Bernanke’s gambit is that the devaluation he is engineering will remain controlled. Unfortunately he has managed to produce yet another asset bubble, this time in stocks which (for the S&P) are trading at an outrageous 122 times earnings on the last quarter’s (2Q 2009) earnings.
This sort of parabolic pricing move (from the bottom in March of this year), of course, is unlikely to hold up. Consider that while P/Es have reached 60 during bear market "rollovers" in the past, they have never seen valuations like this in the history of the US market. Never mind Treasuries, with the IRX (13 week T-bill) pricing at a vast six (yes, six) basis points of yield as of the close today.
These levels are dramatically and ridiculously unsustainable. The only reason to loan the government money for 13 weeks for a near-zero cost (six basis points is six cents per $100 annualized) is because you either believe massive and outrageous deflation is about to strike or you fear that a near-literal end of the world in other financial assets is shortly upon us. Yet this general level of yield on the IRX has persisted since late last year, with the "recent high" reaching a vast 33 basis points in January.
Meanwhile Gold is skyrocketing – yet another "no confidence" vote.
Bernanke may be able to threaten dire consequences if The Fed is audited and he may be able to baffle Congressmen and Senators to the point that they will not call him on his raw monetization of debt along with what appear to be clearly-unlawful purchases, but he cannot stop the rest of the world from judging his actions.
That judgment is being rendered, and the consequence is being reflected in both gold and the dollar. Should Bernanke lose control of his charade, an outcome that appears increasingly likely, the outcome for markets in the US will be unbelievably chaotic – and undesirable. If you think last fall into the spring was bad, you’ve seen nothing yet. A disorderly dollar move would force interest rates higher across the board immediately, it would cause an immediate crash in the stock market, and it would cut off federal deficit spending – immediately – forcing repudiation of most government entitlement programs and half the military budget.
There are rumblings from The Fed that it is searching for a "scapegoat" in that it sees a potential "fiscal crisis" on the horizon. This "concern" is insanely misplaced. The crisis is of Bernanke’s own making; by literally monetizing the entire second quarter net Treasury issuance Bernanke has ratified the spending policies of the administration while at the same time ratifying the making of unsound, unsustainable and fraudulent loans that Barney Frank and the rest of Congress is also approving of:
Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.
“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”
Got that Ben? You’re ratifying the intentional making of bad loans as a policy of the government. Worse, the borrowers know they can’t afford the houses:
“I knew in my heart I could not really afford the house, but they gave it to me anyway,” said Mr. Fullenkamp, 22. “I thought, ‘Wow, I’m surprised I pulled that off.’ ”
That’s right – the people are pulling a scam, they know it, and you’re enabling and powering it forward.
These risks are real and Congress, and the people, must not ignore them.
Anyone who claims that we have a "strong dollar" policy when we in fact have Congress sanctioning and promoting the intentional making of bad loans and then monetizing them to avoid having to recognize the defaults is literally insane. Such a policy is nothing more than Weimar-style printing of money and currency debasement as a formal policy of The United States Government, and if it continues it will lead to a dollar, stock market and government funding collapse.