04.04.2011 0

The Fed Bails Out the World

The Federal Reserve HQ

By Robert Romano – The Federal Reserve is the world’s central bank. There is simply no question now.

In 2008, while the financial crisis was at its peak, the Fed was lending at lightning speed to financial institutions all over the world. “The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record,” Bloomberg News reports.

The foreign banks included the Bank of China, Arab Banking Corp., Commerzbank, Depfa, Landesbank Baden-Württemberg, Société Générale of France, Royal Bank of Scotland, Dexia, Erste Group, Norinchukin Bank, Credit Suisse and Deutsche Bank.

Bloomberg, along with FOX News, finally got the Fed to release the recipients of these loans through their Freedom of Information Act (FOIA) requests, which had been kept under wraps until now. The Fed lost two court decisions fighting the FOIA requests, and then the Supreme Court denied certiorari in the case, leaving the lower court decisions in force.

“Our job is to provide liquidity to keep the American economy going,” Dallas Fed head Richard Fisher said, justifying the Fed’s loan program, despite the participation in the program by foreign firms.

Of course, it turns out that the 2008 credit lines to foreign firms would not be the last.

As reported by the Wall Street Journal, the Fed has helped bail out Europe during its ongoing sovereign debt crisis. According to the report, “the U.S. Federal Reserve said Sunday that it would revive an emergency lending program used during the financial crisis. The Fed will ship billions of dollars overseas through foreign central banks, including the ECB, so they can, in turn, lend the money out to banks in their home countries in need of dollar funding.”

That was ironic, of course, because on February 24th, 2010, when asked if the Federal Reserve was planning to bail out Greece, Fed Chairman Ben Bernanke testified to the House Financial Services Committee, “we have no plans whatsoever to be involved in any foreign bailouts or anything of that sort.” Yeah right.

Of course, even these loan programs pale in comparison to the Fed’s program to purchase mortgage-backed securities (MBS) from financial institutions left holding the bag after the housing bubble popped. Based on data released by the Federal Reserve, of the $1.25 trillion of MBS bought by the Fed, foreign entities sold some $442.7 billion at the height of the program. According to the Federal Reserve, the securities were purchased at “Current face value of the securities, which is the remaining principal balance of the underlying mortgages.”

Importantly, the MBS purchases were not loans, but outright purchases. That’s a bailout.

That included $127.5 billion given to MBS Credit Suisse for the junky securities, $117.8 billion to Deutsche Bank, $63.1 billion to Barclays Capital, $55.5 billion to UBS Securities, $27 billion to BNP Paribas, $24.4 billion to the Royal Bank of Scotland, and $22.2 billion to Nomura Securities. Another $4.2 billion was given to the Royal Bank of Canada, and $917 million to Mizuho Securities.

According to the New York Fed’s website, the purpose of the program was to “foster improved conditions in financial markets”. Even those in foreign countries, apparently.

Perhaps the reason for all this assistance is because many of these foreign financial institutions also happen to be primary dealers, those banks that are responsible for lending money to the government via purchases of U.S. treasuries at government auctions.

That’s what Senator Jim DeMint thought when he was asked about the financial bailouts in 2008. On Oct. 1 of that year, Senator DeMint hypothesized that one of the principal causes of the federal government’s plan to purchase toxic mortgage-backed securities as part of the $700 billion Troubled Asset Relief Program (TARP) was to bail out foreign entities.

On “The Mark Levin Show,” he said, “I think China and Saudi Arabia are holding a lot of these securitized mortgages. And I think they’ve basically said they’re not going to loan us any more money until we buy them back. And if they don’t give us loans every day, we default on our loans [because] we have so much debt as a nation. So, we’re going to borrow more money to try to make this situation right. There’s nothing else for me, Mark, that explains the urgency in using a sledgehammer to fix something that most of us know a few screwdrivers could fix.”

Of course, TARP was rapidly turned into a bank recapitalization program by then-Treasury Secretary Hank Paulson. But clearly, foreign institutions got all the assistance they needed — from the Fed.

And they did not even have to bother with going to Congress since none of the Fed’s loans or outright bailout purchases of MBS require any congressional approval. All of these actions were authorized by Section 14 of the Federal Reserve Act — in 1913. Perhaps it’s time that Congress revisited that Act, and ask the question: Does the nation’s central bank have too much power?

Robert Romano is the Senior Editor of Americans for Limited Government.

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