Wednesday, December 17, 2008

Forget Madoff, Focus on Bernanke

December 17, 2008, 11:00 a.m.

Madoff and Bernanke:
Bad Apples or Poster Ponzis?

(Brought to you by

The Securities and Exchange Commission said Tuesday night that it had missed repeated opportunities to discover what may be the largest financial fraud in history, a Ponzi scheme whose losses could run as high as $50 billion. . . . Mr. [Bernard L.] Madoff was arrested at his Upper East Side apartment in Manhattan last Thursday by F.B.I. agents, after his two sons — both of whom work for the company — reported that he had confessed to them that his money-management business was “basically, a giant Ponzi scheme” and “a big lie.”
Alex Berenson and Diana B. Henriques, "S.E.C. Says It Missed Signals on Madoff Fraud Case," New York Times, December 17, 2008.

There are not a lot of people coming to Madoff's defense this week. There seems to be relatively widespread agreement that defrauding one's friends of $50 billion is not nice.

But how much difference is there between what Madoff did and what the investment and commercial banking industries have been doing to 305 million Americans over the last decade?

Not much, says Tom Friedman:
I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?
Thomas L. Friedman, "The Great Unraveling," New York Times, December 17, 2008.

Two days later the comparison was being spelled out in even greater detail: Paul Krugman, "The Madoff Economy," New York Times, December 19, 2008.

So, meanwhile, what has Federal Reserve Chair Ben Bernanke been up to?

We all know about the $25, or $34, or $15, or $5 billion the auto industry says it needs. We're all appalled at the $700 billion Congress authorized for Wall Street with little more attention to detail than it gave to authorizing our "preemptive war" in Iraq.

But do you have any idea what the total is at this point?

It's not $700 billion, it's 11 times that: $7.7 trillion. That's right, $7.7 trillion.

Here's an excerpt from Bloomberg's report:
The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system . . ..

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, . . . [dwarfing] the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis. . . .

The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms. . . .

The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.
Read the whole story; there's lots more. Mark Pittman and Bob Ivry, "U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit," Bloomberg, November 24, 2008.

But wait; it gets worse.

Having grabbed 10 times what we thought he'd taken from the taxpayers, Bernanke now refuses to tell Congress or the media or us who he gave our money to, or what he got for it on our behalf, or how much what he got is worth on the present market.

Don't believe it? Read on. Bloomberg's suing him.
The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression. . . .

The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP. . . .

Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during Dec. 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had “been bamboozled.”

Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said on June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit. . . .

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.

The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. . . .

“There has to be something they can tell the public because we have a right to know what they are doing,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.

“It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed,” she said. . . .

The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.

Borrowers include the now-bankrupt Lehman Brothers Holdings Inc., Citigroup and New York-based JPMorgan Chase & Co., the country’s biggest bank by assets. . . .

“Americans don’t want to get blindsided anymore,” Mendez said in an interview. “They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now.”

The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.” . . .

“I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system,” [Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle] said.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
Mark Pittman, "Fed Refuses to Disclose Recipients of $2 Trillion," December 12, 2008.

$7.7 trillion. It kind of puts Madoff's little $50 billion fraud into perspective, doesn't it?

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