Nullification is obviously a loaded term. Historical context here [ http://en.wikipedia.org/wiki/Nullification_Crisis ]: think John C. Calhoun, South Carolina, and struggles over federal/state rights in the years before the Civil War. But it is an appropriately dramatic term for the on-the-fly rewriting of the Constitution that the unified Senate Republicans have been carrying out these past five years.
- The U.S. Senate was never designed to be a "supermajority" body. You can look it up [ http://www.usconstitution.net/const.html ]. The U.S. Constitution created an elaborate set of balanced powers; but within that model, the Senate was assumed to run by majority rule. The Constitution set out the few specific exceptions. Treaties require a two-thirds majority for ratification; two-thirds of each House must vote to override a presidential veto; when a president is impeached, it takes a two-thirds Senate vote for conviction; and so on. Otherwise, the Senate would pass or reject measures by majority vote, with the Vice President empowered to break an exact tie.
- Since early in the Republic's operation, the filibuster became another exception -- but one that until recently was actually exceptional. A minority could go all-out to block certain bills or nominations, but not every proposal every day. Again you can look it up [ http://voices.washingtonpost.com/ezra-klein/2010/12/breaking_the_filibuster_in_one.html ]. An outsized share of all bills and nominations blocked in all of U.S. history have been in the past five years. It was five years ago that Democrats gained 51-49 control of the Senate in the mid-term elections of 2006. Once the Republicans moved into the minority, they filed filibusters at a five-times-higher rate than by either party over the previous century (figures here [ http://www.senate.gov/pagelayout/reference/cloture_motions/clotureCounts.htm ]).
- This week's thwarted vote represented a further step in Constitutional revision, in that the minority was not simply trying to keep a bill from being passed. Instead they were openly trying to keep an already-approved piece of legislation from taking effect -- they were nullifying it. To simplify the story: the legislation in question established the Consumer Financial Protection Bureau, often described as Elizabeth Warren's brainchild. President Obama shied from nominating Warren herself, who had become "polarizing." The Republicans have nothing against the replacement nominee, Richard Cordray, except that they don't want his agency to exist. Thus the blocked vote on his nomination. As Senator Orrin Hatch put it to the New York Times:
"This is not about the nominee, who appears to be a decent person and may very well be qualified," said Senator Orrin Hatch, Republican of Utah, according to the Associated Press. "It's about a process that is running out of control."
Out of control indeed. Apart from the short-term distortion of processes of self-government, here are two longer-term problems.
2) Pay back. Some day, maybe starting a year from now, the Democrats will be back in the minority. And they will have two choices:
- They can do what the McConnell Republicans have done and filibuster everything and everyone, which would be "smart" for them but terrible for the country.
- Or they can not do that, which will be terrible for "their side" in partisan disagreements.
It's lose-lose, and it is the natural but destructive consequence of choices these past few years.
A staple of inspirational speeches is the invocation to be a "good ancestor," one who makes decisions that people 50 and 100 years from now will be grateful for. Classic example: Theodore Roosevelt with the National Parks. Classic example of the reverse: what Howard Jarvis did to California. And what the people who have routinized the filibuster are doing to all the rest of us.
I'll have more on "what happens when the GOP is back in control" in future installments.
A Republican reader responded to an earlier item about GOP use of the filibuster:
Should the GOP prevail in 2012 and we have president Romney stymied by a democrat filibuster again and again the same columns you have been writing about this issue will be written by frustrated partisans on the right. Both parties obstruct and thwart legislation they oppose if they can get away with it, if Obama had an approval rating of 60% rather than being mired in the low to mid 40's he could go to the country and rally support to get his legislation passed....The gang of 14 came into existence because the GOP couldn't get around filibuster threats to supreme court nominees and people like Estrada were tied up by the Dems and not given a vote etc......
The moral is if you want to get legislation passed be popular like Ronald Reagan,not unpopular like Obama is.Obama got what he wanted in his first 2 years because he had the majorities and he was personally popular,that is no longer the case.Your complaints are simply sour grapes!
Let's set aside the tautology that Obama would be more popular if he were more popular. As the chart below shows, when the Bush Administration was wroth about the threatened filibuster of the Estrada nomination in 2003, (a) there were well under half as many filibusters as there are now, and (b) the GOP treated them as a big-deal/ borderline outrage. Thus the talk about the "Gang of 14 [ http://en.wikipedia.org/wiki/Gang_of_14 ]" and the "nuclear option [ http://en.wikipedia.org/wiki/Nuclear_option ]."
But I agree with the reader on this point: what has been set in motion these past few years, nullification and all, will do damage for a long time to come.
President Obama, in an interview with “60 Minutes,” talked extensively about unemployment, the economy and his approach to making policy. One of the more interesting moments in the wide-ranging CBS News interview came when Steve Kroft asked Mr. Obama about the lack of prosecutions related to the financial crisis.
“Some of the most damaging behavior on Wall Street — in some cases some of the least ethical behavior on Wall Street — wasn’t illegal. That’s exactly why we had to change the laws,” Mr. Obama said, referring to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the sweeping regulatory overhaul.
The president’s remarks on Wall Street prosecutions are in the beginning of Part 2, at about the 1:00 mark.
CBS News’s “60 Minutes” interview with President Obama, Part 1 [embedded]
CBS News’s “60 Minutes” interview with President Obama, Part 2 [embedded]
Jon S. Corzine, MF Global’s former chief executive, testifying at a House hearing into the collapse of the firm. Michael Reynolds/European Pressphoto Agency
By AZAM AHMED, BEN PROTESS and SUSANNE CRAIG December 11, 2011, 8:28 pm
Soon after taking the reins of MF Global in 2010, Jon S. Corzine visited the Wall Street firm’s Chicago offices for the first time, greeting the brokers, analysts and sales staff there.
One broker, Cy Monley, caught Mr. Corzine’s eye. Unknown to MF Global’s top management in New York, the employee, whose job was to match buyers and sellers in energy derivatives, was also trading a small account on the side, using the firm’s capital.
“How are you making money on side bets? What else are you guys doing to make money here?” Mr. Corzine asked enthusiastically, his eyes widening, the broker recalled. The new chief executive grabbed a seat and spent an hour questioning Mr. Monley as other top executives from New York hovered impatiently nearby.
Although Mr. Corzine had been a United States senator, governor of New Jersey, co-head of Goldman Sachs and a confidant of leaders in Washington and Wall Street, he was at heart a trader, willing to gamble for a rich payoff.
Dozens of interviews reveal that Mr. Corzine played a much larger, hands-on role in the firm’s high-stakes risk-taking than has previously been known.
An examination of company documents and interviews with regulators, former employees and others close to MF Global portray a chief executive convinced that he could quickly turn the money-losing firm into a miniature Goldman Sachs.
He pushed through a $6.3 billion bet on European debt — a wager big enough to wipe out the firm five times over if it went bad — despite concerns from other executives and board members. And it is now clear that he personally lobbied regulators and auditors about the strategy.
His obsession with trading was apparent to MF Global insiders over his 19-month tenure. Mr. Corzine compulsively traded for the firm on his BlackBerry during meetings, sometimes dashing out to check on the markets. And unusually for a chief executive, he became a core member of the group that traded using the firm’s money. His profits and losses appeared on a separate line in documents with his initials: JSC.
Yet few appeared willing to check Mr. Corzine’s trading ambitions.
The review of his tenure also sheds new light on the lack of controls at the firm and the failure of its watchdogs to curb outsize risk-taking. The board, according to former employees, signed off on the European bet multiple times. And for the first time it is now clear that ratings agencies knew the risks for months but, as they did with subprime mortgages, looked the other way until it was too late, underscoring how three years after the financial crisis, little has changed on Wall Street.
MF Global filed for bankruptcy on Oct. 31. As the firm spun out of control, it improperly transferred some customer money on Oct. 21 — days sooner than previously thought, said people briefed on the matter. And investigators are now examining whether MF Global was getting away with such illicit transfers as early as August, one person said, a revelation that would point to wrongdoing even before the firm was struggling to survive.
The consequences of the firm’s collapse have been severe: Some $1 billion in customer money remains missing and thousands of clients, including small farmers in Kansas or hedge funds in Connecticut, still do not have nearly a third of their funds.
Some of that money may never be recovered if, as some regulators now fear, MF Global used it to cover trading losses and replenish overdrawn bank accounts.
The bet on European sovereign debt is not thought to be directly connected to the missing money. But the fears about the firm’s exposure to Europe tipped an anxious market, causing a run on MF Global that regulators suspect led the firm to fight for its life using customer money.
Mr. Corzine has not been accused of any wrongdoing. Through a spokesman, he declined to comment for this article.
While Mr. Corzine apologized for the firm’s collapse when he appeared before the House Agriculture Committee on Thursday, he has continued to defend the European trade, calling it “prudent” at the time.
The European trade was initiated by Mr. Corzine late in the summer of 2010. The new chief executive explained the bet to a small group of top traders, arguing that Europe would not let its brethren default. In just a few months, the trade swelled to $6.3 billion, from $1.5 billion.
Europe’s debt crisis, meanwhile, continued to flare, raising questions about whether some of the Continent’s bigger economies, Spain and Italy, might be ensnared in the maelstrom.
In August, some directors questioned the chief executive, asking him to reduce the size of the position. Mr. Corzine calmly assured them they had little to fear.
“If you want a smaller or different position, maybe you don’t have the right guy here,” he told them, according to a person familiar with the matter. He also told one senior board member that he would “be willing to step down” if they “had lost confidence in me,” Mr. Corzine told Congress on Thursday, although he said he had not intended to make a threat.
The board relented.
A Curious Career Move
Few would have guessed that Mr. Corzine, having led Goldman Sachs before serving in the Senate and as a governor of New Jersey, would wind up the chief executive of a little-known brokerage house.
At Goldman, which he joined in 1975, the young bond trader quickly gained a reputation as someone able to take big risks and generate big profits. Even after ascending to the top of the firm, he kept his own trading account to make bets with the firm’s capital. In 1999, Mr. Corzine was ousted from Goldman amid a power struggle.
By 2010, having suffered a stinging defeat in his bid for re-election as the Democratic governor of New Jersey, Mr. Corzine hoped to resume his career on Wall Street.
A friend, J. Christopher Flowers, one of MF Global’s largest investors, helped him get there. Mr. Corzine and Mr. Flowers worked at Goldman decades ago, and at one point, Mr. Flowers helped manage Mr. Corzine’s vast wealth while he was a senator, according to Congressional records.
Mr. Corzine’s arrival was a coup. MF Global had hired an executive search firm, Westwood Partners, to hunt for a new leader. But some members of the board, including David I. Schamis, who worked for Mr. Flowers, were recruiting Mr. Corzine.
He was a popular manager, former employees say. An avuncular presence with a beard and sweater vest, he had a knack for remembering names. Even in the firm’s final hours, they recall that Mr. Corzine never lost his temper. His work ethic also impressed colleagues. He often started his day with a five-mile run, landing in the office by 6 a.m. and was regularly the last person to leave the office.
His intense routine was on par with his ambitions for the firm. With 15 top executives in the firm’s boardroom on his first day, March 23, 2010, he said, “I think this firm has tremendous potential and I can’t wait to get started,” one person who attended said.
Mr. Corzine faced a steep challenge.
For years, MF Global aligned buyers and sellers of futures contracts for commodities like wheat or metals, and took a small commission along the way. But over the last decade, that business had become endangered. By the time Mr. Corzine arrived, near zero-percent interest rates and paper-thin commissions had led to five consecutive quarters of losses.
Soon after taking the helm, Mr. Corzine oversaw a wave of job cuts and overhauled compensation, moving from steady commissions to salary and discretionary bonuses like the rest of Wall Street.
At the same time, Mr. Corzine filled the ranks with employees from Goldman Sachs and hedge funds like the Soros Fund Management. He recruited Bradley Abelow, a fellow Goldman alumnus and a top aide when he was governor, to be chief operating officer.
Mr. Corzine arrived just as Washington was pressing the big banks to curb their lucrative yet risky businesses. Spotting an opening, he fashioned new trading desks, including one just for mortgage securities and a separate unit to trade using the firm’s own capital, a business known as proprietary trading.
Not to be outdone, Mr. Corzine was the most profitable trader in that team, known as the Principal Strategies Group, according to a person briefed on the matter. Mr. Corzine traded oil, Treasury securities and currencies and earned in excess of $10 million for the firm in 2011, the person said.
Some inside MF Global worried that the expansion of the profitable trading business in New York came at the expense of its futures clearing operation, which was centered in Chicago. To drum up sales, Chicago brokers were pushed to introduce longtime clients to their counterparts in New York, a move that raised tensions.
At times, Mr. Corzine seemed unfamiliar with some aspects of the futures division. In June, speaking at the Sandler O’Neill Financial Services Conference at the St. Regis Hotel in Manhattan, Mr. Corzine stumbled. “Right now, if you thought about MF Global’s retail business, you probably could only think of — ,” he said, then paused to recall the name of the division at MF Global that catered to individual investors.
He leaned over to an aide, who told him it was Lind-Waldock.
‘Chief Risk Officer’
“I consider one of my most important jobs to be chief risk officer of our firm,” Mr. Corzine told that conference.
Yet soon after joining MF Global, Mr. Corzine torpedoed an effort to build a new risk system, a much-needed overhaul, according to former employees. (A person familiar with Mr. Corzine’s thinking said that he saw the need to upgrade, but that the system being proposed was “unduly expensive” and was focused in part on things the firm didn’t trade.)
While risk at the firm had been sharply increased with the bet on European sovereign debt, there was a compelling argument for Mr. Corzine’s strategy.
MF Global had obtained loans to buy debt of Italy, Ireland and other troubled European nations, while simultaneously pledging the bonds as collateral to support the loans. The loans would come due when the bonds matured, which would happen no later than the end of 2012. MF Global, Mr. Corzine reckoned, would profit on the spread between the interest paid on the loans and the coupons earned from the bonds.
But the size of the European position was making the firm’s top risk officers, Michael Roseman and Talha Chaudhry, increasingly uncomfortable by late 2010, according to people familiar with the situation. They pushed Mr. Corzine to seek approval from the board if he wanted to expand it.
Mr. Roseman then gave a PowerPoint presentation for board members, explaining the sovereign debt trade as Mr. Corzine sat a few feet away. The presentation made clear the risks, which hinged on the nations not defaulting or the bonds losing so much value they caused a cash squeeze. The directors approved the increase. Mr. Roseman eventually left the firm.
Within MF Global, Mr. Corzine welcomed discussion about his bet and his reasons for it, though some senior managers said they feared confronting such a prominent figure. Those who did challenge him recall making little progress. One senior trader said that each time he addressed his concerns, the chief executive would nod with understanding but do nothing.
These concerns were only internal at first because, while MF Global had disclosed the existence of the transactions in at least one filing in 2010, it never mentioned the extent to which they were used to finance the purchase of European debt.
The firm bought its European sovereign bonds making use of an arcane transaction known as repurchase-to-maturity. Repo-to-maturity allowed the company to classify the purchase of the bonds as a sale, rather than a risky bet subject to the whims of the market. That called to mind an earlier era of trading when firms used repo-to-maturity to finance the purchase of risk-free assets like United States Treasury securities, Mr. Corzine’s specialty at Goldman many years earlier.
“It’s like a bond trader from 15 years ago went to sleep and suddenly awoke to make these trades,” one regulator who later reviewed the transactions remarked to a colleague.
Eventually, MF Global’s auditor, PricewaterhouseCoopers, asked Mr. Corzine to report the European debt exposure to his investors. He personally met with the accounting firm in December 2010, two people said, and it was agreed that the transactions would be mentioned in a footnote in the firm’s annual report, which was filed on May 20, 2011.
Earlier, one of MF Global’s many regulators noticed something curious. The Financial Industry Regulatory Authority, which helped watch over MF Global’s securities business, noticed a sharp swing in profits in a monthly report the firm filed to regulators. Finra asked MF Global executives about the volatile accounting line but did not get a satisfactory answer, say people familiar with the matter, until the annual report came out weeks later.
When Finra realized what MF Global was doing, it grew concerned. The Wall Street self-regulator told MF Global to set aside enough money in case the trades went bad. But Finra didn’t have the authority to force the firm to do so — that power was in the hands of the Securities and Exchange Commission, whose rule Finra was citing.
Mr. Corzine then personally took the firm’s case to the S.E.C. in mid-August, taking the Delta Shuttle to Washington for a meeting with a top agency official.
The S.E.C. indicated it would side with Finra, but needed a few weeks to make a final determination. In the meantime, MF Global and Finra haggled over the size of the capital cushion: the regulator wanted $200 million set aside, while the firm pushed for a figure closer to $50 million. In late August, Finra won out.
It would be the beginning of the end for MF Global.
The Unwinding
MF Global’s investors may not have been fully informed about the European bet, but the firm’s executives had been explaining the strategy to the ratings agencies for months, according to two people with direct knowledge of the conversations. Indeed, Moody’s Investors Service and Standard & Poor’s had applauded Mr. Corzine’s effort to overhaul the firm, a move that included ratcheting up risk.
“We consider the most recent strategic plan of the new C.E.O. Jon Corzine to be sound,” S.& P. said in 2010, while acknowledging the plan “will incrementally increase the firm’s risk profile.”
But the move by Finra to force the extra capital cushion appeared to only unnerve the ratings agencies when news reports about it emerged in October. A week later, Moody’s cut its rating on MF Global to a notch above junk, pointing to the European debt holdings.
The reversal angered some executives at MF Global, who felt it was disingenuous for the agency to change its mind so suddenly. A spokesman for the ratings agency said, “Moody’s does not refrain from taking rating action when its opinion on the credit risk of an issuer has changed.”
The downgrade sent MF Global into free fall on Oct. 25. Its stock price plunged and trading partners and lenders demanded more capital to continue doing business with the company. At day’s end, rattled employees dialed into a conference call with Mr. Corzine, who tried to be encouraging.
“The sun will come out tomorrow,” he told them, according to one employee.
In truth, the company had just two options: sell itself or unload assets. Mr. Corzine organized two teams. Mr. Abelow, his deputy, began hunting for a buyer and decamped to the 40th floor of the firm’s Midtown Manhattan headquarters. On the 39th floor, where his office was next to the trading floor, Mr. Corzine took charge of selling the assets.
On Friday evening, Oct. 28, regulators and top executives trooped into Mr. Corzine’s office, joining a phone conference with Mary L. Schapiro, chairwoman of the S.E.C. Pictures of Mr. Corzine with Presidents Barack Obama and Bill Clinton sat on shelves near his desk. Towering stacks of paper lined the walls and windowsills of his modest office, partly obscuring the window view.
Dressed in his trademark sweater vest, Mr. Corzine expressed confidence a deal would be reached with one of the potential buyers, which included Interactive Brokers, JPMorgan Chase, the Jefferies Group and the Macquarie Group, according to people briefed on the call.
A deal became crucial as trading partners and lenders circled the firm. LCH.Clearnet, the firm responsible for clearing the vast majority of MF Global’s European sovereign debt trades, was also demanding $200 million to maintain the positions, atop $100 million it had claimed from MF Global earlier in the week, one person briefed on the situation said.
Other people close to the investigation, led by the Commodity Futures Trading Commission’s enforcement division, have said that as the firm rushed to pay off creditors, MF Global dipped again and again into customer funds to meet the demands.
The bidders dropped out one by one, leaving just Interactive Brokers on Sunday, Oct. 30. Mr. Corzine and his team briefed regulators at 2 p.m. saying a sale looked likely to go through. About nine hours later, he got word that more than $950 million in customer funds was missing, making a merger impossible. The day after the bankruptcy, Mr. Corzine sifted through transactions in the hope of locating the missing money, one person said.
Ultimately, the bets Corzine placed wound up better than the firm itself. The European debt trades were profitable, though too late for MF Global.
Before Congress on Thursday, Mr. Corzine continued to emphasize how well his trades held up. “As of today, none of the foreign debt securities that MF Global used,” he said, “has defaulted or been restructured.”
“There actually were no losses.”
Kevin Roose and Lisa Schwartz contributed reporting.
No One Says Who Took $586 Billion in Fed Swaps Done in Anonymity
By Scott Lanman and Bradley Keoun - Dec 11, 2011 5:01 PM CT
For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank’s emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself.
As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent.
The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.
“Increased transparency is warranted here,” given the size of the Fed’s aid and current pressures on European banks, said Representative Randy Neugebauer, a Texas Republican who heads the House Financial Services Subcommittee on Oversight and Investigations.
Whether the U.S. should make disclosure of the recipients a condition of the swap lines is “probably a discussion we need to have,” possibly in a hearing that includes Fed Chairman Ben S. Bernanke, Neugebauer said.
Unprecedented Transparency
The secrecy surrounding foreign central banks’ emergency lending contrasts with unprecedented transparency at the Fed, which was compelled by the 2010 Dodd-Frank Act and court-upheld Freedom of Information Act requests to release details on more than a dozen programs [ http://www.federalreserve.gov/newsevents/reform_transaction.htm ] used to combat the U.S. financial crisis from 2007 through 2010. Bernanke this year began holding regular press conferences and has said he is considering ways to make the Fed’s objectives more clear to the public.
Michelle Smith, a Fed spokeswoman, said there is “no formal reporting channel” for the identities of borrowers from other central banks, which are the Fed’s only counterparties on the swap lines and assume any credit risk.
“U.S. taxpayers have never lost a penny” on the program, she said. “Decisions about disclosure by foreign central banks of their financial arrangements with financial institutions in their jurisdictions is an issue for the foreign central banks.”
Turmoil Overseas
Americans may have to accept nondisclosure as a condition of protecting the U.S. economy from turmoil overseas, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
“As much as we might like to say they should have at least as much transparency as the Fed, I don’t know if we want to say, ‘Well, if you don’t, you’re not going to get the money,’” Baker said. U.S. policy makers should encourage international standards for disclosure through talks at forums such as meetings of the Group of 20 nations, he added.
The swaps are separate from Fed emergency loans to banks and other businesses that peaked at $1.2 trillion in December 2008, including about $538 billion that European financial companies borrowed directly, according to a Bloomberg News examination of available data.
The Fed last week released [ http://www.federalreserve.gov/generalinfo/foia/emergency-lending-financial-crisis-20111206.pdf ] a letter from Bernanke and a staff memo criticizing recent news articles for portraying its crisis-lending efforts as secret, saying that it made aggregate amounts of the loans public. Bloomberg, which published a Nov. 28 article on the topic, said in a point-by-point response that it considered the data secret because the terms of the loans and names of borrowers were withheld. The Fed had resisted disclosing them for more than two years.
Century-Old Program
The Dodd-Frank Act overhauling U.S. financial law included legislation proposed by Senator Bernard Sanders, a Vermont independent, that required the Fed in December 2010 to disclose recipients of aid it provided during the crisis, except for banks that used the liquidity-swap lines or the discount window -- a century-old emergency-lending program. Under Dodd-Frank, new Fed borrowers from the discount window are subject to identification with a two-year delay.
Bloomberg LP and News Corp.’s Fox News Network LLC won a court case forcing the Fed last March to name the crisis discount-window borrowers. There hasn’t been any case or law requiring disclosure of banks that borrowed via the swap lines.
“That is certainly a legitimate piece of information for the American people,” and “we’re going to be vigilant in increasing transparency,” said Warren Gunnels, Sanders’ senior policy adviser.
Borrowing Dollars
Foreign central banks borrowed dollars from the Fed for terms as long as three months in return for euros, pounds and yen. The ECB accounted for 80 percent of total swap-line loans during the mortgage-induced financial crisis, according to the U.S. Government Accountability Office, the congressional auditor. The ECB won’t publicly disclose names of borrowers under any circumstances and doesn’t share the identities outside the 17 euro-area central banks, a spokesman wrote in an e-mail.
“These banks have a right to enjoy the standard confidentiality attached to banking transactions,” the spokesman wrote.
European officials may be concerned that future lending might be inhibited by a “stigma phenomenon” if past borrowers are made public, said Ralph Bryant, former director of the Fed’s international-finance division and now a senior fellow at the Brookings Institution in Washington. The concept is “usually overplayed by people, but it’s not something that’s trivial.”
‘Matter of Principle’
The Bank of Japan, which tapped 3.9 percent of the aggregate swap dollars according to the GAO, has no plans to publicize borrowers’ identities and declined to comment on whether it shares the names with the Fed, a spokesman said. The Swiss National Bank, which accounted for 4.6 percent, “as a matter of principle” doesn’t publish counterparties, said Walter Meier, a spokesman.
The Bank of England doesn’t publish details of individual financial institutions’ use of its facilities. Confidence in banks “can best be sustained” if support is disclosed “only when conditions giving rise to potentially systemic disturbance have improved,” it said in its annual report.
Fed policy makers let the program expire in February 2010 then revived it after three months to try to contain Europe’s debt crisis. Nineteen months later, European officials still struggle to contain the market turmoil, which has spread to sovereign bonds in France and Italy as investors increasingly question governments’ ability to repay debt.
Expanding Crisis
The expanding crisis spurred the Fed and other central banks in November to extend the program by six months to Feb. 1, 2013, and lower borrowing costs by half a percentage point to make them more attractive. Last week, European leaders agreed to make loans of as much as 200 billion euros ($267.7 billion) to the International Monetary Fund and tightened rules to curb future debts.
The Fed swap program had a combined balance of $2.3 billion in loans outstanding as of Dec. 7 for all five participating central banks. That doesn’t account for the ECB’s latest dollar auction because the loans hadn’t settled yet.
The GAO, which released its emergency-lending report in July, wasn’t required to delve into the final destinations of the swap dollars, said Orice Williams Brown, the agency’s lead official on Fed audits. As a result of the study, the GAO learned that UBS AG (UBSN)’s October 2008 bailout from the Swiss government included an “atypical use [ http://www.gao.gov/new.items/d11696.pdf ]” of swap-line dollars “generally not exceeding about $13 billion,” the report said.
Not having the identities would restrict the Fed’s ability to understand the “overall risk exposure of the institutions it’s supervising,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors Inc.
The Fed may not need all the details, said Al Broaddus, former president of the Federal Reserve Bank of Richmond. The ECB and other central banks “are obliged to pay the Fed back. They’re the ones that are taking the credit risk with the institutions that are actually being lent to.”
In 2008, the dollar-based money markets that many foreign banks used to finance their holdings of U.S. mortgage-backed securities froze, forcing them to turn to the Fed to fill the funding gap. Much of the borrowing was done through U.S. branches that are legally eligible to draw emergency loans from the Fed’s lender-of-last-resort programs, according to the Bloomberg examination.
One of the borrowers, Dexia SA (DEXB), is being broken up after running out of short-term funding. The French-Belgian lender had 120.6 billion euros of central-bank liabilities on Dec. 31, 2008, according to a company report; $58.5 billion came directly from the Fed, the Bloomberg examination showed.
Fed officials, including Governor Daniel Tarullo, have emphasized the need for improved monitoring and control of risks throughout the banking system, as well as global coordination among financial-policy makers. Regulators “must not lose sight of the importance of supervisory cooperation in pursuit of the shared goal of a stable international financial system,” he said in a Nov. 4 speech.
Full Disclosure
Ohio Senator Sherrod Brown, a Democrat who heads the Banking Subcommittee on Financial Institutions and Consumer Protection, said he isn’t sure swap-line borrowers should be made public. Still, the Fed “should follow the money in terms of disclosure, period,” he said. “Full disclosure from start to finish is the goal.”
Massachusetts Representative Barney Frank, the senior Democrat on the House Financial Services Committee, said he saw no need for the disclosure because the Fed has no role in approving the ultimate borrowers.
“What the Fed is doing with regard to the ECB is very important for the American economy,” Frank said. “Our interest is to make sure we get paid back. I think the ECB is a pretty good debtor and a pretty reliable one.”
‘Fundamental Problem’
Joseph Stiglitz, a Nobel Prize-winning economist who led President Bill Clinton’s Council of Economic Advisers, said the “fundamental problem” is that capital markets need information to work properly, yet the Fed is saying, “we believe in capital-market discipline without information.”
“It would be very useful to see” those names, said Stiglitz, a professor at Columbia University in New York. With the dollar auctions of foreign central banks shielded from disclosure, “what we have now is a very partial picture.”
To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scheer at dscheer@bloomberg.net
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