Fear and Greed and the Federal Reserve Board

HumanEvents.com ^ | 03/25/2008 | Terry+Easton">Terry Easton

[K-oneTexas]

Fear and Greed and the Federal Reserve Board

by Terry Easton

Posted 03/25/2008 ET

Oh My!  When last we looked, the score was Fed 1, Crash 0.  That was way back in 2007.  A lifetime ago if you’re a day-trader.  

Greed in the street has now turned into rank fear.  And the contrarian investor argues that when everyone is fearful, well that’s the perfect time to jump back in to make a killing.  So, greed is good.  Got that?

In the good old days (say, last October), hope was still blossoming along with the weeds of the sub-prime meltdown mess. Most economists were predicting that the US would squeak through 2008 with slow growth – and just miss going into a recession.  The Fed had taken action back on August 17th to allow banks to pony up to the Fed window and hand in sub-prime mortgages at full face value in return for 100% cash in-the-bank Fed money.   Several hundred billion dollars in dodgy assets appear to have been handed over to the Fed at the time.

Then, during the week of November 25, 2007, the Federal Reserve Board, acting in coordination with the Bank of England and the European Central Bank (among others), dumped several more hundreds of billions of dollars in liquidity into the marketplace through the creation of new embarrassment-free lending vehicles for the money-center banks (read: Citicorp, et. al.).  When all the world’s central banks were counted, the total new “loans” provided to the banks exceeded $1 trillion.  Now that’s beginning to be real money.

Next, on Tuesday, March 11th, the Fed injected another $200 billion into the banking system via weekly auctions where it will lend treasury bills for 28-day periods in return for debt, including “AAA-rated mortgage securities” sold by Fannie Mae and Freddie Mac, and by banks. Loans will be made under a new program called the “Term Securities Lending Facility”, to the 20 banks and securities firms that trade directly with the Fed.

This is uncharted water.  As Nick Parsons, head of strategy at NAB Capital, said to the UK’s Guardian Newspaper: "The Fed is digging a firebreak. The fire was threatening to engulf good assets, bad assets, every sort of asset.”  It may yet still.

All was calm for another 5 days.  Above the surface.

Finally, on Sunday, March 16th, at the start of Easter Holy Week, the Federal Reserve next did the previously unthinkable:  it opened up yet another lending “window” at the New York Fed (where do they find the workmen to jackhammer out all these new windows late on a Sunday night?).  

This time it was for the major (20 or so) participants in the securitization markets, the New York-based “primary dealers” in things like the US Treasury Notes, to the tune of another (at least) $200 billion.  This includes Merrill Lynch, Goldman Sachs -- and Bear Sterns, the 5th largest “investment banker” in the US.  Notice that these are stock brokers, not banks.  The new window is called the “Primary Dealer Credit Facility”.  

So, for the first time ever, the Fed has opened its coffers to non-banks.  Pundits have asked, “What next, Starbucks and Home Depot?”  Perhaps.  If it’s necessary.

The function of the Federal Reserve System is to keep the money supply stable and the financial monetary system working.  Of late, the machinery has been showing a slight tendency to lock up at inopportune times and the Fed’s liberal squirts of liquid assets are being made to insure the system continues to be well if not over oiled.  

One minor problem did creep up at the same time: the imminent collapse of Bear Sterns, worth over $15 billion on Friday and perhaps a negative $30 billion on Monday morning - if it were forced to file for bankruptcy.  The Fed “invited” Bear Sterns and J.P. Morgan, its next-door neighbor in lower Manhattan, to come to an “agreement” whereby JP Morgan would buy Bear Sterns, lock, stock, and new $1.5 billion headquarters building for a piddling $2 per share, or $236 million.  As a good will gesture, the Fed threw in a guarantee to JP Morgan to absorb up to $30 billion of doggy assets (more sub-prime mortgages?) owned by Bear Sterns.  For its part, J.P. Morgan also set aside a few billion  dollars more of its own money just in case.

Finally, to make it worthwhile for the non-banks to turn in their junk collateral to the New York Fed at the new PDCF Window down the street, the Fed dropped its interest rates for the non-banks ¼ point to 3 ¼ %.  

When the next regularly-scheduled interest rate board meeting was held on Tuesday, March 18th, Chairman Ben Bernanke and his colleagues further cut the federal funds rate (the interest that banks charge one other) to 2.25 percent, its lowest point since late 2004.

Now we’re talking!  In response, the stock markets in the US and abroad duly shot up.  Although a predictable  retrenchment occurred the next day, by the end of Holy Week, the stock markets had recovered, gold had dropped substantially, and even the dollar had firmed up viz-a-viz the Euro and Pound.  Holders of Adjustable Rate Mortgages (or ARMS) which are having their rates reset later this year or next can now sigh with relief as they’ve been given a reprieve of another year or two of cheap interest rates.

Ben Bernanke did his Ph.D. thesis on the Great Depression, and on just what the Fed did wrong in those days - and what the Fed must do in the future to make sure that a great depression will never happen again.  Basically, this involves shoveling out of bank windows or helicopter doors potloads of dollars (liquidity) to make sure that we will never have too little money to go around again.  Unfortunately, this tactic is also called (at least in the old-fashioned Austrian school of economics) inflation.

The real threat to the system, however, is not the sub-prime toxic waste mortgages being held in the coffers of the investment banks, retirement funds and insurance companies.  The Fed can simply buy up all of these if it has to.  Jimmy Carter-like inflation of 20% will appear -- but only for a few years at most.  

The real threat to the system is the $4-10 trillion (yes, trillion!) dollars worth of CDO’s: collateralized debt obligations that the global money system holds.  Created as insurance to allow a bond holder to separate the “guaranteed” interest income from the “risky” fluctuating bond selling price, they have seemed to lower these risks until now.  The system fails, of course, if the insurer -- the other party to the CDO transaction (like a Bear Sterns) goes belly up.  Not to mention that the so-called bond-rating agencies have been rating ZZZ bonds as AAA.  

The system itself must not be allowed to lock up.  If Bear Sterns went down it would take lots of depositors and cross-transaction parties with it.  This could have generated the feared settlement system’s doomsday scenario: cascading cross defaults, where, like dominoes, bank A fails knocking down its correspondent bank B which tips over bank C and so on.  Along with every person and every business holding assets in those banks.

By its actions over last weekend, the Fed stopped the eminent crash from happening.  Hats of to the Fed.  Really.  Bless you Ben Bernanke.

So, bottom line, the score appears to now be:  Fed 2, Crash 1, with lots of innings yet to go.  As someone who is perhaps irrationally optimistic, I personally believe that he has an excellent chance of pulling it off.  We’ll see.

Meanwhile, if you compute the real GDP of the US on a per-capita adjusted basis (divide the GDP by the population), we seem to have drifted into a recession since mid-November.  But in GDP-only terms, we’re still in positive territory. And a recession, by definition, is 2 quarters (6 months) of continuously falling GDP.

Of course all of this was predicted by Ludwig von Mises.  It’s what you’d expect when you run a fiat-money system -- and top it up with loads of highly leveraged debt.  And we’ve been doing it for 90+ years now.

Mr. Easton teaches University economics and is passionate about technology and entrepreneurship. He is rosy about the long-term future: "The glass isn't half full, it's overflowing!"

[BGHater]

‘Of course all of this was predicted by Ludwig von Mises. It’s what you’d expect when you run a fiat-money system — and top it up with loads of highly leveraged debt. And we’ve been doing it for 90+ years now.’

Wow. How did this slip by and get posted on Human Events?

[Don Corleone]

"The glass isn't half full, it's overflowing!"

BUMP!

It must be hell to be a Socialist/Liberal and wake up every morning in a state of total depression.

[K-oneTexas]

An older article at The American [http://american.com/archive/2007/september-october-magazine-contents/how-the-fed-works] written by a former Fed economist. Yet an intersting read.

How the Fed Works

By Kevin Hassett ~ From the September/October 2007 Issue

The Federal Open Market Committee meets today and is expected to slash interest rates. KEVIN HASSETT, a former Fed economist, offers an inside look at how America’s central bankers operate.

1) What is the Federal Reserve?

For 94 years, the Fed has been the central bank of the United States. Its primary duties are conducting the nation’s monetary policy, supervising and regulating banks, and providing financial services and liquidity (that is, ready cash) to depository institutions and the federal government.

Providing liquidity sometimes means being a lender of last resort. A lender of last resort can save a bank during a run by providing cash to the embattled financial institution. Throughout the early history of the United States, there was no official lender of last resort. Following a severe bank panic in 1907, the worst of four panics over a 34-year period, Congress appointed a commission to study the issue. The result was the Federal Reserve Act of 1913, which established the Federal Reserve System.

In 2006, after accounting for its expenses, the Fed returned $29 billion in profits to the U.S. Treasury.

The Fed is widely dispersed around the country. It has three major parts: the Washington-based Board of Governors, 12 regional Federal Reserve banks, and the Federal Open Market Committee (FOMC).

It is the FOMC, whose members include all of the governors, the president of the New York Fed, and four regional bank presidents in rotation, that has the high-visibility job of directing the operations that determine interest rates.

2) Who owns the Fed?

The Fed as a whole is a government organization that is not really owned by anyone, but each regional Federal Reserve bank is technically owned by the private commercial banks in its district.

Each of the regional Fed banks has its own board of governors and issues stock to commercial banks, which are required to purchase shares equal in value to 6 percent of their capital. The regional Fed bank actually holds only half of that money, the rest being “subject to call” by the governors in case of an extreme liquidity crisis. Owning stock, however, does not grant authority, much less control. Member commercial banks do receive a 6 percent dividend on their paid-in stock, but they cannot sell the stock or use it as collateral for loans. In addition, the Fed’s Board of Governors in Washington—not the boards of the regional Reserve banks—is responsible for regulatory functions.

3) Where does the Fed get its money?

The Fed has its own source of funds, so Congress cannot guide monetary policy through withholding or bestowing appropriations.

The main source of income is seigniorage revenue. Whenever the Fed increases the amount of money in circulation, it purchases new currency from the U.S. Treasury for cents on the dollar. For example, if a member bank needs an extra million dollars, it calls the Fed to order currency, and the Fed asks the Treasury to print the amount. The Fed gives the money to the bank, and debits the bank’s reserve account. The Fed then invests the reserves in government securities as collateral, and profits from the interest that accrues to its own account. In 2006, after accounting for expenses, the Fed returned $29 billion in profits to the U.S. Treasury (Figure 1).

4) Do Congress and the President influence the Fed?

The founders of the Federal Reserve understood that sound monetary policy requires central bankers to make unpopular decisions. As a result, the 1913 law gave the Fed a much higher degree of independence than other government agencies. The Fed has its own source of funds, so Congress cannot guide monetary policy through withholding or bestowing appropriations. Governors are appointed for 14-year terms, tenure that is second in length only to the lifetime appointments of federal judges.

But the independence has boundaries. Each member of the seven-person Board of Governors is appointed by the President and confirmed by the Senate. The Federal Reserve must report annually to the Speaker of the House and twice annually to the banking committees of Congress. Of course, Congress can pass new laws affecting the Fed at any time. And Fed bankers read the newspapers. They aren’t completely insulated from politics.

5) Is the Fed’s job to boost the economy, or is it just to preserve the value of the currency?

Both. The Humphrey-Hawkins Act of 1978 requires the Fed to maintain long-run growth while minimizing inflation and pursuing price stability. So the Fed is supposed to fight inflation, but not so much that its actions undermine growth. Since Paul Volcker became chairman of the Fed during Jimmy Carter’s term, the Fed has generally avoided cutting rates in an effort simply to rev up the economy. The Fed’s strategy is that low inflation, even if it needs to be achieved through raising interest rates, is an important prerequisite for long-term economic growth.

6) How does the Fed influence the economy?

Member banks maintain reserves that they deposit at the Fed. A bank that is short on reserves can borrow the money from other member banks at what is called the “federal funds rate”—or “overnight rate,” since the loans are extremely short-term. The federal funds rate is critical to the economy, and it feeds through to other rates.

The overnight rate is one of only two rates that the Federal Reserve controls. When inflation fears are aroused, the Fed increases the fed funds rate (called a “tightening”) in order to slow activity in sectors of the economy, such as housing and automobiles, that are particularly sensitive to interest rates. When the economy slows, the Fed reduces the fed funds rate in order to stimulate activity (“loosening”).

The Fed also controls what is called the “discount rate”—which is what the Fed charges banks for loans it makes directly to them. The discount rate is usually close to the fed funds rate.

7) How does the Fed decide whether to tighten or loosen monetary policy?

A recent study by two economists, Meredith Beechey of the Fed and Pär Österholm of Uppsala University in Sweden, showed that the Fed generally has acted as if it has a target inflation rate. That target, however, has varied considerably depending on who was running the Fed.

When Alan Greenspan was chairman, the Fed acted as if it had a target inflation rate of about 2.9 percent for the overall Consumer Price Index (CPI). If inflation topped 2.9 percent, the Fed usually tightened; if inflation was below 2.9 percent, it tended to loosen. Under the current Fed chairman, Ben Bernanke, the target rate may be a bit lower, perhaps around 2.5 percent, although it has yet to be formally estimated. The Fed does not announce a target in advance.

8) How does the Fed set rates?

Through its operations in the open market, the Fed adds or subtracts money to hit its rate target (Figure 2). If the Fed wants to raise rates by one-quarter of a point, for example, it can sell Treasury securities to banks in its system. The banks get the securities, and, in payment, they send the Fed money that had previously been used to meet reserve requirements. The banks now need to borrow from other banks to replenish their reserves. This demand for credit drives up interest rates. The open-market process may sound convoluted, but it works. If the Fed wants to lower rates, it can buy securities from banks, which receive money that lets them reduce their demand for reserves.

9) Does the Fed also affect long-term rates, like those for mortgages?

The Fed is supposed to fight inflation, but not so much that its actions undermine long-term economic growth.

Only indirectly. Long-term rates are set in the bond market and depend on buyers’ and sellers’ expectations of inflation and economic growth. If short-term rates are expected to be on an upward trajectory, long-term rates will generally be higher than short-term and will rise roughly in tandem, since investors usually demand more interest when they put their money to work for a longer time.

Sometimes, however, investors will react to rising short-term rates by lowering long-term rates. The reason is that high short-term rates can choke off economic growth in the future. Investors reckon that, under such a scenario, rates farther out will level off or fall because the Fed will be forced to reduce the fed funds rate in the future. When long-term rates are below short-term rates, the yield curve is said to be “inverted.” Market participants often see an inversion as a harbinger of a recession.

10) How important is the Fed chairman?

At times, Alan Greenspan seemed to have dictatorial power over monetary decisions. The FOMC, however, has 12 independent members, and each has one vote. If Greenspan did have sway over the votes of the others, it can only be because he was able to persuade them that his views were correct.

 

11) Why is there only one Federal Reserve bank on the West Coast?

The locations of Federal Reserve banks and the boundaries of Federal Reserve districts (Figure 3) were based on the distribution of population and banking in 1913, and on political forces that were peculiar to that year. As the nation’s population shifted, the Federal Reserve responded by adding branches of the Reserve banks, but these branches do not increase a region’s representation on the FOMC. For example, the Federal Reserve Bank of San Francisco, the only one on the West Coast, has branches in Los Angeles, Salt Lake City, Seattle, and Portland.

12) Why are there two Federal Reserve banks in Missouri?

Senator James A. Reed was rewarded by the Senate for breaking a deadlock in committee and permitting the 1913 law to pass. Kansas City, of which he was formerly mayor, was awarded a bank, and St. Louis, one of America’s great commercial hubs at the time, got one too.

13) Are all regional Fed banks created equal?

The New York Fed conducts open-market operations, intervenes in foreign exchange markets, and stores monetary gold. Its president is generally considered the second most important Fed official.

No. The Federal Reserve Bank of New York plays a unique role within the Federal Reserve System. In addition to the usual duties of a Fed bank, it conducts open-market operations, intervenes in foreign exchange markets, and stores monetary gold. Also, while the presidents of the other 11 banks rotate on and off the FOMC, the president of the New York Fed is a permanent voting member and serves as its vice chairman. As a result, the presidency of the New York Fed is viewed as the second most important post in the system.

14) Did a secret meeting of Wall Street bankers produce the Fed?

The Fed is often the subject of elaborate, fanciful conspiracy theories. This one, however, has some truth. In 1910, Senator Nelson Aldrich of Rhode Island met off the coast of Georgia to discuss banking reform and plans for a new central bank. Wary that, if word got out, they would appear to be manipulative masterminds, participants kept the meeting secret. The Aldrich Plan that they devised was defeated in the House, but it served as a foundation for the Federal Reserve Act.

Kevin Hassett, director of economic policy studies at the American Enterprise Institute, was formerly a senior economist at the Federal Reserve.

Image credit: Chart illustrations by MacNeill & MacIntosh.

 

[K-oneTexas]

You caught that too. I wonder what possessed the writer.

[Travis McGee]

More Von Mises:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."~~Ludwig von Mises

"Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump."~~Ludwig von Mises

"True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression."~~Ludwig von Mises

"Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness."~~Ludwig von Mises

"What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse."~~Ludwig von Mises

"If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders."~~Ludwig von Mises

[AndyJackson]

What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse.

It is amazing how many people do not understand the difference between genuine wealth (physical assets, organizations and people that produce goods and services for which people voluntarily spend money in the marketplace) and money.

What we have seen is that in the credit boom a lot of labor and materials went into nonproductive activities (condos in Miami that will become the next slum projects), ghost towns of foreclosed and unsold houses in the mid-west, gambling enterprises around the country. No matter how much money the fed prints, all that effort is wasted, gone, worth pennies on the dollar.

[RSmithOpt]

Well put and all fact....W's and Congress's failed attempt to stimulate the economy out of the 2002/2003 recession.

This next recession will be even worse as the Dems will tax us to death instead of cutting spending, pork and useless programs.

[nicmarlo]

The real threat to the system, however, is not the sub-prime toxic waste mortgages being held in the coffers of the investment banks, retirement funds and insurance companies. The Fed can simply buy up all of these if it has to. Jimmy Carter-like inflation of 20% will appear -- but only for a few years at most.

The real threat to the system is the $4-10 trillion (yes, trillion!) dollars worth of CDO’s: collateralized debt obligations that the global money system holds. Created as insurance to allow a bond holder to separate the “guaranteed” interest income from the “risky” fluctuating bond selling price, they have seemed to lower these risks until now. The system fails, of course, if the insurer -- the other party to the CDO transaction (like a Bear Sterns) goes belly up. Not to mention that the so-called bond-rating agencies have been rating ZZZ bonds as AAA.

[nicmarlo]

There is absolutely no truth to the rumors of liquidity problems
that circulated today in the market.
Bear Stearns' balance sheet, liquidity and capital remain strong.

~~Alan Schwartz, Bear Stearns CEO, March 10, 2008

[Toddsterpatriot]

2) Who owns the Fed?

The Fed as a whole is a government organization that is not really owned by anyone, but each regional Federal Reserve bank is technically owned by the private commercial banks in its district.

Each of the regional Fed banks has its own board of governors and issues stock to commercial banks, which are required to purchase shares equal in value to 6 percent of their capital. The regional Fed bank actually holds only half of that money, the rest being “subject to call” by the governors in case of an extreme liquidity crisis. Owning stock, however, does not grant authority, much less control.

Interesting.

[Nick Danger]

a lot of labor and materials went into nonproductive activities (condos in Miami that will become the next slum projects), ghost towns of foreclosed and unsold houses in the mid-west, gambling enterprises around the country. No matter how much money the fed prints, all that effort is wasted, gone, worth pennies on the dollar.

Hindsight is the Greatest Thing Ever™. It allows us to know, in ways we never could before, which actions are stupid and which ones will pan out.

Using this miraculous gift, we can tell that these condos were destined to become the next slums, while those condos would sell quickly and make everyone involved happy. If only those who built the doomed condos had been as smart as hindsight would allow!

Imagine if the builders had gone to the bank for a construction loan and said, "These condos we're building will not sell. We will lose our shirts. We'll be unable to repay you, and the buildings will ultimately become slums." Why, if they had known what we know now, they probably wouldn't have built the condos at all! And the bankers for sure wouldn't have made a construction loan that left them holding the bag on a slum.

But there is an answer! Through the miracle of Liberal Politics — especially those variants known as communism and socialism — the decision to build things is not made by mere mortals who do not know the future in advance, but by government officials who are not motivated by profit, but by the urge to do good! Even better, unlike bankers and builders, they are infinitely smart and they never make mistakes!

With government officials running things, there will always be exactly the right number of condos. No labor or materials will be wasted. It will be super-efficient, just like it was in Russia under communism. When the communists were running things, guys like you could never say that there were more condos built than there should have been. You couldn't say that there were unsold houses. Everything was perfect. All the time!

We really need to get away from this system that allows human beings to make mistakes. We need a system where really smart bureaucrats, wearing gray suits, make all the decisions and tell everyone what to do. That way these supposed "mistakes" that you've highlighted above will never happen. (Or if they do, you will at least not highlight them, if you know what's good for you.) This whole "freedom" thing that allows builders to make too many (or too few!) condos, and bankers to make too many (or too few!) loans, and guys like you to crab about it afterwards, has to go. Down with mistakes! Perfection now! Allow only people who know the future in advance to make decisions!

[Toddsterpatriot]

Allow only people who know the future in advance to make decisions!

Excellent!

[nicmarlo]

Why is Bear Stearns Trading at $6 Instead of $2?

Bear Stearns is trading at $6 instead of $2 because unelected bureaucrats went beyond their legal mandates, delivered a windfall to a single private company at public expense, entered agreements that violate the the public trust, and created a situation where even if the bureaucratic malfeasance stands, the shareholders of Bear Stearns will either reject the deal or be deprived of their right to determine the fate of the company they own. Very simply, Bear Stearns is still in play. Still, when all is said and done, my own impression is that the ultimate value of the stock will not be $2, but exactly zero.

In effect, the Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”

[B4Ranch]

Chart of who "owns" the Federal Reserve

Chart 1

Federal Reserve Directors: A Study of Corporate and Banking Influence

Published 1976

Chart 1 reveals the linear connection between the Rothschilds and the Bank of England, and the London banking houses which ultimately control the Federal Reserve Banks through their stockholdings of bank stock and their subsidiary firms in New York. The two principal Rothschild representatives in New York, J. P. Morgan Co., and Kuhn,Loeb & Co. were the firms which set up the Jekyll Island Conference at which the Federal Reserve Act was drafted, who directed the subsequent successful campaign to have the plan enacted into law by Congress, and who purchased the controlling amounts of stock in the Federal Reserve Bank of New York in 1914. These firms had their principal officers appointed to the Federal Reserve Board of Governors and the Federal Advisory Council in 1914. In 1914 a few families (blood or business related) owning controlling stock in existing banks (such as in New York City) caused those banks to purchase controlling shares in the Federal Reserve regional banks. Examination of the charts and text in the House Banking Committee Staff Report of August, 1976 and the current stockholders list of the 12 regional Federal Reserve Banks show this same family control.

---

                                N.M. Rothschild , London - Bank of England
                                 ______________________________________
                                |                                     |
                                |                           J. Henry Schroder     

                                |                             Banking | Corp.
                                |                                     |
                          Brown, Shipley - Morgan Grenfell - Lazard - |
                           & Company        & Company       Brothers  |
                                |               |              |      |
            --------------------|        -------|              |      |
            |                   |        |      |              |      |
 Alex Brown - Brown Bros. - Lord Mantagu - Morgan et Cie -- Lazard ---| 
 & Son      |  Harriman       Norman     |    Paris          Bros     |
            |                   |        /      |            N.Y.     |
            |                   |       |       |              |      |
            |            Governor, Bank | J.P. Morgan Co -- Lazard ---| 
            |            of England    /  N.Y. Morgan       Freres    |   
            |            1924-1938    /   Guaranty Co.      Paris     |
            |                        /    Morgan Stanley Co.  |      / 
            |                       /           |              \Schroder Bank   
            |                      /            |              Hamburg/Berlin
            |                     /      Drexel & Company         /  
            |                    /       Philadelphia            / 
            |                   /                               /
            |                  /                           Lord Airlie
            |                 /                               /
            |                /     M. M. Warburg       Chmn J. Henry Schroder
            |                |      Hamburg ---------  marr. Virginia F. Ryan
            |                |         |               grand-daughter of Otto
            |                |         |                Kahn of Kuhn Loeb Co.
            |                |         |                        
            |                |         |                        
Lehman Brothers N.Y -------------- Kuhn Loeb Co. N. Y.                         
            |                |     --------------------------                     
   µ
            |                |       |                      |                     
           8
            |                |       |                      |
Lehman Brothers - Mont. Alabama   Solomon Loeb           Abraham Kuhn
            |                |     __|______________________|_________
Lehman-Stern, New Orleans   Jacob Schiff/Theresa Loeb  Nina Loeb/Paul Warburg
-------------------------    |       |                      |
             |               | Mortimer Schiff        James Paul Warburg
_____________|_______________/       |
|            |          |   |        |
Mayer Lehman |     Emmanuel Lehman    \
|            |          |              \
Herbert Lehman     Irving Lehman        \
|            |          |                \
Arthur Lehman \    Phillip Lehman     John Schiff/Edith Brevoort Baker
              /         |             Present Chairman Lehman Bros
             /  Robert Owen Lehman    Kuhn Loeb - Granddaughter of
            /           |             George F. Baker
           |           /               |
           |          /                |
           |         /           Lehman Bros Kuhn Loeb (1980)
           |        /                  |
           |       /             Thomas Fortune Ryan
           |      |                    |
           |      |                    |
      Federal Reserve Bank Of New York |
           ||||||||                    |
  ______National City Bank N. Y.       |
  |        |                           |
  |   National Bank of Commerce N.Y ---|
  |        |                            \
  |   Hanover National Bank N.Y.         \
  |        |                              \
  |   Chase National Bank N.Y.             \
  |                                        |
  |                                        |
Shareholders - National City Bank - N.Y.   | 
-----------------------------------------  |  
  |                                        /
James Stillman                            /
Elsie m. William Rockefeller             /
Isabel m.  Percy Rockefeller            / 
William Rockefeller          Shareholders - National Bank of Commerce N. Y.   
J. P. Morgan                 -----------------------------------------------
M.T. Pyne                    Equitable Life - J.P. Morgan
Percy Pyne                   Mutual Life - J.P. Morgan
J.W. Sterling                H.P. Davison - J. P. Morgan
NY Trust/NY Edison           Mary W. Harriman
Shearman & Sterling          A.D. Jiullard - North British Merc. Insurance
|                            Jacob Schiff
|                            Thomas F. Ryan
|                            Paul Warburg
|                            Levi P. Morton - Guaranty Trust - J. P. Morgan
|
|
Shareholders - First National Bank of N.Y.
-------------------------------------------
J.P. Morgan
George F. Baker
George F. Baker Jr.
Edith Brevoort Baker
US Congress - 1946-64
|
|
|
|
|
Shareholders - Hanover National Bank N.Y.
------------------------------------------
James Stillman
William Rockefeller
|
|
|
|
|
Shareholders - Chase National Bank N.Y.
---------------------------------------
George F. Baker

[groanup]

I would say he nailed it.

[nicmarlo]

Chart of who "owns" the Federal Reserve...

bttt!

[AndyJackson]

Through the miracle of Liberal Politics — especially those variants known as communism and socialism — the decision to build things is not made by mere mortals who do not know the future in advance, but by government officials who are not motivated by profit, but by the urge to do good! Even better, unlike bankers and builders, they are infinitely smart and they never make mistakes!

I merely pointed out that the loss has occurred, and you point this Marxist charge at me?!?!?! Question: is it not socialism for those operating in so-called free markets to expect guarantees, price supports, floods of liquidity, securities swaps, access to the discount window, guarantees of the most toxic portfolio holdings etc. to minimize the consequences of these mal-investments?Or is that your definition of free-market capitalism?

Where did the credit for these massive investments in real estate development come from in the first place? Is not the Federal Reserve's expansion of credit markets post 2001, which most economists claim provided the fuel for this incendiary asset bubble, socialist by your definition?

Or does it boil down to what appears to be the economic definitions accepted around here, namely:
1. Free market capitalism is the right to have your bank account hooked to the Federal Reserve firehose.
2. Marxism is pointing out that the FED has turned on the spigot.

[Toddsterpatriot]

Owning stock, however, does not grant authority, much less control.

[Nick Danger]

Lehman! Warburg! Rothschild! Lazard! I knew it! It's Da Jooz!

Thank you for the 4,312th posting to FR of the Official Anti-Semitic Kookburger Theory of Federal Reserve Ownership. It's already been debunked 4,311 times, so there's no reason to do it again. Suffice to say that no private individuals, no matter what "families" they belong to, own stock in a Federal Reserve Bank. The shares are available only to the regulated institutions. Today those are virtually all publicly-held corporations. The good news about publicly-held corporations is that we know who all the 5%-and-up shareholders are, because that is public information. The bad news about it is that the information exposes the crap you posted as the work of looneytunes who can't figure out how to operate Yahoo or Edgar Online.

In closing, let me suggest this:

[AndyJackson]

But the bank – J.P. Morgan – was in no financial trouble. .

Not true. They were a counterparty to a lot of derivatives and would surely have been severely affected by the mess of a bankruptcy.

[Toddsterpatriot]

Bear Stearns is trading at $6 instead of $2

It's trading at nearly eleven. The most recent offer is $10.

Rick Santelli of CNBC is exactly right.

Ask Rick how his hedge fund is doing.

[B4Ranch]

Which post makes more sense to you? This one or #11?

What does controlling shares in the Federal Reserve regional banks actually mean? Would it give you any influence at all on how the Federal Reserve regional banks operated?

_______________________________________________________________________________

>>One minor problem did creep up at the same time: the imminent collapse of Bear Sterns, worth over $15 billion on Friday and perhaps a negative $30 billion on Monday morning - if it were forced to file for bankruptcy. The Fed “invited” Bear Sterns and J.P. Morgan, its next-door neighbor in lower Manhattan, to come to an “agreement” whereby JP Morgan would buy Bear Sterns, lock, stock, and new $1.5 billion headquarters building for a piddling $2 per share, or $236 million. As a good will gesture, the Fed threw in a guarantee to JP Morgan to absorb up to $30 billion of doggy assets (more sub-prime mortgages?) owned by Bear Sterns. For its part, J.P. Morgan also set aside a few billion dollars more of its own money just in case.<<

Chart of who "owns" the Federal Reserve

Chart 1

Federal Reserve Directors: A Study of Corporate and Banking Influence

Published 1976

Chart 1 reveals the linear connection between the Rothschilds and the Bank of England, and the London banking houses which ultimately control the Federal Reserve Banks through their stockholdings of bank stock and their subsidiary firms in New York. The two principal Rothschild representatives in New York, J. P. Morgan Co., and Kuhn,Loeb & Co. were the firms which set up the Jekyll Island Conference at which the Federal Reserve Act was drafted, who directed the subsequent successful campaign to have the plan enacted into law by Congress, and who purchased the controlling amounts of stock in the Federal Reserve Bank of New York in 1914. These firms had their principal officers appointed to the Federal Reserve Board of Governors and the Federal Advisory Council in 1914. In 1914 a few families (blood or business related) owning controlling stock in existing banks (such as in New York City) caused those banks to purchase controlling shares in the Federal Reserve regional banks. Examination of the charts and text in the House Banking Committee Staff Report of August, 1976 and the current stockholders list of the 12 regional Federal Reserve Banks show this same family control.

[AndyJackson]

We really need to get away from this system that allows human beings to make mistakes.

No. we really need a system that does not isolate those who make these decisions from the consequences of their mistakes. Furthermore, it is quite foreseeable that prices way out of line with some sort of justifiable equilibrium are going to correct to an equilibrium. That it happens later rather than sooner, and is fueld by excess credit only makes the correction to the norm that much more painful.

[groanup]

I thought the theories that the Rothschilds and Rockefellers owned the banking system went out with the Nehru jacket.

[B4Ranch]

Please calm down and take your meds. Toddsterpatriot was the one posting Anti-Semitic BS yesterday, not me. "Ahhhhh, the Joooooooos control the Federal Reserve. It all makes sense now. Thanks."

There's no need to get excited about this unless I am bringing forth something you would prefer I didn't. If so, ask the Mod to delete it. Zip and it's gone. So, slow down Nick. Take it easy.

[Toddsterpatriot]

What does controlling shares in the Federal Reserve regional banks actually mean?

There is no such thing as controlling shares. Shareholders get no vote. They cannot buy or sell their shares. They cannot pledge them as security for a loan. They get no share of Federal Reserve profits. Sorry.

Would it give you any influence at all on how the Federal Reserve regional banks operated?

No.

[B4Ranch]

As whacked out as you are, sorry but I don’t believe that statement.

[Toddsterpatriot]

No. we really need a system that does not isolate those who make these decisions from the consequences of their mistakes.

Bear Stearns officers, employees and shareholders were isolated from the consequences of their mistakes? What about Countrywide? What about New Century Financial?

[Toddsterpatriot]

Toddsterpatriot was the one posting Anti-Semitic BS yesterday, not me. "Ahhhhh, the Joooooooos control the Federal Reserve. It all makes sense now. Thanks."

Wrong, I was mocking your anti-Semitic source.

[Toddsterpatriot]

Well, why don't you provide the vote totals for the last Fed rate cut and show how each of those families voted their shares? I wonder how close it was? Any hanging chads? Did they need a recount?

[AndyJackson]

No losses from grotesque misallocation of resources are occurring??? Reasonable men could not foresee the “shakeout” resulting from the expansion of a major industry based on average real estate prices in principal markets at 3 x (and rising exponentially( what can be supported by average family incomes?

[nicmarlo]

Guess you missed this part.......

In effect, the Federal Reserve decided last week to overstep its legal boundaries –
going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity.

[nicmarlo]

Examination of the charts and text in the House Banking Committee Staff Report of August, 1976 and the current stockholders list of the 12 regional Federal Reserve Banks show this same family control.

bttt!

[Toddsterpatriot]

In effect, the Federal Reserve decided last week to overstep its legal boundaries

Who said they overstepped its legal boundaries? Why should we believe that?

[nicmarlo]

Per the article: the bank – J.P. Morgan – was in no financial trouble.

AndyJackson: Not true. They were a counterparty to a lot of derivatives and would surely have been severely affected by the mess of a bankruptcy.

Really?!.........then:

Why Didn't Bear Use its Credit Lines?

....a stunning revelation came from a very senior Japanese executive, who sent these notes from a meeting with a top Japanese financial official:

The depth of the problems at Bear Stearns which led up to the buyout are not clear. Mr. X wondered why [Bear Stearns] did not try to use committed credit lines before agreeing to the JPM Chase deal. These lines were significant and included large amounts committed by Japanese banks, who are now relieved that they did not have to extend the credit.

...And even odder: those credit lines are still in place (although the downgrades by the rating agencies on Friday might have changed the pricing or reduced the size of facilities). Why did the Fed stump up a whole $30 billion? This seems a tremendous oversight on its behalf. Yes, those lines no doubt terminate upon a change in control, but if Bear draws them down, they become an obligation of JPM when the deal closes.

The Fed probably could have leaned on the banks to keep them in force. After all, they would be lending against a better balance sheet with JPM, although adding the Bear lines to whatever credit facilities they now have with JPM might put them over their limits for exposure to any one bank. But the Fed could have offered to backstop the excess, which would be a smaller commitment than the one it made.

After all, the whole logic of the Fed going to the lengths was to save the rest of the banking and securities industry, not Bear per se. The fear was that a bankruptcy filing would have lead to colossal disruption, possibly failures of other firms, and writedowns at other firms due to forced sales of securities. The Fed thus had considerable leverage to persuade other firms to go along, particularly since they were already obligated to lend to Bear. Syndicating the risk, particularly when the parties were already exposed, would have been a logical move.

Again, from the article:

The Fed did not act to save a bank, but to enrich one. Congress has the power to appropriate resources for such a deal by the representative will of the people – the Fed does not, even under Depression era banking laws. The “loan” falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a “loan” to J.P. Morgan was true, J.P. Morgan would be obligated to pay it back, period. The only point at which the value of the “collateral” would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.

[nicmarlo]

Personally, I could care less what you and other shills, who have sold this country out for greed or for their silver shillings.....I certainly don't believe what the likes of you has to say about anything.

The “loan” falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a “loan” to J.P. Morgan was true, J.P. Morgan would be obligated to pay it back, period. The only point at which the value of the “collateral” would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.

[Toddsterpatriot]

Mr. X wondered why [Bear Stearns] did not try to use committed credit lines before agreeing to the JPM Chase deal. These lines were significant and included large amounts committed by Japanese banks, who are now relieved that they did not have to extend the credit.

Oh, Mr. X, he's never led us astray before.....

I must force Speed Racer to use these credit lines.

[Toddsterpatriot]

Personally, I could care less

Right back at ya, sparky.

Maybe John P. Hussman, Ph.D. had a short position in JP Morgan stock? I'll wait until he files a law suit.

[nicmarlo]

Concerning the illegality of the Federal Reserve handing out monies to JP Morgan/Chase:

"On or about March 16th, 2008, George W. Bush, both personally and through his Treasury Secretary Henry Paulson, caused to be provided to JP Morgan/Chase a bribe⁽¹⁾ ultimately flowing from the United States Treasury in an amount not to exceed $30 billion dollars US, via The Federal Reserve, in order to induce JP Morgan/Chase to assume the liabilities and assets of Bear Stearns and Company at a price not determined in the free market or via public bidding, in violation of the limitations expressly set forth in The Federal Reserve Act of 1913, 12 USC Ch 6."

...the Federal Reserve “bailout” of Bear Stearns on March 16th constituted an unlawful act as it was in effect granting a payment of up to $30 billion US Dollars by The Federal Reserve to JP Morgan/Chase as part of the inducement to purchase Bear Stearns and Company.

The Federal Reserve proffered to the world that this was a “loan”, but...in fact it is no such thing. A loan that is “non-recourse”; in other words, there is no obligation upon the acquiring company (JP Morgan) to repay the loan should the posted collateral decrease in value or turn out to be worthless, is not a loan at all. It is in fact a payment conditional upon the default of the underlying collateral, and thus...appears to constitute in fact and in law an act of bribery.

Such a proffering of a public “backstop” would be legitimate when authorized by an explicit prior act of Congress, however, Congress has passed no law authorizing this action. Under the plain language of The Federal Reserve Act, The Fed is authorized to make loans under “exigent” circumstances to non-bank organizations (of which Bear Stears was), however, it is not authorized to make direct payments to “prop up” a failing organization nor is it authorized to make payments to enrich one private enterprise at the expense of another, or at the expense, either potential or realized, of the United States Treasury.

⁽¹⁾Bribery constitutes a crime and is defined by Black's Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or other person in discharge of a public or legal duty.

[nicmarlo]

Prove that there are no credit lines in existence. I lol at just the thought that such a “worthy” firm had no credit lines issued to it.

[nicmarlo]

The existence, or non-existence, of a lawsuit has no bearing on the fact that what the Federal Reserve did was and is illegal.

[Toddsterpatriot]

Prove that there are no credit lines in existence.

Prove that it matters.

[Toddsterpatriot]

has no bearing on the fact that what the Federal Reserve did was and is illegal.

Prove it was illegal.

[B4Ranch]

The legality issue was briefly, very briefly discussed on CNBC just after it was made public. I don’t recall who the commentators were but one of them said something all the lines of, “This stamps a hammer and sickle on everybodies mortgage papers, doesn’t it”.

That snapped my head into listening position but it was the close of the discussion. The other commentator mumbled a short comment and switched subjects.

[nicmarlo]

Which .gov do you shill for?

[nicmarlo]

Or is it the Federal Reserve for whom you are a .gov employee?

[Toddsterpatriot]

educatingfools.gov

[B4Ranch]

I'm sure somebody with the proper qualities will make the investigation happen or bury it, whatever is best for the nation administration and JP Morgan.

[nicmarlo]

My post #14:

n effect, the Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”