This is a continuation of an essay I wrote yesterday concerning the Fed’s moves during the financial crisis. As a recap, here are those moves again:
- The Federal Reserve cutting interest rates from 5.25-0.25% (Sept ’07-today)
- The Bear Stearns deal/ Fed taking on $30 billion in junk mortgages (March ’08)
- The Fed opens up various lending windows to investment banks (March ’08)
- The SEC proposes banning short-selling on financial stocks (July ’08)
- Hank Paulson gets a blank check for Fannie/Freddie but promises not to use it (July ’08)
- Hank Paulson uses the blank check with Fannie/ Freddie spending $400 billion in the process (Sept ’08).
- The Fed takes over insurance company AIG (Sept ’08) for $85 billion.
- The Fed doles out $25 billion for the auto makers (Sept ’08)
- The Feds kick off the $700 billion Troubled Assets Relief Program (TARP) with the Government taking stakes in private banks (Oct ’08)
- The Fed offers to buy commercial paper (non-bank debt) from non-financial firms (Oct ’08)
- The Fed offers $540 billion to backstop money market funds (Oct ’08)
- The Feds agree to back up to $280 billion of Citigroup’s liabilities (Oct ’08).
- $40 billion more to AIG (Nov ’08)
- Feds agree to back up $140 billion of Bank of America’s liabilities (Jan ’09)
- Obama’s $787 Billion Stimulus (Jan ’09)
- QE lite (August ’10)
- QE 2 (November ’10)
I’m sure I left something out. But the above make it clear just how Ben Bernanke likes to tackle financial problems: printing money. On that note, we need to keep in mind just WHY the Fed did all of this: propping up the Big Banks and their gaping balance sheets.
The global derivatives market is completely unregulated and frankly no one knows how big it is. However, we DO know that US commercial banks alone have over $230 TRILLION in notional value derivatives on their balance sheets. Of this $230 trillion, 94%+ sits on just four banks’ balance sheets. They are:
The above chart reveals the derivatives exposure (in $ TRILLIONS) of the Fed’s darlings: the four banks that the Fed favored above all others during the 2008 disaster. As I wrote in the April 6 2011:
The Fed not only insured that they didn’t go under during 2008, but in fact allowed these firms to INCREASE their control of the US financial system.
Consider that JP Morgan took over Bear Stears. Bank of America took over CountryWide Financial and Merrill Lynch. Citibank and Bank of America were the only two banks to have their liabilities directly backed by the Fed ($280 billion for Citi and $180 billion for BofA).
Then there’s Goldman Sachs which was made whole from all AIG liabilities, received $13 billion in direct funding from the Fed, and was supported while ALL of its investment bank competitors either went under or were consumed by other entities, granting Goldman a virtual monopoly over the investment banking business (the firms that were merged with larger firms all laid off large portions of their employees and closed down whole segments of their business).
The ENTIRE 2008 episode was the result of the Credit Default Swap (CDS) market imploding (CDS, a type of derivatives, comprised about $50-60 trillion in value). And to claim that the Fed didn’t know why the Financial Crisis happened is a lie.
Indeed, as early as 1998, Ben Bernanke’s predecessor, Alan Greenspan, tol , soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, that if she pushed for regulation of the derivatives market it would implode the financial system.
Again, the Fed knew for over 10 years (possibly longer) that the derivatives market was a disaster waiting to happen. So believe me when I tell you than Ben Bernanke knew exactly what caused 2008.
Indeed, his actions make it clear just what he was fighting (a derivatives collapse) as 90% of his major moves were meant to prop up the four banks with the largest derivatives exposure.
Now, as stated before, 2008 was caused by the CDS market, which was $50-60 trillion in size. In contrast, the derivative market based on interest rates is $196 TRILLION in size.
In fact, derivatives based on interest rates represent 84% of ALL derivatives in the US.
So with that in mind, it is clear the Fed will be engaging in QE 3 and QE 4 and on and on for as long as it can. The reason? Because if the Fed loses control of the interest rate curve, it could trigger a systemic collapse that is FOUR TIMES as large as that of 2008.
So more money printing is coming. There’s no question of that.
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Good Investing!
Graham Summers.
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