Federal Reserve’s Bailout of the Rich and Well-Connected

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Published December 07, 2010

| FOXBusiness

The conflicts of interest and policy controversies in the Federal Reserve’s bailout of the financial system now include helping out millionaires, billionaires, foreign automakers, and companies whose executives sit on the board of directors of the U.S. central bank.

General Electric (GE), JPMorgan Chase (JPM), Goldman Sachs (GS), Banco Popular, SunTrust Banks (STI) and Fifth Third Bank (FITB) received “hundreds of billions of dollars in low-interest Federal Reserve loans at the same time that senior executives at these institutions served on the Federal Reserve’s regional board of directors,” says Senator Bernie Sanders (Ind.-VT) in a letter to Federal Reserve chairman Ben Bernanke Monday. 

Sanders backed a new clause in the Dodd-Frank financial reform bill that forced the Fed to disclose more than 21,000 transactions it entered into between Dec.1, 2007, and July 21, 2010, involving more than $3.3 trillion to float the financial system after it collapsed. 

The bank executives who sit on the Federal Reserve’s board of directors include James Rohr of PNC Financial Services (PNC), Kelly King of BB&T (BBT), James M. Wells of SunTrust Banks, Dan Hogan of Fifth Third Bank, Jamie Dimon of JPMorgan Chase, and GE’s Jeffrey R. Immelt.

“It is an obvious conflict of interest when CEOs of banks and large corporations who serve on the Fed’s board of directors receive cheap loans from the Fed,” says Sanders in his letter.

Sanders is also demanding emails, phone logs and correspondence between the bailed out banks and the Federal Reserve.

"We have received the letter and plan to respond to it," the Federal Reserve tells FOX Business.

The Fed’s new disclosures also show how the U.S. central bank dangerously became the supranational lender of last resort to both domestic and foreign companies, heightening deep concern in Washington that the central bank entered into a regulatory void with little to no help from foreign central banks.

The disclosures show in glaring, striking detail the profound absence of a global regulatory apparatus for dealing with a worldwide financial crisis involving large cross-border banks whose home countries have zero to no regulatory wind down authorities for their banking systems. 

Banks worldwide tapped into the Federal Reserve’s emergency lending programs more than 4,200 times for a total of $3.8 trillion, estimates show.

Senator Sanders’ staff found that “several billionaires and tens of multi-millionaires received cheap loans from the Fed to invest in securities backed by auto, mortgage, credit card, student and mortgage loans,” Sanders’ letter says. That Fed program is called the Term Asset-backed Securities Loan Facility.

The rich include Christy Mack, the wife of Morgan Stanley’s (MS) John Mack, billionaire businessman H. Wayne Huizenga; and Michael Dell, co-founder of Dell Computer (DELL), hedge fund manager John Paulson and private equity honcho J. Christopher Flowers.

Dell, Paulson and Flowers came to light in the disclosures through their ownership stakes in OneWest Bank. Also in the mix is the Barron Hilton Charitable Remainder Unitrust.

The senator also says that it appears the Fed provided loans to over 100 separate hedge funds, offshore funds, and other investment funds located in the Cayman Islands and other tax havens via the TALF program alone.

Corporations and wealthy taxpayers shelter an estimated $100 billion away from the U.S. tax system in offshore tax havens like the Caymans and other areas of the world.

Sanders also wants to know why the Federal Reserve bailed out the Korea Development Bank, the state-owned bank of South Korea, by purchasing more than $2.2 billion of its commercial paper, and why it also extended more than $40 billion to the central bank in South Korea.

The Federal Reserve also bought more than $2.2 billion in commercial paper from the state-owned central bank of Bavaria, and it gave more than $23 billion in loans to the Arab Banking Corp. based in Bahrain, with an interest rate as low as a quarter of a percentage point. The Federal Reserve also lent more than $9.6 billion to the Central Bank of Mexico.

And the Federal Reserve helped foreign automakers by purchasing nearly $5 billion in commercial paper from Toyota and Mitsubishi. It also lent investors money to invest in securities issued by foreign carmakers such as the BMW Vehicle Lease Trust, the Nissan Auto Lease Trust, the Volkswagen Auto Lease Trust and Honda Auto Receivables.

“We have lost over five million American manufacturing jobs since 2001, and our bridges highways, and schools are crumbling,” says the Senator. “Yet there are startling examples of massive levels of financial assistance to foreign governments and banks under these programs.”

At the same time, while the Fed says it has been repaid on its credit facilities, the policy questions Washington lawmakers now must grapple with include whether the interest rates the Fed charged on its loans fully covered the risk it was entering into—in many cases the central bank charged nearly zero percent, meaning it effectively gave away free money.

And while the Fed justifies its lending as being fully secured and made to sound borrowers, fresh disclosures provide little detail about the types and credit valuations of the collateral it accepted—and many of the borrowers were insolvent or on the brink of collapse, including Citigroup and AIG.

The Federal Reserve has also declined to disclose the specific details on the collateral, as well as the credit ratings of the collateral, it accepted as backing for $885 billion in emergency loans. "Frankly, much of the information that you have provided on your website raises bigger questions than it answers, and some of the information mandated by the law appears to be missing," the senator says.

Estimates show that 36% of the collateral pledged to the Fed for overnight funding under its primary dealer credit facility came in the form of equities or bonds ranked below investment grade. Another 17% were unrated credit or loans.

Morgan Stanley and Merrill Lynch pledged the most amount of low-grade collateral after Lehman Bros. collapsed, the Fed disclosures show.

"The emergency response appears to any objective observer to have been a clear case of socialism for the rich, and rugged free market capitalism for everyone else," Senator Sanders wrote in his letter to Mr. Bernanke.

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