The Secret Bank Bailout

EconomicPolicyJournal.com

WEDNESDAY, JANUARY 20, 2010

The Secret Bank Bailout

There's one method that the Federal Reserve has been employing to shovel money to the bank elite that is rarely mentioned, though I hear the sums that have been shoveled are in the billions and they are showing up on the books of firms like Goldman Sachs as pure profit. It's really pure scam.

Here's what went on for months, according to traders familiar with the situation.

When the Federal Reserve buys and sells Treasury securities it does so through primary dealers. Goldman Sachs and JPMorgan are among the select elite firms that, naturally, got into this club.

So when the Fed wants to trade it goes to one of these primary dealers. In the past, to earn a profit, the banks would execute the trade and mark up the price a bit on a buy to the Fed (or mark down a bit to the Fed when they were selling for the Fed ). Since Fed traders have screens showing them where market prices are, in the past primary dealers were allowed small mark ups and mark downs in line with what banks were marking up and down for their other clients. It would be difficult for a primary dealer to get away with an outrageous mark up or down because the Fed trader would have a pretty good idea of where a trade should have been made.

Once the Fed and Treasury started shoveling money in every possible way they could think of to the elite banks, the word came down to Fed traders to "ease up" on the mark ups and down. Let the banks take a "healthy" mark up and mark down, they were told. I'm advised that the "healthy" mark ups and mark downs have resulted in the Fed overpaying on their trades with primary dealers to the tune of billions. These billions are looking like profitable skilled trades, when they are nothing of the kind. They are hidden gifts from the Federal Reserve that are generally unseen, unknown and will never be paid back.

Fed trades with the primary dealers need to be audited for the period starting Sept. 2008 to date. The prices of trades made by the primary dealers with the Fed need to be compared with market prices at the time to determine exactly how "healthy" these bonus mark ups and mark downs actually have been. Further, it needs to be determined if all primary dealers received the same treatment or were there favored primary dealers, who were shoveled more money than others.

An easy place to start with this investigation is for a Congressman to ask Fed chairman Bernanke, the next time he testifies, if this went on, and, secondly, ask Bernanke for a rough estimate as to how much of a benefit this was for primary dealers, and if all primary dealers benefited to the same degree.