Bloomberg Files Lawsuit Against Federal Reserve Over Failure To Disclose Loans

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
(Bloomberg)

This is precisely what many feared. Firstly, that $700 bn was nowhere near enough, and secondly, that without a precise protocol about what transparency means the Fed will hide behind smokescreens of its own making. In September, both Bernanke and Paulson testified that they wanted the whole process to be transparent, like children promising they could look after the party food without eating it.

Now, the Federal Reserve, with what seems like the obvious complicity of the Treasury, are defaulting on their promises. These are not just promises to Congress, they are also promises to the American people and, because of the scale of the problem, to the world at large. This is yet another indication that people should never trust bankers and governments. The primary aim of governments is to keep control, with the supposed will of the people being a subsidiary concern once the electoral begging season is over. The primary aim of central banks is to keep control of money and to make profits for their owners. The US government is a client of the Federal Reserve. If that government either does not or cannot extract the information they need, or they can and do but are just not telling anybody else, then they are negligent in their office. Remember that Congress was bounced into the bailout bill be apocalyptic visions from both Bernanke and Paulson. Because of all the arm-twisting that was necessary just to get the bill passed, the oversight rules were big on words and small on specifics.

The corporate media is also complicit in this propaganda. However, occasionally one hears the odd independent analyst make some good points. Yesterday there was one talking head trying to talk up Goldman Sachs stock, for no good reason other than that the price is now so low. But as we are seeing, stock prices can quickly go to zero. Anyway, our bullish advisor was then contradicted by a fund manager who said in his opinion Goldman Sachs was vulnerable to changes in staff at the Treasury and Fed. It is well-known that Henry Paulson and many others are all fully signed up members of Goldmans and that more than a helping hand has been given to this bank compared to others that were fed to the lions. Nobody yet knows what changes the new president will make and whether he too has been brought into the fold, but such uncertainty is precisely what worries investors.

The defenders of secrecy - as the Fed are not answering the phone - claim that disclosing every loan or agreement could signal to the markets that the companies involved may have greater problems than anticipated and could lead to further market volatility. But the main reason for all this largesse was precisely to bring back market confidence. The fact that professional investors and fund managers are worried means that everybody else should be too. This slow motion crash is nowhere near over and any pundit seen talking up stocks is doing it for their own interest rather than the investor's.

As is often the case with these big decisions taken with public money, the individual feels powerless to do anything. The huge public outcry at the bailout bill was fended away and after all the emails and phonecalls and huffing and puffing the house of fiat money is still standing. I still think there is one protest that the public can still do. Take your money out of the banks and put it into credit unions. They operate under different rules to commercial banks and are not exposed to the credit crisis because their rules stopped them from ever participating in either fractional banking or leveraged financial products.

Banks Demand Fantasy Fair Value

Investors locked horns with the banking industry on Wednesday on whether U.S. regulators should suspend or change accounting rules used to value assets such as mortgage-backed securities.

Fair value accounting, which requires assets to be valued at market prices, has been blamed for billions of dollars in writedowns by some U.S. banks and policymakers. But investors and accountants say the approach gives investors a clearer window into banks' balance sheets.

The U.S. Securities and Exchange Commission was charged by Congress to produce a study by early 2009 analyzing the effects of fair value accounting rules on financial firms' balance sheets and examining alternative accounting standards. The SEC held a public meeting on Wednesday to gather information on the accounting rules, also known as mark to market or FAS 157.

Charles Maimbourg, senior vice president of KeyCorp bank, told the SEC that what management intends to do with an asset should help determine the fair value of the asset.

"You have to include management intent. They have opinions, they are in the best position to do that," Maimbourg said.

Under the fair value rules, assets can be valued based on a simple price quote in an active market. But hard to value assets rely on management's best estimate derived from computer models.

Given that there is no market for certain securities such as those linked to mortgages, banks say they have been forced to value assets at fire sale prices they could fetch in the current market. That is misleading, they contend, because the banks do not plan to sell the assets immediately and their value could rise in the future.

"There are loans that banks hold and intend to hold," said Maimbourg. "The fact that the market will only pay us 20 cents ... (is not) a reason to mark it down to 20 cents on the dollar."

Patrick Finnegan, a director at CFA Institute, disagreed and said allowing management intent to influence the value of an asset was an "insidious" idea.

Reuters

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This is quite astonishing. The idea is that by sleight of hand companies can massage their balance sheets to make themselves look better. Indeed, I heard one senior commentator on Bloomberg some days ago openly say that as far as he was concerned banks should value these "assets" at whatever level is necessary to make their balance sheets look good! A blatant public plea to companies to swindle their investors.

And as for the pathetic quote above, that just because an asset is now worth 20% of its "value" as it might be worth more in the future companies should be allowed to reprice it, they should call it "unfair value accounting" or "fantasy book value". That is the whole point of fair value accounting - by booking it to 20% now, if the value should rise to say 50% then that's a profit compared to the present valuation. By creating a fantasy valuation companies are not only misrepresenting their liabilities to shareholders they are also going to be presenting losses for years to come as they chip away at these "liability assets".

As an example, if I have an account with a broker I need to place a deposit for every trade. The beauty of leveraging is that I can place a fraction of the real value of the trade. This increases profits in percentage terms. However, if suddenly the market for an instrument evaporates and the price drops to zero, my broker is going to phone me and ask me to either put up the money for the whole trade or close that trade. If I say to him that surely this is just temporary and that once markets stabilize the value will look less distressed, the broker is going to turn round and say to me,"Sure, you may be right, but that's your risk! At the moment it is worthless - put up the money on the assumption it remains worthless."

Surely if a market in a particular instrument just disappears, that is telling us something important. The problem with leveraged trades is that one can lose more money than one has put in. If I buy a stock at $100 but only need to deposit 10% of the price, my liability is just $10. If the price rises to $110 I have made $10 profit. Notice that the asset price has risen 10% but my profit is 100% - that's the nature of leveraged positions. However, if the price drops to $50 I am $50 down with only $10 deposit. I have to find the money to cover that extra $40 loss. As far as my leveraged trade is concerned my asset, the stock, is actually a liability, and will remain so until the price goes back to $100. Perhaps these bank "assets" are worth negative amounts of money. Perhaps these assets should be moved to the liabilities column. Then we can see their fair value.