Book Cooking on New Year's Eve


“Increasing the Fed’s transparency, openness and accountability has been one of my top priorities as chairman.” –Fed Chairman Ben Bernanke on the 100th anniversary of the Federal Reserve

Ben Bernanke is a big believer in transparency. Transparency, transparency, transparency. Hardly a day goes by that Bernanke doesn’t reiterate his commitment to transparency. He thinks the Fed should be as open and honest as possible. That’s why he named his new program something everyone could get a handle on. He named it “The Fed’s Overnight, Fixed-Rate, Full-Allotment Reverse Repo Facility.”

You can’t get much more transparent than that, can you?

Now the average working stiff probably doesn’t give a hoot about Bernanke’s new program. But that’s really a shame, because it looks like old Bennie is going to sock it to us one more time before he rides off into the sunset. Here’s the scoop:

US Treasuries have been plunging for the last few days because the Fed has been swapping tons of US debt with banks and other financial institutions so they can conceal the condition of their books from nosy shareholders. Sound familiar?

It should, because it all hearkens back to April 2010 when the Wall Street Journal ran a story about the way banks were using a dodgy accounting device to mislead investors about the true state of their financial health. Here’s a clip from the article in the WSJ:

“Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York. A group of 18 banks…understated the debt levels used to fund securities trades by lowering them an average of 42 per cent at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.” (“Big Banks Mask Risk Levels”, Kate Kelly, Tom McGinty, Dan Fitzpatrick, Wall Street Journal)

Whoa. Now that sounds a lot like what’s been going on for the last few days, now doesn’t it? Just take a look. This is from yesterday’s Wall Street Journal:

“A push to tidy up balance sheets among banks and other financial firms is driving surging demand at a Federal Reserve lending facility currently in a testing phase, market participants say.

Over recent days, financial firms that are eligible to participate in the Federal Reserve Bank of New York’s overnight fixed-rate reverse repurchase agreement facility have been very active.

On Monday, the penultimate day of 2013, participating firms, which include large Wall Street banks as well as many investment funds, borrowed $102.6 billion in Fed-owned securities in exchange for cash, at a rate of three basis points. On Friday, the total was a similarly hefty $95 billion, with $47 billion done on Thursday. Typical borrowing amounts have been much smaller…

Scott Skyrm, a repo market expert and former trader, said “year-end financing is most important to the repo market.” He explained that a wide range of market participants are likely engaged in what’s called “window dressing” and are shifting around securities and cash to make their balance sheets look less risky. Some financial firms will now be able to report to clients an active engagement with the risk-free Fed, while others are rejiggering their positions to reduce capital charges, Mr. Skyrm said.” (“Year-end Factors Drive Demand for Fed’s Reverse Repos” Wall Street Journal)

“Tidy up balance sheets”, you say? And what’s this gabble about “‘window dressing’ to make balance sheets look less risky”? Am I mistaken, or is their a bit of central bank chicanery going on here?

Keep in mind, that “window dressing” is a term that has one meaning alone, that is, to deceive shareholders. So, the question is, is the Fed actively involved in this practice?

Do you really need to ask?

Just for the sake of argument, let’s look back a few years to 2010 when it looked like the Federal Reserve Bank of New York was helping Lehman Brothers hide $50 billion in debt off its books with a maneuver called Repo 105. The NY Fed was headed by–you guessed it–“honest” Timmy Geithner. Here is a short recap of what transpired between the Geithner’s NY Fed and Lehman according to ex-regulator William Black and former NY governor Eliot Spitzer from an article on Huffington Post:

“The FRBNY [i.e., New York Fed] knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the Office of Thrift Supervision (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations.

The Fed’s behavior made it clear that officials didn’t believe they needed to do more with this information. The FRBNY remained willing to lend to an institution with misleading accounting and neither remedied the accounting nor notified other regulators who may have had the opportunity to do so… We now know from Valukas and from former Treasury Secretary Paulson that the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values.” (Time for the Truth” William Black and Eliot Spitzer, Huffington Post)

“Misrepresentations”? “Misleading accounting”? “Overstating liquidity”? “Smoke and mirrors”?

Hmmm? That sounds a lot like what’s going on right now, doesn’t it?

Of course, the financial media is doing a fine job of covering up these latest shenanigans by posting stories that provide fake explanations for the sudden spike in yields, like this gem from Bloomberg on New Years Day:

“Treasuries fell, pushing 10-year note yields to the highest level in more than two years, as gains in U.S. consumer confidence and home sales bolstered bets thee Federal Reserve will end bond purchases next year.” (Bloomberg)

Sorry, guys, but the yield on 10-year US Treasuries didn’t jump from 2.98% to 3.04% in 24 hours because investors suddenly felt all warm and fuzzy about the shitty economy. That just didn’t happen. The reason yields shot up was because the Fed was swapping boatloads of USTs for cash with the big boys on Wall Street. But, don’t take my word for it. Check out this clip from Bloomberg which I dug up under the Google heading of “reverse repos”:

“Usage of the Federal Reserve’s fixed-rate reverse repo facility surged before the end of the year as rates for borrowing and lending securities slide and banks shored up balance sheets.

The Fed Bank of New York drained $197.8 billion today, the largest amount in a test of its fixed-rate reverse repo facility that began operation in September, through 102 bidders. Yesterday, it drained $102.6 billion from the banking system with 75 bidders.” (“Fed Reverse Repo Facility Usage Soars, Rates Low at Year End“, Bloomberg) (Fri-$95 bil. Thurs-$47 bil)

Got that? That’s over $400 billion smackers in four effing days! That ain’t normal, pal. It looks to me like the Fed is helping these jokers cook the books again so Joe Shareholder doesn’t see that they’re leveraged up to their eyeballs and headed for another crackup.

But that can’t be right, after all, if there was any book-cooking going on, old transparent Bennie would let us in on it, right?


MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

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