Wall Street profits from trades with Fed
Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.
(...) In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.
The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.
(...) The central bank’s approach to securities purchases was defended by William Dudley, president of the New York Fed, which is responsible for market operations. “We believe that opting for transparency is a greater good,” he said. “If we didn’t have transparency, we’d be criticised on other grounds.”
Nurturing banks back to health being one of the goals of current policies, paying a slightly higher price for it to sustain a high-minded principle sounds reasonable, right?
Well...
Except that the Fed using the argument of transparency is quite extraordinary considering that how vehemently it has refused to reveal how it is using the trillions it is providing to the (same) banking sector:
Under Bush:
Fed Refuses to Disclose Recipients of $2 Trillion
Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.
Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.
The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.
“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.
And under Obama:
Treasury, Fed criticized on TARP spending transparency
American taxpayers could end up spending as much as $23.7 trillion in bailing out the financial system, but the U.S. government isn't disclosing with enough transparency how the money is being spent nor how the investment is performing.
That is the conclusion drawn by Neil Barofsky, the special inspector general of the Troubled Asset Relief Program (TARP), who is set to testify Tuesday before the House Oversight and Government Reform Committee.
So: transparency towards investment banks is good, and a matter of high principle. Transparency towards taxpayers is dangerous, nd to be avoided at all costs.
I guess we should not be surprised by such breathtaking double standards: there is the usual consistency in that they favor the financial world and penalize taxpayers and/or citizens:
- bailouts of banks is good, but bailouts of homeowners (or industrial companies) is bad;
- real trillion-dollar holes in public accounts caused by bank bailouts are ok, but imaginary trillion dollar holes caused by social security commitments are evil
- accountability for destitute welfare recipients is paramount, but accountability for billion dollar transactions with banks would distort markets;
- budget deficits caused by the crash caused by irresponsible financiers are necessary, but budget deficits caused by basic sfety net needs are unsustainable;
... and so forth.
I guess we should not be surprised either that they are so blatant and open about it: nobody can or will do anything about it.