Just ahead of Ron Paul's latest Fed hearing, a Fed paper questions blanket bailouts

Is the Fed saying goodbye to moral hazard? Likely not. At least, not for the Fab Five (or is it the Turby Twenty), who will get their liquidity fixes until the Fed no longer presides over the POMO opium fields. For everyone else, though, a new NY Fed policy paper seems to float just this idea: that a resolution procedure (read--gasp--breakup) might be preferred to providing blanket liquidity to all takers. That is, Kalamazoo S&L might starve at the discount window (or similar) waiting for Zimbabwe Ben to drop some morsels, while JPM and Goldman dine at the table on lobster and tenderloin.

Though the NY Fed paper has undoubtedly been in the works for months, if not longer, the timing is interesting. Only today, the top lawyers of the NY Fed and the Board of Governors will get grilled in front of Ron Paul's monetary committee in a hearing entitled "Federal Reserve Lending Disclosure: FOIA, Dodd-Frank, and the Data Dump". Of particular interest will be why certain (sometimes unexpected) names pop up so frequently in the thousands of pages of bailout docs released by the Fed.

The research paper is called, "A Model of Liquidity Hoarding and Term Premia in Inter-Bank Markets" and primarily focuses on rollover risk as a determinant of market stress and freezes. (Unfortunately, it is left to the reader to extrapolate to the logical extreme and wonder what happens when rollover risk of the US debt portfolio itself surfaces, concurrent with the last marginal buyer of Treasurys losing all credibility).

The interesting part is the Policy Conjectures on page 22, which we reproduce in full (emphasis and brackets ours):

4.3 Policy conjectures

It is important to consider cases where the lending banks' precautionary demand for liquidity may be excessive relative to its socially efficient level. In turn, this would suggest possible policy interventions to address excessive hoarding of liquidity by highly leveraged banks. Is it desirable to have an unconditional (traditional) lender of last resort (LOLR) in which a central bank provides liquidity to strong as well as weak banks? Or would it be better to have a solvency-contingent LOLR in which the central bank provides liquidity only to sufficiently strong banks? And should there instead (or in addition) be a resolution authority that forces weak banks to reduce their rollover risk? We conjecture that (i) a resolution authority to address weak banks' excess leverage and rollover risk, and (ii) a solvency-contingent LOLR by a central bank (that itself has lower credit and rollover risk than its banks), are likely to be more effective interventions than the traditional, unconditional LOLR.

Such welfare analysis can also help understand the impact of interventions that were put in place during the crisis of 2007-09, such as the Term Auction Facility (TAF) by the Federal Reserve for 28-day and later 84-day loans. We conjecture that through these facilities, the Federal Reserve, acting as a relatively risk-free intermediary, intermediated liquidity hoardings (reserves) of riskier banks to banks that participated in the facilities. This intervention should have increased volumes of lending to the real sector by the participating banks. [Note, lending in the real sector did not pick up, so is this a tacit suggestion that the Fed exacerbated the problem with its bailouts?] Note that under the alternative view, that stress in inter-bank markets is caused purely by borrower credit-risk problems, lending by central bank to banks at lower than market rates would effectively constitute a "bail out" of these banks and engender severe moral hazard. However, a resolution authority to address weak banks' leverage and rollover risk would be a robust intervention also under this alternative view.

Though carefully couched in academic objectivity, this is probably the strongest internal rebuke we've read of Federal Reserve intervention during the crisis. That bank resolution is discussed at all might signal a shift in priorities at the Fed, or perhaps hint of the pressure it's come under. Or, maybe this is simply a prelude to a renewed turf battle between the lethargic FDIC and the profligate Fed. We might even entertain the notion that one or more token TBTF banks could go down. Watch out Blankfein.

Keep Your Hands Off My FaceBook, George Soros; Filter Bubbles and the New P.C. Search

I like a good TED talk. Mainly the tech and scientific ones. The social ones tend to get gummed up with statist, interventionist groupthink. [Al Gore is always in the intro--cringe.] I thought this one about online filter bubbles by Eli Pariser would be a tech one.

Eli said he was raised in the sticks of Maine. He thought the internet would bring him and everyone else in the world together. Instead, Facebook and Google are filtering our content based on what they think we want to see. Artificial reinforcement of cognitive bias is the result. Libs get search results with links to Daily Kos and Salon (just kidding, you wish Salon). Repubs can only see Palin supporters in their FaceBook feed. Okay, somewhat creepy and big brotherish.

He had me until he started talking about solutions. He said, be afraid of the cold, heartless algorithmic gatekeepers. You need human gatekeepers with ethics to monitor and direct the algos. Just like the ethical journalists of old media past. He said journalism, imperfect as it is, "got us through the last century". In fact, the mainstream media has been the perennial go-to apologist and enabler of state sanctioned murder and theft. The ethical media helped to nearly wipe us off the planet.

At this point, Eli smells like just another shill for the elite. A quick Google search confirmed my bias, as the #1 result was his paraphrased Wikipedia entry (apparently, Google knows I dig facts). He is the board president of Soros' MoveOn.org. So at least we know which power center he serves.

Eli closes with an impassioned plea to the audience, with a special shout out to Google founders "Larry and Sergei", who happen to be in the audience. Please make the internet a better place by bringing people together. Please let our ethical human gatekeepers into your PageRank TM formula. [No need to fuss with a simple "on/off filtering" toggle.] Rousing applause. Standing O.

I'd like to thank the Academy.

Sorry, but this smacks of the Fairness Doctrine. I was wondering how they would creep in control over the internet. Overt control (internet kill switch) sets off too many alarm bells (but it's still in the pipe). In the future, Search will be mandated to be socially responsible, community conscious and to celebrate diversity. In the future, Search will be less useful where it counts. Rather than impose content balancing on individual sites, the chilling effect will come top down from the largest portals.

Industrious seekers of information will still be able to self-direct their propaganda flow with some trouble. Meanwhile, the masses will be spoon fed the standard diet of oligarch-directed propaganda. Everything will be back to normal. The Google home page will be the new Walter Cronkite. Here's what to think, world.

It's the standard interventionist MO. Create a false problem. Solve it with more control by the lettered welfare overlords. Maintain the illusion of choice. In this case, the means of control of information itself are at stake.

Somewhere hot, Goebbels smiles.

Revealed: Fed Graphs of the Big Banks' Borrowings During the Crisis; Bonus: The Fed's $102 Trillion in Lending Since 2000

Over at EPJ Central, Robert Wenzel is all over the $80 billion so-called ST OMO Federal Reserve facility that took in dubious mortgage backed securities (MBS) in exchange for cash lent for 28 days. He writes:

Credit Suisse, Goldman Sachs and Royal Bank of Scotland each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public.

No wonder Goldman was able to withstand the panic period that took Lehman Brothers down. They were being propped up by the Fed.

The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc,reports Bloomberg.

Units of 20 banks were required to bid at auctions for the cash. They incredibly paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent. For a large portion of that period, the Fed Funds rate was over 2.00% Got that? Goldman and the other banksters could borrow at 0.01% and loan out in the Fed Funds market at over 2.00%. ---all in secret.

We dug through our Mark Pittman FOIA files and found the exact document used by Bloomberg and others to estimate the borrowings. Below are the relevant graphs from one "Chart Pack of Market Monitoring Metrics.pdf". There are various snapshots of this graph series in the file, some of which were emailed to Geithner himself when he was still at the NY Fed. Most interesting is one emailed on January 30, 2009, which contains the most comprehensive collection of banks, conveniently overlaid with their CDS spreads. [Would we go so far to say the Fed simply shovels money at the big banks whenever their risk trades too high? Yes.]

We can see Goldman Sachs was borrowing heavily during December, 2008. Wonder if they were among the lucky to secure the 0.01% stop-out interest rate on December 30.

A similar series from March, 2009 (look who's listed first again):

Lending cash for MBS is nothing new to the Fed, however. Below shows the Fed's temporary open market operations (also called repos) for MBS since inception of data publication in July, 2000.

All in all, $3.057 trillion in less than a decade. And this does not include Treasury and Agency lending, which bump up the total a bit to $102.067 trillion over the same time period:

To be fair, many of these operations only have a short term date, after which the money must be repaid. Some only a day later. If we eliminate the repos of nine days and under, we still have an eyewatering $28.520 trillion in lending, with an average term of 21 days:

Are we beginning to see where all that money came from that fueled the housing boom and the commodities bull market? The only reason the trend tapers off beginning in early 2008 is because the Fed switched to permanent operations, or outright purchases of securities, which are not shown.

The single tranche open market operations (ST OMO) discussed at the top are characterized by a one day forward settlement with 28 day terms, while most temporary OMOs/repos are same day settlement, either 14 or 28 day term. The regular $15 and $20 billion ST OMOs conducted from March 2008 to December 2008 totaled $840 billion, of which about $80 billion was outstanding at any given time (which is the figure used in the articles). However, there was an addition contribution of $205 billion total same day settlement MBS repos over the same time period, typically with 14 day terms. This would add about $10 billion outstanding at any time.

One final chart to zoom in from May 2007 (when MBS lending picked up again) filtered to show only MBS repos of 14 day terms and over):

The pickups in activity correlate with well-known macro disruptions, especially the Bear Stearns melt-down timeline (and the so-called quant melt-down in August, 2007). If we were investigating the Fed's lending, we might hone in on the specifics of the Fed's repo program since inception (presumably prior to the inception of data publication in July 2007). It has largely avoided scrutiny in the wake of all the new Fed programs in the last few years, yet it was the principal tool of monetary expansion during the period that led to the greatest economic collapse since the Great Depression.

As ZeroHedge, notes it would also be nice to question Goldman Sachs COO Gary Cohn on why he perjured himself in front of Congress, falsely testifying that Goldman only once used another Fed facility, the discount window.

And, we're still wondering why Goldman CFO David Viniar and MD David Lehman testified that they knew nothing of AIG funds landing in the bank's private coffers when it is clear from internal Fed emails when this fact was known at the highest levels at the Fed.