The AIG Bailout: Why Was the Onus Placed on Taxpayers? 32 comments
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Yesterday, amidst massive political and public opinion pressure, AIG revealed the counterparties they had paid out money to since receiving bailout money from the US government (AIG Press Release).
The payouts are as follows:
- $22.4 billion for collateral postings under Credit Default Swaps contracts AIG wrote
- $24.6 billion net to buy toxic assets from institutions on which AIG had also sold Credit Default Swaps on those assets to those institutions
- $43.7 billion to pay back securities lending counterparties
- $12.1 billion to states under guaranteed investment agreements
- TOTAL: $102.8 billion
In a front page New York Times article from today (“AIG Lists Which Banks It Paid With US Bailout Funds”), we see that Goldman (GS) received about $13 billion, Societe Generale (SCGLY.PK) and Deutsche Bank (DB) about $12 billion each, about $7 billion to Merrill, $8.5 billion to Barclays (BCS), $5 billion to Bank of America (BAC) and UBS, $2.3 billion to Citi (C) and $1.5 billion to Wachovia.
So now we know where all this government bailout money has gone and the systematic links between AIG and other huge, systemically important financial institutions.
Let’s review the categories so we understand why the payouts were made in the various instances:
(1) AIG’s Financial Products division, the 377 person unit based in London, that everybody knows wrote these CDSs that torched the entire company, paid out $22.4 billion in collateral to parties it sold these contracts to. It is required to post this collateral as the value of the securities it insures declines in value and also if its own credit rating gets reduced (which it has). (Anybody who wants to learn more about AIG’s Financial Products division needs to read Gretchen Morgenson’s superb New York Times Profile, “Behind Insurer’s Crisis, Blind Eye to a Web of Risk”, September 28, 2008, A1).
(2) Another $24.6 billion from the Financial Products division’s reckless gambles went to buy up toxic assets from institutions it also wrote insurance (CDS) policies on those assets. This way AIG just owns the assets and has no liabilities to these counterparties anymore.
(3) Interestingly, the $43.7 billion to securities lending counterparties comes from AIG’s Investment division. This division manages AIG’s huge investment portfolio which it gets from insurance premiums and then has to be used to pay out future claims.
To juice returns on the investment portfolio, AIG lent out securities to financial institutions in exchange for cash which it then invested in mortgage backed securities! Most insurance companies that do this, invest the cash in very liquid, safe short term vehicles like treasuries and commercial paper to juice returns a bit but conservatively. As the value of the mortgage backed securities bought collapsed, they couldn’t pay back the money they owed to their securities lending counterparties.
It is noteworthy that this money isn’t the fault of the Financial Products division but the Investment division which apparently also did some really stupid stuff. (Anybody who wants to read more about this needs to read The Wall Street Journal’s “An AIG Unit’s Quest to Juice Profit: Securities Lending Business Made Risky Bets. They Backfired On Insurer” (subscription required), February 5, 2009, C1 (e-mail for a link if you want to read it - fascinating reading!)) (Hat Tip The Economics of Contempt).
(4) Finally, $12.1 billion went to states who left money raised from bond issuance in AIG’s hands to manage until they needed it. What AIG did with this money I'm not sure, but I’m thinking something stupid.
So this is very informative and interesting information. We can kind of see now how exposed other financial institutions were to AIG, though this is still an ongoing and unfolding process, and what kinds of hits they might have had to take had AIG went under. We can understand why the Fed did what it did.
Bottom line, however, is that taxpayers are paying out money to all these financial institutions when they would have had to take losses on their AIG exposure had AIG went under. They could have fought over whatever AIG had in a bankruptcy proceeding based on their claims. Instead, the taxpayer is making them whole. Maybe there would have been systemic meltdown, maybe not. But why not let the financial institutions who have the exposure take the hit? Why do taxpayers have to bail them out?
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This article has 32 comments:
Second, the citizens of this country ultimately run this country - it's called a democracy - and for the last 8+ years we did a pretty crappy job of it. We need to vote in mature adult responsible leadership who will (a) regulate the financial system to ensure companies don't write checks that their ass can't cash, and (b) use the Sherman act to prevent companies from becoming so big that their failure presents a systemic risk.
To expect wall street to not take advantage of opportunities to privatize profits and socialize wealth is to expect more from them than any of us expect from ourselves. This is why regulation is important.
You wouldn't leave your cash on the sidewalk outside and then call the cops when it's gone, would you?
> jack
that "equity" is not tangible at the moment those w/o a job and home....
Really now!
1. Do you really believe that equity is gonna be worth much in the future, when AIG STILL NEEDS more bailout money?
2. Do you really believe that the USA is STILL a Democracy?
3. Do you really believe that the US taxpayer ultimately runs the USA and controls the country?
The answer is simple - to save Goldman Sach's worthless a$$. Hammerin Hank had his buddies' back. Its also the reason why Lehman had to fail.
Greg, great article, but for one point. They wouldn't have been fighting over the assets in bankruptcy court, because (according to what I've read) derivatives holders can make claims on a the issuer BEFORE it goes to bankruptcy. So AIG would have been -- and still could be --stripped bare of any assets by the gamblers and high-rollers, leaving NOTHING for bondholders, while the taxpayers still get stuck with the cost of making whole the policyholders of the basic insurance business.
Ugly, ugly, but that's the way the "free market can do no wrong" people wrote the law.
Paulson never had the interests of this country at heart and along with the Federal Reserve Bank, which we cannot forget is a PRIVATE BANK, not a government entity, whose only goal is to MAKE PROFITS, orchestrated this not so subtle panic in order to scare the population into accepting his plan for Bail-out or the economy would crumble and Americans would lose their jobs, their house, their savings plunging this country into the darkest depression.
BULL$$$IT.
What he saw was the biggest opportunity since the Depression, for the financial institutions to enrich themselves and himself ipso facto. The people bought it then and they are buying it now. Who will pay for it? The American people. Who will benefit from it? The Federal Reserve Bank and other Banks Paulson's plan was created for.
Look at who is asking for bail-out money and then look what this bail-out money is used for: to pay other similar companies who were asking for bail-out money but spent it on acquisitions and outrageous bonuses and not on helping people keep their house by renegotiating their mortgage etc... So CORP1 asks for $100 billion or it will go bankrupt. CORP1 gets it and spends it foolishly knowing that there are more billions coming from CORP2 using their billions of bail-out money to fulfill whatever contractual obligations they have with CORP1 and then asks for another $100 billion because they used the money to pay what they owed CORP1 and of course to pay for obscene bonuses until there is no money left.CORP1 and CORP2 GET IT ALL. THE AMERICAN PEOPLE GET NOTHING BUT DEBT.
The FEDERAL RESERVE BANK, major BANKS, WALL STREET financial corporations, the with the help of PAULSON and the CORRUPT BUSH ADMINISTRATION used the ignorance and credulity of the masses to acquire more power, influence and money. It is just appalling to see the immensity of the fraud taking place. Hopefully something will be done by the OBAMA administration to
correct this injustice and stop these companies and their corrupt CEOs and let the people know what is really going on.
It is well known that as long as THE FEDERAL RESERVE BANK will exist we will always be in debt. By contracting the money supply or expanding it like they did in the last few years they dictate and create a healthy economy or a very troubled one like is happening now. They are responsible for inflations and depressions.THE FEDERAL RESERVE BANK serves no purpose other than enrich its owners and should be abolished so that the US GOVERNMENT can regain control of its currency and finances and stop this nonsense by issuing its own money interest free instead of paying billions of money in interest to the owners of the FEDERAL RESERVE BANK, a PRIVATE BANK.
You think that is conspiracy theory? No, it is better than theory, it is conspiracy FACT.
See article below:
"Banks Counted on Looting America’s Coffers"
tinyurl.com/bkezmt
or
www.nytimes.com/2009/0...
Nuh-huh:
"Second, the citizens of this country ultimately run this country - it's called a democracy - and for the last 8+ years we did a pretty crappy job of it.
"
The government is run by 17,000 lobbyists Nuh-huh; in the employ of the rich plue influential who also happen to run Americas major corporations. As such, if you think the people have more say than the 14,000 lobbyists, then you also believe the Bernanke/Paulson $700 billion bail-out was passed b/c of the wished of the people and you might also then even consider Venezuelan President Hugo Chavez to be capitalist in temporary disguise as a socialist...
The lies go on and the dupes do nothing.
It has no reason to exist and should be abolished.
On Mar 16 11:57 PM Micajah wrote:
> I admit right up front that I don't have any idea just what the Federal
> Reserve Bank is, but I wonder: since it was the Federal Reserve
> Bank that bailed out AIG, how are the taxpayers on the hook?
Now to the question of why the onus is on taxpayers. The simple answer is that they had no voice and lots of cash. Now our wallets are less delicious looking to the vultures. They may actually have to work to get more money out of us.
The market is up but few are cheering. We need reform not the printing of reckless and expensive get out of bankruptcy cards.
The Treasury Secretary and the President and many of his men are now gone, but not all. Geithner and Bernanke remain in the most powerful positions in the world in control of the US money supply and monetary and fiscal policy. Obama placed his faith in these same men. The arguments made are the same ones.
THEY ARE ALL WRONG. THERE IS NO CASE FOR LEGITIMACY OF A TAXPAYER BAILOUT!!!
You may also note that a foreign subsidiary of AIG was the culprit in writing the credit default swaps and corrupting the "prudent investor rule" for assets that back insurance contracts. Why does the US back foreign financial institutions and their gambling debts?
This bailout makes a mockery of the purpose of Treasury securities and insured bank deposits and pension funds. The money was needed for that purpose. Now, the money is gone. Do you believe that AIG or any of the co-conspirators in this scheme are going to pay us back?
Where are the Marines when you need them? Oh, right, they're off in some desert fighting to protect us from harm. We need a few squads to clean out enemy snipers in London and New York.
Recent Chairmen of this Board:
Alan Greenspan (August 11, 1987 – January 31, 2006)
Ben Bernanke (February 1, 2006 – )
why is Ben Bernanke still in this position??????
You get it.
The entire country has gone mad about the taxpayer bailout of AIG. Except that is all wrong. The AIG bailout came from the Federal Reserve from "funny" money that Bernanke/Federal Reserve creates (out of thin arir) by computer entry (as Bernanke said on "60 Minutes") in banks where Fed has accounts.
AIG bailout is not in the budget, deficit, nor a taxpayer debt. If AIG fails to pay back the Fed, it would seem that the money just goes up in smoke like a restriction of the money supply. Too bad they did not do all the bailouts with Fed funny money. That would be better for the taxpayers.
On Mar 16 05:15 PM cabanker wrote:
> Am I the only one who questions Paulson's motives of bailing out
> AIG? From the start I figured Goldman was going to be the largest
> beneficiary. It's certainly looking that way now.
"On December 23, 1913, the Federal Reserve System, which serves as the nation's central bank, was created by an act of Congress. The System consists of a seven member Board of Governors with headquarters in Washington, D.C., and twelve Reserve Banks located in major cities throughout the United States."
"Federal Reserve Banks were established by Congress as the operating arms of the nation's central banking system. Many of the services provided by this network to depository institutions and the government are similar to services provided by banks and thrift institutions to business customers and individuals. Reserve Banks hold the cash reserves of depository institutions and make loans to them. They move currency and coin into and out of circulation, and collect and process millions of checks each day. They provide checking accounts for the Treasury, issue and redeem government securities, and act in other ways as fiscal agent for the U.S. government. They supervise and examine member banks for safety and soundness. The Reserve Banks also participate in the activity that is the primary responsibility of the Federal Reserve System, the setting of monetary policy."
On Mar 17 01:25 PM Chancer wrote:
> Micajah:
>
> You get it.
>
> The entire country has gone mad about the taxpayer bailout of AIG.
> Except that is all wrong. The AIG bailout came from the Federal Reserve
> from "funny" money that Bernanke/Federal Reserve creates (out of
> thin arir) by computer entry (as Bernanke said on "60 Minutes") in
> banks where Fed has accounts.
>
> AIG bailout is not in the budget, deficit, nor a taxpayer debt. If
> AIG fails to pay back the Fed, it would seem that the money just
> goes up in smoke like a restriction of the money supply. Too bad
> they did not do all the bailouts with Fed funny money. That would
> be better for the taxpayers.
They operate without any intervention from the government and control the money supply, set interest rates etc...The FRB is a privately owned bank.
The banks use a fractional reserve system which allows them to loan 9 times more money than they actually have in deposit with the Federal Reserve Bank. A really stupid system where money loaned is backed by virtually nothing since they loan 9 times what they have in reserve.
Now prove me that I'm wrong and I will be happy to retract all I said and apologize for being so ill informed.
On Mar 17 04:03 PM adcva wrote:
> Lavalson, get a grip. Post whatever conspiracy theories you like,
> but label as such. The Fed is not in any way a private bank. It
> is the bank of the United States. Go to federalreserve.gov (that's
> .gov, not .com). Here's a preview of what you'll find...
>
> "On December 23, 1913, the Federal Reserve System, which serves as
> the nation's central bank, was created by an act of Congress. The
> System consists of a seven member Board of Governors with headquarters
> in Washington, D.C., and twelve Reserve Banks located in major cities
> throughout the United States."
>
> "Federal Reserve Banks were established by Congress as the operating
> arms of the nation's central banking system. Many of the services
> provided by this network to depository institutions and the government
> are similar to services provided by banks and thrift institutions
> to business customers and individuals. Reserve Banks hold the cash
> reserves of depository institutions and make loans to them. They
> move currency and coin into and out of circulation, and collect and
> process millions of checks each day. They provide checking accounts
> for the Treasury, issue and redeem government securities, and act
> in other ways as fiscal agent for the U.S. government. They supervise
> and examine member banks for safety and soundness. The Reserve Banks
> also participate in the activity that is the primary responsibility
> of the Federal Reserve System, the setting of monetary policy."<br/>
It is legalized robbery. Without the FRB we could regain control of issuing our own money and get out of debt very quickly. Am I wrong?
On Mar 17 04:03 PM adcva wrote:
> Lavalson, get a grip. Post whatever conspiracy theories you like,
> but label as such. The Fed is not in any way a private bank. It
> is the bank of the United States. Go to federalreserve.gov (that's
> .gov, not .com). Here's a preview of what you'll find...
>
> "On December 23, 1913, the Federal Reserve System, which serves as
> the nation's central bank, was created by an act of Congress. The
> System consists of a seven member Board of Governors with headquarters
> in Washington, D.C., and twelve Reserve Banks located in major cities
> throughout the United States."
>
> "Federal Reserve Banks were established by Congress as the operating
> arms of the nation's central banking system. Many of the services
> provided by this network to depository institutions and the government
> are similar to services provided by banks and thrift institutions
> to business customers and individuals. Reserve Banks hold the cash
> reserves of depository institutions and make loans to them. They
> move currency and coin into and out of circulation, and collect and
> process millions of checks each day. They provide checking accounts
> for the Treasury, issue and redeem government securities, and act
> in other ways as fiscal agent for the U.S. government. They supervise
> and examine member banks for safety and soundness. The Reserve Banks
> also participate in the activity that is the primary responsibility
> of the Federal Reserve System, the setting of monetary policy."<br/>
On Mar 17 04:03 PM adcva wrote:
> Lavalson, get a grip. Post whatever conspiracy theories you like,
> but label as such. The Fed is not in any way a private bank. It
> is the bank of the United States. Go to federalreserve.gov (that's
> .gov, not .com). Here's a preview of what you'll find...
>
> "On December 23, 1913, the Federal Reserve System, which serves as
> the nation's central bank, was created by an act of Congress. The
> System consists of a seven member Board of Governors with headquarters
> in Washington, D.C., and twelve Reserve Banks located in major cities
> throughout the United States."
>
> "Federal Reserve Banks were established by Congress as the operating
> arms of the nation's central banking system. Many of the services
> provided by this network to depository institutions and the government
> are similar to services provided by banks and thrift institutions
> to business customers and individuals. Reserve Banks hold the cash
> reserves of depository institutions and make loans to them. They
> move currency and coin into and out of circulation, and collect and
> process millions of checks each day. They provide checking accounts
> for the Treasury, issue and redeem government securities, and act
> in other ways as fiscal agent for the U.S. government. They supervise
> and examine member banks for safety and soundness. The Reserve Banks
> also participate in the activity that is the primary responsibility
> of the Federal Reserve System, the setting of monetary policy."<br/>
You haven't heard of the Bureau of the Public Debt before? We're a small agency within the Department of the Treasury.
Our job is to borrow the money needed to operate the federal government and to account for the resulting debt. In a nutshell, we borrow by selling Treasury bills, notes, and bonds, as well as U.S. Savings Bonds; we pay interest to investors; and, when the time comes to pay back the loans, we redeem investors' securities. EVERY TIME WE BORROW OR PAY BACK MONEY,IT AFFECTS THE OUTSTANDING DEBT OF THE UNITED STATES.
On Mar 17 11:10 PM Lavalson wrote:
> adcva you get a grip and check who are the members of the Federal
> Reserve Banks. You will see that the members are private banks and
> that they are paid dividends by the FRB. They fund themselves by
> creating money out of thin air. They are not part of the government
> but the President chooses its chairman.
> They operate without any intervention from the government and control
> the money supply, set interest rates etc...The FRB is a privately
> owned bank.
> The banks use a fractional reserve system which allows them to loan
> 9 times more money than they actually have in deposit with the Federal
> Reserve Bank. A really stupid system where money loaned is backed
> by virtually nothing since they loan 9 times what they have in reserve.
>
> Now prove me that I'm wrong and I will be happy to retract all I
> said and apologize for being so ill informed.
>
> On Mar 17 04:03 PM adcva wrote:
So who owns the Fed? Although it is set up like a private corporation and member banks hold its stock, the Fed owes its existence to an act of Congress and has a mandate to serve the public. So the most accurate answer may be that the Fed is "owned" by the citizens of the United States.
Notice that they put "owned" in quotation marks because it is not owned by the people but by private stock holders who are private banks. So if there was any doubt in your mind as who owns the FED now you heard it from the horse's mouth. So get a grip ADCVA! and get your facts straight before accusing me of posting conspiracies. It is because of ignorant people like you who think they know everything that we got stuck with an idiot like Bush for 8 years.
On Mar 17 04:03 PM adcva wrote:
> Lavalson, get a grip. Post whatever conspiracy theories you like,
> but label as such. The Fed is not in any way a private bank. It
> is the bank of the United States. Go to federalreserve.gov (that's
> .gov, not .com). Here's a preview of what you'll find...
>
> "On December 23, 1913, the Federal Reserve System, which serves as
> the nation's central bank, was created by an act of Congress. The
> System consists of a seven member Board of Governors with headquarters
> in Washington, D.C., and twelve Reserve Banks located in major cities
> throughout the United States."
>
> "Federal Reserve Banks were established by Congress as the operating
> arms of the nation's central banking system. Many of the services
> provided by this network to depository institutions and the government
> are similar to services provided by banks and thrift institutions
> to business customers and individuals. Reserve Banks hold the cash
> reserves of depository institutions and make loans to them. They
> move currency and coin into and out of circulation, and collect and
> process millions of checks each day. They provide checking accounts
> for the Treasury, issue and redeem government securities, and act
> in other ways as fiscal agent for the U.S. government. They supervise
> and examine member banks for safety and soundness. The Reserve Banks
> also participate in the activity that is the primary responsibility
> of the Federal Reserve System, the setting of monetary policy."<br/>
just one last thing. So you know, I made almost $1,000,000.00 on the stock market since last week. You are not talking to some ignorant bozo who has no clue how money is made and spent. I resent your comment about my posting "conspiracy theories" when you have no clue what you are talking about. And nowhere on the federalreserve.gov website does it say that the Federal Reserve Bank is a part of the government. Actually it answers its own question "what is the Fed?" with "it was created by Congress...." but fails to state that it is part of the government . In fact it was created on december 23rd when they waited until almost all of the members of Congress were away for the Christmas Holidays but a handful of corrupt politicians paid by the Bankers to vote the Act as law. Wilson signed it the same day, I believe and this was the greatest fraud ever perpetrated on the american people. Only a few weeks before Congress had voted the Income tax law ,which was never ratified by all the states but that's another story, but which was to guarantee through direct taxation of its citizens that the US government would be able to repay their loan to the Fed, money they were going to create out of thin air. Incredible but true story.
On Mar 17 04:03 PM adcva wrote:
> Lavalson, get a grip. Post whatever conspiracy theories you like,
> but label as such. The Fed is not in any way a private bank. It
> is the bank of the United States. Go to federalreserve.gov (that's
> .gov, not .com). Here's a preview of what you'll find...
>
> "On December 23, 1913, the Federal Reserve System, which serves as
> the nation's central bank, was created by an act of Congress. The
> System consists of a seven member Board of Governors with headquarters
> in Washington, D.C., and twelve Reserve Banks located in major cities
> throughout the United States."
>
> "Federal Reserve Banks were established by Congress as the operating
> arms of the nation's central banking system. Many of the services
> provided by this network to depository institutions and the government
> are similar to services provided by banks and thrift institutions
> to business customers and individuals. Reserve Banks hold the cash
> reserves of depository institutions and make loans to them. They
> move currency and coin into and out of circulation, and collect and
> process millions of checks each day. They provide checking accounts
> for the Treasury, issue and redeem government securities, and act
> in other ways as fiscal agent for the U.S. government. They supervise
> and examine member banks for safety and soundness. The Reserve Banks
> also participate in the activity that is the primary responsibility
> of the Federal Reserve System, the setting of monetary policy."<br/>
"Federal Reserve Banks generate their own income, primarily from interest earned on government securities that are acquired in the course of Federal Reserve monetary policy actions. A secondary source of income is derived from the provision of priced services to depository institutions, as required by the Monetary Control Act of 1980. Federal Reserve Banks are not, however, operated for a profit, and each year they return to the U.S. Treasury all earnings in excess of Federal Reserve operating and other expenses."
But back to the issue of ownership, at which point I will stop wasting my time here and put the burden of proof on you - if any Federal Bank is privately owned, find and show us the names of the individual or corporate owners, or even an evidence of incorporation in any state. You can't. The US Gov't owns the banks. The directors are part-time gov't employees, mostly bank and other financial group CEOs, but also other business executives who serve a few years in those roles. There is no money flow to their businesses.
First here's an excerpt from:
What is the Federal Reserve Bank (FED) and why do we have it?
by Greg Hobbs November 1, 1999
and here is the link:
seekingalpha.com/artic...
The act created the Federal Reserve System, a name carefully selected and designed to deceive. "Federal" would lead one to believe that this is a government organization. "Reserve" would lead one to believe that the currency is being backed by gold and silver. "System" was used in lieu of the word "bank" so that one would not conclude that a new central bank had been created.
In reality, the act created a private, for profit, central banking corporation owned by a cartel of private banks. Who owns the FED? The Rothschilds of London and Berlin; Lazard Brothers of Paris; Israel Moses Seif of Italy; Kuhn, Loeb and Warburg of Germany; and the Lehman Brothers, Goldman, Sachs and the Rockefeller families of New York.
Did you know that the FED is the only for-profit corporation in America that is exempt from both federal and state taxes? The FED takes in about one trillion dollars per year tax free! The banking families listed above get all that money.
Almost everyone thinks that the money they pay in taxes goes to the US Treasury to pay for the expenses of the government. Do you want to know where your tax dollars really go? If you look at the back of any check made payable to the IRS you will see that it has been endorsed as "Pay Any F.R.B. Branch or Gen. Depository for Credit U.S. Treas. This is in Payment of U.S. Oblig." Yes, that's right, every dime you pay in income taxes is given to those private banking families, commonly known as the FED, tax free.------------
Now to put the frosting on this cake. When was the income tax created? If you guessed 1913, the same year that the FED was created, you get a gold star. Coincidence? What are the odds? If you are going to use the FED to create debt, who is going to repay that debt? The income tax was created to complete the illusion that real money had been lent and therefore real money had to be repaid.
I have no idea if this guy is legit or if he is a crackpot but then there's this other source citing a court case where it was established that the FRB is a private institution.
Court Rules Federal Reserve is Privately Owned
Case Reveals Fed's Status as a Private Institution
Below are excerpts from a court case proving the Federal Reserve system's status. As you will see, the court ruled that the Federal Reserve Banks are "independent, privately owned and locally controlled corporations", and there is not sufficient "federal government control over 'detailed physical performance' and 'day to day operation'" of the Federal Reserve Bank for it to be considered a federal agency:
Lewis v. United States, 680 F.2d 1239 (1982)
John L. Lewis, Plaintiff/Appellant,
v.
United States of America, Defendant/Appellee.
No. 80-5905
United States Court of Appeals, Ninth Circuit.
Submitted March 2, 1982.
Decided April 19, 1982.
As Amended June 24, 1982.
Plaintiff, who was injured by vehicle owned and operated by a federal reserve bank, brought action alleging jurisdiction under the Federal Tort Claims Act. The United States District Court for the Central District of California, David W. Williams, J., dismissed holding that federal reserve bank was not a federal agency within meaning of Act and that the court therefore lacked subject-matter jurisdiction. Appeal was taken. The Court of Appeals, Poole, Circuit Judge, held that federal reserve banks are not federal instrumentalities for purposes of the Act, but are independent, privately owned and locally controlled corporations.
Affirmed.
1. United States
There are no sharp criteria for determining whether an entity is a federal agency within meaning of the Federal Tort Claims Act, but critical factor is existence of federal government control over "detailed physical performance" and "day to day operation" of an entity. . . .
2. United States
Federal reserve banks are not federal instrumentalities for purposes of a Federal Tort Claims Act, but are independent, privately owned and locally controlled corporations in light of fact that direct supervision and control of each bank is exercised by board of directors, federal reserve banks, though heavily regulated, are locally controlled by their member banks, banks are listed neither as "wholly owned" government corporations nor as "mixed ownership" corporations; federal reserve banks receive no appropriated funds from Congress and the banks are empowered to sue and be sued in their own names. . . .
3. United States
Under the Federal Tort Claims Act, federal liability is narrowly based on traditional agency principles and does not necessarily lie when a tortfeasor simply works for an entity, like the Reserve Bank, which performs important activities for the government. . . .
4. Taxation
The Reserve Banks are deemed to be federal instrumentalities for purposes of immunity from state taxation.
There are more references from court cases like these:
H.R. Report No. 69 Cong. 1st Sess. 18-19 (1913).
The fact that the Federal Reserve Board regulates the Reserve Banks does not make them federal agencies under the Act. In United States v. Orleans, 425 U.S. 807, 96 S.Ct. 1971, 48 L.Ed.2d 390 (1976), the Supreme Court held that a community action agency was not a federal agency or instrumentality for purposes of the Act, even though the agency was organized under federal regulations and heavily funded by the federal government. Because the agency's day to day operation-------------... Reserve Banks, as privately owned entities, receive no appropriated funds from Congress.
Et Voila, the defense rests its case having established the proof that the FRB is a private institution.