Is the $700 Billion Really for Bailing Out the Fed? 32 comments
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I happened to come across several articles written by New York Post business writer, John Crudelle and a number of others. They believe fervently in an organization known as the “PPT”, or “Plunge Protection Team”, which was allegedly created by Presidential order, in 1987, after the 22% one day market crash that year. Mr. Crudelle, along with some private economists, and Congressman Ron Paul, apparently, all believe in this conspiracy. These folks are not fools, so it is worth giving serious consideration to whether or not it really exists.
The official name is the “President’s Commission on Working Capital Markets”, but PPT believers allege that it has devolved into a conspiracy between the biggest banks in the nation (primary dealers of the Fed), the Chairman of the SEC, Treasury Secretary and Federal Reserve Chairman to control markets. Allegedly, the PPT’s original mission was to infrequently intervene, only in emergency situations, when the falling markets might get out of control, by using cash injections, delivered by the Federal Reserve, through its various money delivery “windows”, such as the repo loan window, and, now, the secretive dealer discount window, term auction securities window, etc.
According to PPT theorists, the organization is now dedicated to using the Fed balance sheet to produce trading profits for its private players, by manipulating markets up and down, and doing the “pump & dump” while using taxpayer funds to pay the costs of the program. I don’t know if PPT really exists, but, if it does, it certainly explains a lot. When you look at the history of money given out at the so-called “repo” window, and the amount of free cash that is floating at any one time, there does seem to be a distinct relationship to the rising and falling of the stock market.
After reading some of the articles, I began thinking about the $700 billion bailout. I took the time to recalculate the Federal Reserve balance sheets, and suddenly realized that it has accepted almost exactly $700 billion worth of toxic mortgage paper, in return for ostensible loans that many of the big banks cannot possibly repay. It just so happens that that is the sum of money they want to extract from Congress. You can’t help but see that the so-called “loans”, given by the Fed to the banks, have changed the composition of its balance sheet dramatically. The Fed’s assets went from nearly 100% liquid Treasury bills, to mostly illiquid “cash for trash” mortgage bonds. The illiquidity of the mortgage bonds would mean that the Fed could no longer raise sufficient funds to adequately support the PPT conspiracy, if, in fact, that is what it wants to do.
I call the illiquid securities “cash for trash” because the Fed has given treasury bills or cash in exchange for these distressed mortgage backed securities. They are supposed to hold the bonds for a very short time, but, in fact, most of the cash for trash loans have been endlessly renewed, month after month. Assuming, however, that Congress passes the bailout bill, the U.S. Treasury will have authority to buy these same bonds permanently, removing a headache for the Fed, and freeing up its balance sheet to continue funding for the market manipulation that PPT theorists allege.
Let’s indulge ourselves, for a moment, and assume that PPT does exist. If so, the $700 billion bailout is not only for insolvent banks. They already have gotten rid of these toxic assets by placing them with the Fed, and obtaining endlessly renewable Fed loans in return. It appears to be a bailout of the Federal Reserve, itself. The Fed, of course, according to PPT theory, acts as the PPT’s private slush fund. Money is taken out to pump up stock prices, and then taken back in so that prices will fall. The PPT players profit on the movements of the market, induced by this activity.
If all of this is true, maybe, Bernanke and Paulson don't want to admit the embarrassing facts? How could they go to Congress and say,
“I’m sorry, but we need more money at the Fed. Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC) and JP Morgan Chase (JPM) aren’t able to manipulate markets as effectively as they would like. So, please, could you help us?”
According to PPT theory, the Fed has been used as a slush fund to support stock manipulation for over 21 years now. The U.S. Treasury was forced to try to partially recapitalize the nearly insolvent Federal Reserve by selling $100 billion in new Treasury Bills, last week. The giveaways, to primary dealers and others, have taxed the Fed to the breaking point.
Whatever the truth or falsity of PPT theory may be, one thing is clear. Mismanagement of the nation's central bank, in the form of giving out loans that cannot be repaid, is so severe that the central bank itself is now virtually insolvent. Some of the banks who borrowed tens of billions of dollars are now bankrupt (Lehman Brothers), and will never repay. Fed will be stuck with that cash for trash. Most other banks are too shaky and close to bankruptcy to ever repay. Instead of foreclosing, as a bank would do to an individual, the Fed has responded by endlessly renewing the loans. The loans have become gifts, and the Fed has run out of money, because it has also become nearly insolvent. And, let’s not forget, if PPT theory is true, without heavy use of public funds, the PPT players cannot generate large private profits.
The Federal Reserve has been paying very close to par value for these distressed assets, even though a lot of the assets are only worth $0.22 on the dollar, or even less, in the private market. It has only taken a very small “haircut” to accept them. That is, no doubt, why Ben Bernanke slipped up and admitted he wants the U.S. Treasury to pay much more than fair market value. Otherwise, either the banks or the Federal Reserve will be forced to write down big losses when the mortgage paper is transferred onto the balance sheet of the U.S. Treasury.
So, is the $700 billion being disguised as a bailout for banks, when it is really for bailing out the Federal Reserve? Is it a way of avoiding the embarrassment of walking into Congress and admitting the truth of the need for Congress to authorize issuance of new Treasury bills to recapitalize the nation’s central bank? Will the stock market drop sharply if the Fed “slush fund” is not recapitalized? Will recapitalization of the Federal Reserve allow it to create a series of false rallies to allow people-in-the-know to dump equities into a temporarily rising stock market?
I don’t know the answer to these questions. But, the arguments made by people who believe in the so-called “PPT” are interesting. If true, it would serve to explain a lot of the irrational market action we all observed over the past years. One thing I do know. Dow Jones’ Marketwatch reported that China has announced new regulations that order Chinese banks to temporarily not lend money to American financial institutions, because of the danger of default.
If the story is correct, given that China has so many dollars, previously continued to accumulate more and more, and has always required private banks to hold large dollar reserves, this may mark the beginning of the end for the U.S. dollar.
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This article has 32 comments:
But will we ever see it? Not until we all decide enough is enough...enough smoke-screen accounting. Enough upsizing of government in response to every business mistake. Enough fleecing of the taxpayer. Do we need to march on D.C. with pitchforks?? Maybe.
I have a degree in math and statistics and for over 4 years I am studying the US financial complex.
And so often I have observed weird market behavior while the SEC did her own thing that all in all I can say:
PPT for real?
Statistical proof = 100%
Courthouse proof = 0%
__________
In the article it is mentioned that the 700 billion size could be explained by the fact that the US FED is almost at the end of her US Treasuries (builded up since 1913 or so).
After my humble opnion it has more to do with accountancy rule 157 now we are just before the end of the fiscal year.
That also explains why there is so much hurry to shove this through Congress & the likes.
I am not an accountant but rather likely there are vast quantities of assets that are only marked once a year to market value.
So for the time being I only look in amazement at the 700 billion US$ thing; why the size and why the speed?
And PPT theories are rather likely true, but all they do is plunge protection and have not infiltrated the money and Treasuries auctions...
But you never know; sometimes I am wrong too...
GET RID OF THE FEDERAL RESERVE AND I WILL CONSIDER A BAILOUT FOR THE RICH.
R.I.P
The job of the central bank is to PRINT MONEY. They accept
collateral in the form of GSEs and PRINT THE MONEY to give
it to the banks.
GET IT?
You have no idea how central banks work.
These people are Coincidence Theorists, which apparently is acceptable.
Interestingly no one has proposed issuing actual, debt free US currency to simply buy these distressed banks. The US had a very successful debt free currency from the Revolutionary War until it was eliminated in 1971. It was called the Greenback.
The largest of these distressed banks who need a bailout are the owners of the shares of the Federal Reserve System. These shares pay a 6% annual dividend. This is information available on the Federal Reserve website.
This bailout is simply the Fed desperately trying to stay alive by sucking cash directly from the taxpayer. If we demand equity from these banks for this cash, we will start buying back the right to issue our own currency.
Don't let them get this money without handing over equity.
---
PS, Wyoming: The Treasury does print the paper, and the "Fed" buys it for the cost of printing, and then sells it back to the US at interest. This is the beginning of the debt spiral we now see unwinding.
Think of the U.S. government as a customer of a bank, if we need to borrow money: no different then me when I want a car loan - we borrow it. Other central Banks and the U.S. Govt. borrow it typically from the Federal Reserve bank, we then pay them interest on that loan.
If we were not in debt for the loans we said we would repay (Like the national debt [notice it is called a debt]) Then we would not have to pay interest and principle to the federal reserve at all.
The real problem is that the Federal reserve has spent a ton of money on crappy assets from failing companies - now they are running low on their own assets - in this case american dollars, that they want the Congress to approve the U.S. treasury to print more T-bills and literally buy bad debt of faling companies, because the Fed. does not have enough assets any longer to do so. Yeah banks arn't lending to eachother, but think about all of the money that is not available because 170 billion already has been taken out of the market in the form of bailouts.
Who is to blame? Everyone and noone. Germany isn't clean by any means. Drilling ban expire? Interesting turn of events for sure.
The Fed will never go to a courtroom, nor will it ever beg a judge for forgiveness, as individuals do. It won't ever receive a little slip of paper called a "bankruptcy discharge." It won't ever do any of these things, because a Federal agency cannot go legally bankrupt, and, if it becomes insolvent, as we are seeing, the higher authorities, in the form of the U.S. Treasury and Congress will act, in one way or another, to print money to keep it functioning.
I used the word "insolvent", not bankrupt, when speaking of the Federal Reserve. I use the word bankrupt, only when speaking about private banks, like Lehman Brothers, not about the Fed, itself.
The Fed will be insolvent when its obligations exceed its assets. That has not happened yet, but it is not far away. It is so close to insolvency that it does not have enough cash, at the moment, perhaps, to feed cash to their favorite Wall Street players, the way PPT theorists claim money has been feed to them in the past.
The Fed has a balance sheet which, until last week, totalled $939 billion. Because the U.S. Treasury has now sold $100 billion in additional T-bills to recapitalize the Fed, that balance sheet now has about $1.039 trillion, after the recapitalization. You folks who are so quick to call names, should take the trouble to click on the link that I have given so you can see the balance sheet's condition for yourselves.
Part of your problem is that you have no legal education. Contrary to what laymen believe, the Fed DOES NOT have legal authority to issue Treasury bills. They can only buy and sell existing T-bills. Only the U.S. Treasury can expand their balance sheet, and that is what it did, last week, when it issued $100 billion T-bills to recapitalize the Fed, last week.
The U.S. Treasury, however, only has standing authority to issue the number of T-bills already authorized by Congress. The $100 billion was within existing standing authority, previously issued by Congress. The money it is now seeking, for the $700 billion bailout, will require issuance of more Treasury bills than can legally be issued, right now. If that were not the case, there would be no ongoing debate in Congress. Hank Paulson would just issue however many Treasury bills are needed to bail out the banks, and the Federal Reserve.
Finally, I have not asserted anywhere, in this article, that the PPT is my personal theory, nor that it has been proven true. I merely note that a lot of sensible people believe in it, and that its makes certain events, that would otherwise appear irrational, make common sense again.
For example, back in October, 2007, stocks like Merrill Lynch, Citigroup and others were soaring each time they announced bad earnings. The worse their earnings, the high their stock seemed to soar. Such things are unlikely to happen in real markets that are governed by rational people buying and selling based on fundamentals. Whether or not this proves the existence of PPT is up to the reader. I make no comment except that it does make these events understandable.
The extreme defensiveness of certain commentors, and the failure on the part of the name-callers, to disclose their true identity, is quite interesting. Why be so offended? Why be so offensive? Who are you?
Are rational educated men prohibited, now, from considering or writing about the possibility that PPT exists? Do we live in a society in which discussion of controversial issues must be crushed? Is there something you are afraid of?
For the political edge, they assume that he Dems take the WH and the load is so great that they can't fix it and surprise, Romeny stands ready in 2012....
BTW, the reason the WS Banks need greasing is that they have lost their shirts, and pants too, this year with all their excessive commodity speculation. The country has been drying up from the export of funds to OPEC since 2005, when GS began juicing the Passive long investor and causing commodities to rise and China has been soaking up our dollars for the last decade.
Roosters are now coming home to roost and it ain't pretty!
Now hear this...The Mayan Calendar predicted 'this shift in power" from North America to the East from 1988 to 2012, but with the real speed and thrust of the shift taking place from 2008 to 2012....how 'bout that...
Many 'out there' have not begun to accept MS and GS
s role in running up iteh price of OIL, thriggering the Global Recession..."it is only supply and demand"..well, NO its not1
Our reserach indicated, and was confirmed by the Oil Chiefs, The Saudis and the IMF, in testimony, that anything above $90 was excessive speculation brought on by the new financial players, since mid-2005 - the point at which GS began to really induce the funds to invest in their CIFs and become 'passive long investors".
This, btw, is their language, not that of M. Master's, as some would believe. (Again, people speak out without looking at the facts.)
mark to market accounting is forcing this crisis into the opening. it is not the cause or the solution - just an indicator. the banks and other institutions have assets on their books which will never go up in value - and they were previously allowed to carry this toxic paper on their books until redemption or default. they new accounting standards put american and european accounting systems on the same footing.
<The piecemeal approach using slide rules and models to effect trickle up or down is causing disorder>
The FED isn't a Federal Agency
www.archives.gov/feder...
Here's the Wikipedia article:
en.wikipedia.org/wiki/...
The question or "conspiracy" if it must be called that, is whether this group abused its' power to intervene in markets for their own benefit. Certainly if I had that kind of power I would never use it to help myself of my friends..... NOT! Yeah Right! Anybody remember the saying, Power Corrupts?
PPT Real = 100% period.
My opinion very simply is that over the years since the Order was put in place it was abused more and more until here we are 20 years later and they lost a lot of money and now want us to refinance them so they can continue their game.
How the PPT ties in with the current credit crises is unclear but needs to be officially investigated by an unbiased 3rd party.
Let me applaud the post by "HiThere" about the comment that "The FED isn't a Federal Agency".
Most people don't know this fact. The Federal Reserve Bank is not a federal governmental agency. It is a PRIVATE BANK with many of its' top share holders being European in origin. It was legislated in place in 1913 to regulate our currency among other functions. The IRS is a byproduct of this legislation and is often used as a tool for the FED to refinance itself. In my opinion it is the root of all these so called banking/financial crises and "bubbles" that seem to pop up every decade or so. Now here we are again. They are asking the taxpayer to foot the bill. I'm not alone in this opinion. Do a little research on your own. Google is i great tool.
The original institutionI where I had lightened up on the balance and was already neck deep in scandal, gave me a belligerent phone call and said "if you had any real money, maybe we could do something with it". That was their attitude holding several hundred thousand dollars of the pension's dollars.
Now the fed comes out with a club and is trying to punish those who got out of the game, by more or less telling them, that even their cash will be worthless, if they don't cave into this rescue plan. This is financial terrorism, plain and simple.
This whole thing is disgusting and it doesn't take a rocket scientist to see which financials are being favored and getting perks to do favors for the fed right now.
The Federal Reserve balance sheet is established by the U.S. Treasury. The Board of Governors has permanent representation on the FOMC, which is the committee that sets Fed policy. They outnumber the regional bank presidents. The Board members are appointed by the President with the "advice and consent" of Congress, just like cabinet members.
For all practical purposes, it is a federal agency.
The "doves", who tend to want to lower interest rates, are more often the political appointees on the Board of Governors. Historically, the "inflation hawks" have always been, and still are, the regional bank Presidents. One would think that the commercial banks regionally would want lower rates so that their banks can earn the "spread" between that rate and the money they loan out. But, it isn't so. The most likely reason for the anomaly is that a handful of the biggest banks have an big voice in choosing the political appointees. A lot of smaller, non-Wall Street based, regional banks have more say on choosing the regional Presidents, other than the President of the New York Fed.
When Wall Street absorbs the $700 billion, Main Street banks will pay dearly to maintain their capital ratios.
It makes more sense to distribute the $700 billion to American community banks so they can lend for local transactions or use it to recapitalize Wall Street.