Linus Wilson's  Instablog

Many Americans like to think of the U.S. as a color blind society. We have an African American president after all. State sponsored segregation is now a thing of distant memory in the United States. Yet, some recent, highly-respected academic studies have indicated that racial discrimination may hurt African Americans in economic transactions. One study found that applicants with identical resumes were much more likely to be called back for an interview if they had "white" sounding names than applicants sporting "black" names. Another study found African American cab drivers received 1/3 less money in tips on average than white cab divers.

Yet, these studies point to private citizens' potential prejudices. Before embarking on my most recent study, I would have been skeptical that the federal government with its affirmative action programs would favor non-minority owned businesses over African American owned firms. Unfortunately, that is what my coauthor Lucas Puente ofStanford University and I found in our paper "Racial Discrimination in TARP Investments."

We found that minority and black owned banks were significantly less likely to receive funds from the Troubled Asset Relief Program (TARP) Community Development Capital Initiative (CDCI). A non-minority bank with the median characteristics was approximately ten times more likely to obtain TARP funds than an African American owned bank after controlling for other factors. Thus, healthier black owned banks were much less likely to obtain TARP funds through this program than weaker non-minority owned banks.

This finding makes me really sad. There needs to be more investigation of the investment process in TARP program. We cannot tolerate a government that hands out its funds preferentially to predominantly white owned firms. The TARP bailout was distasteful enough before finding out that the investment process may have been marred by racial prejudice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I own some index funds that have holdings in some publicly trade banks.

The Federal Reserve Chairman Ben Bernanke has decided the best way to resuscitate his disastrous tenure as head of the Fed is to hold open lectures on why the Fed is not to blame for the financial crisis. The Wall Street Journal reports that "helicopter" Ben Bernanke argued that the historically low interest rates that poured gasoline on the red-hot housing market had nothing to do with the crash. I'm sure that he will also say that the Fed is not to blame for the lax supervision that led to the failure of Lehman Brothers and the Fed rescues of AIG and Bear Sterns. The net result is that 2.6 million Americans lost their jobs in 2008, and another 4.6 million lost their jobs in 2009. Unemployment went from 5.0 percent to 10.0 percent. I suspect that the statistics for Federal Reserve employment were much less brutal during the Great Recession.

Unfortunately, there are few other Ph.D.'s in finance and economics willing to take on the Fed. The Fed's role as the biggest employer of U.S. based Ph.D.'s in those disciplines might have something to do with that. Yet, the Fed gets an assist from all those well placed and supposedly independent academics that it signs up for paid "visiting positions" to pad those scholars' university salaries.

The editorial boards of supposedly independent journals that study the banking, the Fed, and monetary policy are regularly dominated by scholars on the Fed's payroll. A supposedly prestigious academic finance journal, the Journal of Financial Intermediation, refused to send a jointly written paper about a $2.3 TRILLION bailout of18 Wall Street banks to editors and referees without financial ties to the Fed. Below is a list of the top 5 borrowers from the program and the market value of the Treasuries borrowed from the Fed:

100 percent of the top 5 editors of that journal held down paid visiting, advisory, or consulting jobs with the Fed, according to the CVs on their websites. If you want to publish at the Journal of Financial Intermediation, it appears that it must be approved by somebody on the Fed's payroll. I think that the Fed is getting its money's worth! Luckily, this journal is just the most reckless about its lack of concern for conflicts of interest in my experience.

Today the Fed lets the too-big-to-fail banks buy back stock and pay big dividends. It supports the dangerous mergers of banks working towards the goal of being too-big-to-fail banks. Yet, there is little criticism from academics studying the Fed. My joint research finds finance academics lining up to pile their criticism on a $205 billion Treasury bank bailout, but the academic profession has ignored the numerous and much larger Fed sponsored bailouts. (Relatively, few economics of finance Ph.D.'s are on the Treasury's payroll.) Unfortunately, too often you cannot make people understand problems that they are paid to ignore.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I only own broad-based mutual funds.

Tom Hoenig, the dissident voice of the Federal Reserve who pushed for a tougher inflation stance at the central bank, comes up for his confirmation hearing as Vice Chairman of the Federal Deposit Insurance Corporation (FDIC) on Thursday, November 17, 2011, in the Senate Banking Committee at 10 A.M.  This appointment could be construed as the latest attempt by the White House in its attempts to stack the Fed with inflation doves.

            Unfortunately, this is a common tactic of the White House.  Quiet a dissident voice with the promise of another appointment.  The last part of Harvard Law Professor Elizabeth Warren’s tenure as overseer of the Troubled Asset Relief Program (TARP) was punctuated with pulled punches about the administration’s handling of the $700 billion bailout.  Ms. Warren was named the effective head of the newly created Consumer Financial Protection Bureau by the President without Senate confirmation.  Now she is running to represent Massachusetts in the U.S. Senate presumably with White House support.

            At a time when the House Financial Services Committee wants to put the salaries of the some of the biggest recipients of Federal bailouts, Fannie Mae and Freddie Mac, on government pay scales, Mr. Hoenig is earning over $20,000 a month in retirement as the President of the Kansas City Fed because he was exempted from federal pay scales.  The Fed has figuratively printed money to pay generous salaries to the Presidents of its branch banks who count as their alumni Mr. Geithner and Mr. Hoenig.  Yet, Mr. Geithner and Mr. Hoenig were Presidents of regional Federal Reserve banks while the Federal Reserve passed out over $17 trillion in bailout loans of cash and securities to a group of about 20 investment banks and brokerage houses called primary dealers.  Some of these same primary dealers set Mr. Geithner’s salary.  (That was not a misprint.  These banks got over $17,000,000,000,000 in bailout loans from the Federal Reserve, which over 20 times more than the $700,000,000,000 initially authorized under the Troubled Asset Relief Program (TARP) bailout.)  The least these investment banks could do was pad Mr. Geithner’s retirement fund.

            It is argued by some that Mr. Hoenig will help end too big to fail (TBTF) at the FDIC.  This seems unlikely.  First, the Federal Reserve is the supervisor of the bank holding companies some of which are the TBTF banks.  If Mr. Hoenig wanted to end TBTF, he wasn’t very successful as one of the most powerful regulators of these institutions.  The FDIC is generally the primary supervisor of community banks and has limited jurisdiction over the TBTF banks. 

Moreover, Mr. Hoenig has never publically questioned the FDIC’s hundred’s of billions in bailout loan guarantees to primarily Wall Street’s elite.  Unfortunately, the FDIC program known as the Temporary Liquidity Guarantee Program (TLGP) has made hundreds of billions of dollars if not trillions of dollars in loan guarantees.  Yet, the FDIC has not disclosed the recipients of these guarantees.  That allows the FDIC to hide losses from this bailout program.  For example, no news outlet has reported on the losses to the TLGP from the failure of Integra Bank, which received $50 million in loan guarantees, because the FDIC has not distributed a list of these bailout recipients.  The FDIC is now writing checks to make those Integra Bank bondholders with taxpayer guarantees whole.  This program could be sitting on billions in losses, but taxpayers would never know.  If Mr. Hoenig wants to prove himself as an opponent of too big to fail, he should say publicly—and back those words with actions—that he believes that the FDIC should disclose the names of all the recipients of TLGP bailout loan guarantees since the program began in October 2008.