Is the Fed’s Dirtiest Bailout About to Come Under the Spotlight?

Until the public knows the truth about why the Fed bailed out the insolvent Citigroup – despite its mandate not to lend to an insolvent institution – and why it bailed out Morgan Stanley and Merrill Lynch, which were broker-dealers, not major commercial banks, there can be no confidence in the U.S. financial system.

By Pam Martens and Russ Martens and cross-posted from Wall Street on Parade

Based on data that Wall Street On Parade has newly compiled, there is a strong suggestion that the Federal Reserve conspired with at least three of the largest Wall Street firms to hide their teetering condition from the public during the financial crisis, despite the fact that these were all New York Stock Exchange listed companies with a duty to reveal material, adverse financial information to the public in a timely fashion.

If Maxine Waters wants to leave her mark in history as Chairman of the House Financial Services Committee, she will subpoena records from the Federal Reserve on its biggest and dirtiest bailout program, known as the Primary Dealer Credit Facility (PDCF). She and her colleagues must then demand answers from Fed witnesses during the hearing Waters has scheduled for May 16 at 10:00 a.m. The upcoming hearing is titled “Oversight of Prudential Regulators: Ensuring the Safety, Soundness and Accountability of Megabanks and Other Depository Institutions.”

The Federal Reserve is the prudential regulator of the largest Wall Street bank holding companies – three of which are only alive today because the Fed engaged in an unprecedented $5.7 trillion cash for trash operation with the three during the financial crisis. Until the public knows the truth about why the Fed bailed out the insolvent Citigroup – despite its mandate not to lend to an insolvent institution – and why it bailed out Morgan Stanley and Merrill Lynch, which were broker-dealers, not major commercial banks, there can be no confidence in the U.S. financial system.

There can be no trust or confidence because we strongly suspect that the reason for these unprecedented bailouts comes down to two words – derivatives and counterparties. These banks were all so intertwined as counterparties to each other’s insane levels of derivatives that the Fed had no clue what to do other than to save them all. That thesis would also explain why the Fed funneled trillions of dollars in cumulative loans to foreign banks – which also just happened to be derivative counterparties to the collapsing Wall Street firms. These interlocking concentrations of risk between derivative counterparties are just as dangerous today as they were in 2008 because the Fed has not forced the banks to follow the law and put these derivatives on exchanges or central clearing facilities. The majority of the derivatives remain as dark, private over-the-counter contracts between counterparties

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