Last week’s move by JPMorgan Chase to reduce its cash on deposit at the Fed would suggest that the bank is “getting closer to home” with its money, as the former CEO of Goldman Sachs, Lloyd Blankfein, phrased it during the last financial crisis.
By Pam Martens and Russ Martens of Wall Street on Parade
No one can say with any certainty where the hundreds of billions of dollars that the Federal Reserve has been pumping into Wall Street since September 17 are actually ending up. The Fed is not releasing the names of which of its primary dealers (securities firms) are taking the lion’s share of the loans nor does anyone know if those borrowers are making further loans with the money (which is a core purpose of a central bank’s lender of last resort function) or simply plugging a whole in their own leaky boat. Astonishingly, Congress has yet to call a hearing to ask these critical questions.
Let’s say, hypothetically, that there is a bank with a large, interconnected footprint on Wall Street that’s in trouble and on top of that there’s a big hedge fund taking on water and listing on its side. The New York Fed (one of the 12 regional banks in the Federal Reserve system) in that situation might be expected to call all of the big lenders on Wall Street to a secret meeting at its offices and “suggest” (much like a consigliere makes a “suggestion”) that they bail out these entities for the good of the markets and financial system.
Could that really happen? Here’s a paragraph from a Wall Street Journal report dated September 25, 1998:
“Meeting Wednesday evening at the headquarters of the New York Federal Reserve Bank, 15 financial institutions agreed to chip in $3.5 billion to keep alive the Long-Term Capital Management L.P. hedge fund.”
The Long-Term Capital hedge fund was a five-year old firm with two Nobel laureates on board that fed exotic mathematical formulas into computers that then spit out the rationale for taking on insane levels of leveraged derivative bets. It all blew up spectacularly, of course.
Alan Greenspan, the Chairman of the Federal Reserve Board of Governors at the time, would later tell Congress that the decision to convene that meeting was done “on the judgment of the officials at the Federal Reserve Bank of New York.” In other words, the New York Fed typically believes it needs no outside approvals for its actions when it comes to Wall Street…