The Fed’s Wall Street Bailout May Go into Overdrive in December

By Pam Martens and Russ Martens of Wall Street on Parade.

The Fed is in deep fear, while also in deep denial, about what happened last December. Its fear is that it could happen again this December. Its denial is that its lax supervision of the Wall Street mega banks is largely responsible for the mess.

The stock market news on December 24 of last year was not what folks want to be reading about on Christmas Eve. The Dow Jones Industrial Average had plunged 653 points on Christmas Eve and headline writers across major media were declaring the month to have been the worst December for stocks since the Great Depression.

But the declines in the broader stock market averages paled in comparison to the December carnage that occurred in the share prices of the mega banks on Wall Street and, to the Fed’s consternation, the insurance companies that are stealthily interconnected to the mega banks as their derivative counterparties.

Despite all of the warnings that have come out of the Office of Financial Research (OFR), and the implosion of the giant insurer, AIG, during the financial crisis as a result of its derivatives ties to the big Wall Street banks, the Federal Reserve has not reined in these interconnections.

The two charts below show the companion collapses in December in the share prices of the Wall Street banks with the heaviest exposure to derivatives and the insurance companies serving as counterparties to those derivatives. (Banks are also derivative counterparties to each other)

Among the big banks, Citigroup fared the worst. On Monday, December 3, 2018 Citigroup closed the day with a stock price of $65.16. By Christmas Eve, December 24, 2018, the mega Wall Street bank had lost 24 percent of its share price, closing at $49.26.

Citigroup was the poster child for the Fed’s bungling supervision in the leadup to its collapse in 2008. It became a penny stock in 2009. Secretly, without any approval or hearings in Congress, the Fed pumped $2.5 trillion in below-market-rate, revolving loans into Citigroup from December 2007 through at least the middle of 2010 to resuscitate the serially-charged bank. (The Fed’s loans became public after the Government Accountability Office released the results of its audit of the Fed’s loans in 2011.) Citigroup did not, however, change its jaded ways and was forced to admit to a felony charge in 2015 for its role in rigging foreign currency markets. (See A Private Citizen Would Be in Prison If He Had Citigroup’s Rap Sheet.)

Among the swooning insurers, Lincoln National and Ameriprise Financial lost more than 20 percent while MetLife lost 14 percent between Monday, December 3, 2018 and the close on Christmas Eve. All three insurers are connected to the Wall Street banks via derivatives

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