1. A tweet thread on a recent court case of relevance to monetary theorists: U.S. v Wells Fargo (2d Cir. 2019) (jdsupra.com/legalnews/2nd-…) H/t @sam_a_bell & @PeterContiBrown. 1/n
2. US v Wells Fargo was a dispute over whether a fraudulent loan request presented to the emergency lending facilities of a Federal Reserve Bank (“FRB”) constituted a claim under the False Claims Act (“FCA”) (31 USC 3729 et seq.). 2/n
3. The district court concluded that it didn’t, but the 2nd Circuit disagreed and vacated/remanded. Wells Fargo and the US Govt were named parties, but the Fed Board of Governors (BoG), and the FRBs of New York and Richmond also submitted amici briefs. 3/n
3. The district court concluded that it didn’t, but the 2nd Circuit disagreed and vacated/remanded. Wells Fargo and the US Govt were named parties, but the Fed Board of Governors (BoG), and the FRBs of New York and Richmond also submitted amici briefs. 3/n
5. To qualify under the latter category, the money requested from a contractor/grantee/other recipient must be i) “spent or used on the Govt’s behalf or to advance a Govt program or interest; and ii) provided for or reimbursed, at least in part, by the US Govt. 5/n
6. Additionally, the FCA clearly states that it does not matter whether the US Govt has “title” to the money it “provides” to the contractor/grantee/other recipient (this distinction will prove relevant). 6/n
7. The decision offers many insights, but ill focus on the three core issues that the Court considered: 1) the “officer/employee” issue; 2) the “agent” issue; and 3) the “money” issue. 7/n
8. FIRST, the 2nd Circuit held that FRB personnel were not officers or employees of the US Govt. 8/n
9. This holding is consistent with longstanding caselaw, including a SCOTUS decision from 1928 (275 US 415) concluding that FRBs were not “departments of the Government.” 9/n
10. It’s also consistent with the amici briefs of the FRBs of New York and Richmond, which argued that FRBs were established to ‘serve the interests of, but stand apart from, the sovereign.’ 10/n
11. Critically, however, the Court distinguished the FRBs from the BoG, which it called “an independent agency within the executive branch” 11/n
12. Additionally, the Court noted that since the founding of the Federal Reserve System in 1913, Congress had “transferred functional ownership and control of the FRBs to the Treasury and to the BoG.” 12/n
13. SECOND, the Court held that although FRB personnel were not direct employees/officers of the US, FRBs were nevertheless “agents” of the US *when operating emergency lending facilities.* 13/n
14. Notably, the Court declined to extend its finding beyond the narrow scope of the emergency lending program, leaving open the question of whether other FRB activities constitute the actions of an agent of the US Govt. 14/n
15. This finding refuted the view expressed in the FRBs’s amici briefs, that FRBs were “federal instrumentalities,” but nevertheless were not agents of the US Govt when conducting emergency lending. 15/n
16. In particular, the Court held that the US created the FRBs to “act on its behalf in extending emergency credit to banks,” and that FRBs did so in compliance with Congressional strictures and BoG rules. 16/n
17. Importantly, the Court held that the FCA did not require “agents of the US” to be “agents of a US agency,” only that FRBs “act, and be empowered by law to act, on behalf of the US.” 17/n
18. Additionally, the Court clarified that its holding that FRBs were agents of the US Govt did not imply FRBs were acting on behalf of the BoG in particular. 18/n
19. With respect to the emergency lending program, the Court noted that the Lending Agreement stated explicitly that bank advances “must be in accordance with” the FRA “and regulations promulgated thereunder” by the BoG 19/n
20. Beyond the specifics of Lending Agreement, BoG also has the power to promulgate new regulations regarding the extension of credit by FRBs (see 12 USC 243; 248, 301; 305; 341; 411-412; 414). 20/n
21. Additionally, the Court noted that FRBs extended emergency loans “pursuant to a statutory delegation from Congress and according to the terms set forth by Congress in the FRA,” and this authority could be changed or revoked ‘at any time.’ 21/n
22. Consequently, the Court found that the United States’ ‘overall control’ over FRBs with respect to emergency lending was ‘undisputed,’ even as FRBs, like many agents, enjoyed limited discretion in some aspects of their operations. 22/n
23. In making this Court clarified that there was no tension between FRBs acting as agents of the US Govt in emergency lending activities, and acting as “fiscal agents” of Treasury for other purposes. 23/n
24. Furthermore, the Court concluded that because FRB earnings were remitted “dollar for dollar” to Treasury, underpayment by a borrowing bank harmed the US by reducing Treasury revenue - “precisely the sort of fraud Congress meant to deter when it enacted the FCA” 24/n
25. The Court found it “highly implausible that Congress would intend the FCA to cover claims made to private contractors where the money is to ‘advance a Govt program or interest’ and where the govt provides or reimburses the money… 25/n
26. ...but not to cover claims made to govt instrumentalities operating under direct supervision of a govt agency where the disbursement itself is part of a govt program and where the money is created ex nihilo pursuant to congressional authority” 26/n
27. In reaching this decision, the Court rejected the argument that FRBs lending activity was conducted for the purpose of their private shareholders – an argument that, wisely, no party actually attempted to make. 27/n
28. Instead, the Court found that the “United States, not the nominal shareholders, are the economic owners of the FRBs,” since FRBs are required to remit net profits to Treasury as part of general revenue. 28/n
29. In particular, the Court concluded that “the ‘capital’ contributions made by member banks function as debt interests owned by the member banks, not equity interests.” 29/n
30. This view is consistent with that of the FRBs, who argued that “[c]ommercial banks acquire FRB stock not for ownership or control, but because it is a condition of their membership in the Federal Reserve System” 30/n
31. It is also consistent with the position of the US Govt, who argued that “in the event a FRB is liquidated, any value remaining (after debts...and certain required payments are made)...become the property of the United States” 31/n
32. Previously, the 2nd Circuit reached a similar conclusion in Starr Int’l Co. v. FRB (2d Cir. 2014): “FRBs are not operated for the profit of shareholders; rather, they were created and are operated in the furtherance of the national fiscal policy” 32/n
33. The 2nd Circuit’s position on this is consistent with SCOTUS’s view, articulated in Am. Bank & Tr. Co. v. Fed. Reserve Bank of Atlanta, 256 US 350, 359 (1921), that ‘the policy of the FRBs is governed by the policy of the US with regard to them.” 33/n
34. Sidenote: this is a crucial point that MMTers have made over and over in debates over whether the Fed is “private,” and the distinction between being a shareholder and an “owner” of a corporation. 34/n
35. THIRD, the Court held that for the purposes of the FCA, the money requested from FRBs via emergency lending facilities was “provided” by the US Govt in order to “advance a Govt program or interest.” 35/n
36. the Court held that that reserves, which were FRB liabilities - “promises to pay Federal Reserve notes...on demand” - functioned as money because they “must be accepted by the Treasury and by other banks as payment.” 36/n
37. Hence, the Court determined that “money created for the Term Auction Facility or the Discount Window is as much a product of the ‘public fisc’ as money that is distributed by the Treasury Department” 37/n
38. The Court rejected the FRBs’ argument that the money lent in the emergency credit programs was not provided by the US Govt because it did not come from the US Treasury, but was instead created “ex nihilo, at a keystroke,” by FRBs 38/n
39. Instead, the Court held that the FCA “nowhere limit[ed] liability to requests involving ‘Treasury Funds,’” and instead adopted a “deliberately broad” framework that applies “whether or not the US Govt has title to the money” in question 39/n
40. Thus, the Court agreed with the US and BoG’s view that the word “provides” in the FCA is “properly read to reach some circumstances in which the Govt makes money available through an exercise of its legal authority outside the appropriations process” 40/n
41. This conclusion is consistent with an earlier decision, US ex rel. Health v Wisconsin Bell, Inc., (E.D. Wis. 2015), which held that “[t]he fact that [Universal Service] Fund money does not pass through the Treasury does not make the Gvt any less its source” 41/n
42. Additionally, the Court noted that when banks who received emergency lending “withdr[ew]” the process of those loans in the form of Federal Reserve Notes (FRNs), they “quite literally receive money ‘provided’ by the BoG,” 42/n
43. The Court noted that FRNs are one of two types of legal tender in the US, along with coins, and while the Treasury (Mint) determined the supply of coins (31 USC 5111(a)(1)), the BoG controlled the supply of notes (12 USC 411). 43/n
44. This authority, the Court concluded, was a delegation of Congress’s exclusive power to create money under Art. I, S. 8 of the US Constitution, building on the Mixt Money case from 1605, and reaffirmed in Knox v. Lee, 49 US 457 (1871) 44/n
45. The Court saw “no reason why Congress’s decision to separate the FRBs from the Board and the Board from the Treasury” should “alter [its] conclusion that the US is the source of the purchasing power” extended via emergency lending facilities 45/n
46. Thus, the Court found that the BoG, like the Mint, was an agency of the US, and the fact that the BoG “unlike the Mint, is not also a bureau of the Treasury Department is of no legal significance here” 46/n
47. Instead, the Court determined that Congress “empowered” the BoG and FRBs to act “in conjunction” to issue legal tender, and “[h]ad Congress not delegated this power to the Fed, the FRBs would be unable to extend the loans at issue in this case” 47/n
48. Consequently, the Court found that in extending reserves the FRBs were acting as “issuers of base money” on behalf of the US Govt as “federal instrumentalities” 48/n
49. Additionally, the Court rejected as irrelevant 12 USC 244, which provides that the “funds derived” by the BoG through assessments on FRBs “shall not be construed to be govt funds or appropriated monies” 49/n
50. In the Court’s view, the purpose of 12 USC 244 was to distinguish the money used to fund the BoG’s operating budget from Congressionally appropriated money, and had nothing to do with the creation of reserves by FRBs 50/n
51. Overall, this case is, in my view, a validation of the merits of the ‘consolidation’ approach to Tsy-Fed analysis, as well as a direct refutation to the conspiracy theorish claims that the Fed is merely a “private entity owned by banks”. 51/n
Ugh. Mistake. Should be:
4. To constitute a claim under the FCA (31 USC 3729(b)(2)(A)), a request for money must be presented to either i) an “officer, employee, or agent” of the US, OR ii) to a “contractor, grantee, or other recipient” 4/n
4. To constitute a claim under the FCA (31 USC 3729(b)(2)(A)), a request for money must be presented to either i) an “officer, employee, or agent” of the US, OR ii) to a “contractor, grantee, or other recipient” 4/n
@RealProgressUS of interest
*proceeds
