1) I know I promised a thread on the California economy, but after my most recent argument, I need to give a proper example of how the Fed operates and makes its decisions. As it is relevant to the previous argument, let's turn back the clock to the Fed's dealings with Wachovia
2) That was a bank, not some made up country in the Marvel Universe, btw.
3) Here is the testimony by the General Counsel for the Federal Reserve at the time made before the Financial Crisis Inquiry Commission, a bipartisan commission investigating the 2008 financial crisis and WTF happened federalreserve.gov/newsevents/tes…
4) I'll take out the snippets of the key relevant bits and translate as we go along.
5) "At the end of the second quarter of 2008, Wachovia had assets of $812 billion, making it the fourth largest banking organization in the United States in asset terms."
6) "The examinations conducted by the Federal Reserve are designed to review the organization's systems for managing risk across the organization and to evaluate the organization's overall financial strength."
7) "federal law gives the Federal Reserve authority to review merger and expansion proposals by bank holding companies and enforcement authority over bank holding companies...including the ability to stop or prevent a bank holding company from engaging in an unsafe practice."
8) Essentially, Wachovia was a huge bank, and the Federal Reserve by law tests a bank's stability and has the ability and authority to intervene to keep ridiculously stupid shit from happening.
9) This is all established by law. The Federal Reserve is independent in that it doesn't run its decisions by Congress or the President. It has to explain them later, but in action they are independent.
10) "Wachovia had been profitable continuously for more than a decade through year-end 2007. During the first half of 2008, Wachovia posted losses totaling $9.6 billion, reflecting write-downs on securities and high provisions for loan losses."
10) "the provisions reflected significant expected losses on option adjustable-rate mortgages (ARMs), which Wachovia acquired in the 2006 purchase of Golden West Financial Corporation, a $125 billion federal thrift holding company based in California."
11) "The losses also reflected, to a lesser extent, declines in the value of commercial real estate mortgages originated and held by Wachovia." Basically, Wachovia was suffering losses pre-2008 crisis shitstorm which happened in the 2nd half of 2008.
12) Losses on adjustable rate mortgages, which were the key building blocks of mortgage backed securities, and the decrease in value of commercial real estate mortgages, because little known fact it wasn't just residential but also COMMERCIAL property values that suffered big.
13) "With encouragement from the Federal Reserve, Wachovia raised $8 billion in capital in April 2008 to partially offset those losses." The losses were large enough that the Federal Reserve stepped in and told Wachovia to strengthen itself.
14) "On August 19, 2008, the Federal Reserve Bank of Richmond entered into a Memorandum of Understanding (MOU) with Wachovia. This MOU was the culmination of efforts by the Federal Reserve that had been initiated earlier through our inspection process to ensure that Wachovia..."
15) "completed a number of steps to improve corporate governance, risk management, liquidity, capital management, and strategic planning." IE, the decision making at Wachovia was ALREADY under scrutiny BEFORE the financial crisis in 2008 even BEGAN.
16) "On September 7, 2008, the Federal Housing Finance Agency had placed Fannie Mae and Freddie Mac into conservatorship and the Treasury had used its authority, granted by Congress in July 2008, to make financial support available to these two GSE's" Context
17) "On Sep 15 Lehman Brothers had filed for bankruptcy after efforts had failed to organize private-sector assistance/arrange an acquisition. The failure of LBs ended efforts by private investors to provide liquidity to AIG which faced its own mounting financial difficulties"
18) So, what they're saying here is that the Federal Reserve saw that when Lehman Brothers went down, they took ANOTHER company with them that was unconnected to Lehman Brothers. This is contagion; the effect of a crisis on an entity to have people panic about OTHER entities.
19) It's like one house burning down, and then firefighters panicking and pumping 1000 gallons of water into a house a block down where someone accidentally burned popcorn.
20) "Losses at a prominent money market mutual fund caused by the failure of LBs sparked extensive withdrawals from a number of similar funds. These events caused extraordinary turbulence in financial markets"
"equity prices dropped sharply, the costs of short-term credit spiked upward, and liquidity dried up in many markets." See, this is what I'm talking about. LBs failing knocked out a money market mutual fund, so people started withdrawing their money from ALL mutual funds.
22) These are 'Runs'. Bank Runs are just one kind of Run. Any mass panic that causes people to withdraw from similar entities due to one entity having difficulties is a Run. LBs failing wasn't just LBs failing. It was a fragmentation landmine going off in financial markets.
23) Short term credit is how major companies, I'm talking General Electric, General Motors, etc handle day to day expenses like fucking payroll. They have assets, like say mortgage backed securities, which they use as collateral for short term loans (credit).
24) Pay employees with the loan, then income comes in, then they pay off the loan in like a week. Creditor makes a bit of money, cashflow management is easy for large companies to manage, everyone's happy. Until suddenly no one will give these large companies a 1 week loan.
25) All because investors are panicking over a company that had nothing to do with the General Whateverthefuck, the creditor company, etc going bankrupt. Contagion.
26) "On September 25, 2008, the Federal Deposit Insurance Corporation (FDIC) seized and sold Washington Mutual Bank (WaMu), then the largest thrift in the United States. WaMu was the second largest holder of option ARMs at the time, and Wachovia was the largest holder."
27) Remember WaMu going tits up? Hardly anyone does. The FDIC swooped in and kept them from going bankrupt by forcibly selling them off to a larger company who could afford the losses. ARMs were fucking melting down hard by then.
28) Also, this was 2 1/2 weeks AFTER Lehman Brothers went tits up. Bank runs move FAST. The Federal Reserve had to move FASTER.
29) Also note: NONE OF THIS HAD ANYTHING TO DO WITH FIAT MONEY. All this was was pure fucking panic. The dollar wasn't dying, ARMs were, but in the process ARMs were taking the entire fucking financial system down with them.
30) "The failure of WaMu thus raised creditor concern about the health of Wachovia. Wachovia's stock price declined sharply and credit default swap spreads on its debt surged." Remember what I said about the firefighters and the burnt popcorn? Here you go. Runs on Wachovia.
31) "The day after the failure of WaMu, Wachovia Bank depositors accelerated the withdrawal of significant amounts from their accounts. In addition, wholesale funds providers withdrew liquidity support from Wachovia." Emphasis on THE DAY AFTER. It was a straight out bank run.
32) Wachovia was FUCKED. Everyone THOUGHT they were fucked, which in a bank run, means they're FUCKED, REGARDLESS of whether they are or not.
33) September 27th and 28th, DAYS AFTER WAMU, Citigroup and Wells Fargo look into a merger. "Both Citigroup and Wells Fargo also contacted federal regulators indicating that government assistance would be needed in connection with each of their proposed bids to acquire Wachovia."
34) "The FDIC judged that an assisted bid from either Citigroup or Wells Fargo could be more expensive than a liquidation of Wachovia Bank and the two insured thrifts." Wachovia was so fucked, the 2nd and 5th largest banks couldn't absorb the potential losses from Wachovia.
35) The FDIC by LAW, not the Federal Reserve, the Federal Depositors Insurance Corporation, is able to take even non least-cost steps necessary to protect depositors within Wachovia, with the ok of the Federal Reserve, if doing otherwise would cause a shitshow in the economy.
36) "The Fed and the FDIC were concerned about the systemic complications of the failure of the fourth largest bank in the US. The Fed believed that a full or partial default by Wachovia on their debt would intensify liquidity pressures on other U.S. banking organizations."
37) If Wachovia fell, we'd see the bank runs of the Great Depression all over again. This isn't hyperbole. WE WERE THAT CLOSE TO THE GREAT DEPRESSION AGAIN.
38) "Markets were already under considerable strain after the events involving Lehman Brothers, AIG, and WaMu." The worst part? PEOPLE WERE RIGHT TO BE SCARED.
39) "At the time, Wachovia was considered "well capitalized" by regulatory standards and until very recently had not generally been thought to be in danger of failure so there were fears that the failure would lead investors to doubt the financial strength of other organizations"
40) They were right. Even though Wachovia was considered healthy by regulatory standards, investors and depositors were already doing their run on Wachovia. If it failed, that would kill every other large bank. Contagion.
41) "For these reasons, on September 28, 2008, the Board by unanimous vote determined that compliance by the FDIC with the least-cost requirements of the FDI Act with respect to Wachovia Bank and its insured depository institution affiliates would have serious adverse effects"
42) The Fed did not demand that Wachovia be broken up and sold. The FDIC did. All the Fed did was approve those actions.
43) That's when things went to hell in a handbasket. Citigroup and Wells Fargo entered into a goddamn BIDDING WAR OVER WACHOVIA.
44) Yep. Economic crisis, we're on the verge of the great depression, and what does Citigroup and Wells Fargo do? Start fighting in the courts over who gets to merge with Wachovia.
45) "On October 4, Citigroup filed suit against Wachovia and Wells Fargo, seeking a temporary restraining order, preliminary and permanent injunctive relief, specific performance of the exclusivity agreement, and punitive damages"
46) "On October 5, Wachovia filed its own motion for a temporary restraining order preventing Citigroup from taking any steps to interfere with the implementation of the Wachovia-Wells Fargo merger agreement."
47) This made a bad situation worse. The economy was literally melting down over a course of WEEKS. There WAS NOT TIME for Citigroup and Wells Fargo to fight this out in the courts.
48) At this point, the Federal Reserve stepped in and arranged a ceasefire to negotiate away from the courts. "On December 23, 2008, Wachovia announced that its shareholders had approved the Wells Fargo merger proposal. On January 1, 2009, Wells Fargo announced that the merger."
49) No, Wachovia was not 'sold out from under the CEO of Wachovia.' The Federal Reserve did NOT demand a merger. Wachovia was melting down, the FDIC were the ones who wanted the merger to happen, and the Fed simply stepped in to make sure it got done in time to avert a depression
50) You ask why I trust the Federal Reserve? Because only people who don't take an hour to fucking do ANY RESEARCH AT ALL complain about the Federal Reserve, run their fucking mouths off with no documentation to back it up, and then act shocked when you disagree with them. /end
