Why Does the SEC Protect Banks’ Dirty Secrets?

Illustration by Pete Gamlen

Πηγή: Bloomberg
By William D. Cohan
Oct 28 2012

Remember Richard Bowen?

He is the former senior executive at Citigroup Inc. (C) who in November 2007 issued a clarion call to his colleagues and Citi’s board that a major credit-quality problem loomed for the bank.

About William D Cohan

William D. Cohan is the author of the recently released "Money and Power: How Goldman Sachs Came to Rule the World" and the New York Times bestsellers "House of Cards" and "The Last Tycoons."More about William D Cohan

Bowen was the chief underwriter in the business unit that bought some $50 billion annually in home mortgages from third parties that were then bundled up and sold as securities to investors the world over. On Nov. 3 he sent an “urgent” e-mail to executives including Robert Rubin, the former U.S. Treasury secretary who was then chairman of the bank’s executive committee, and Gary Crittenden, the chief financial officer, raising concerns about “breakdowns in internal controls and resulting significant but possibly unrecognized financial losses existing within our organization.”

Bowen wrote that he had been “agonizing for some time” about the problem, especially since his direct superiors at the bank, whom he had warned repeatedly since he first discovered the problem in mid-2006, had done little or nothing to remedy it. What he had discovered was that 60 percent of the home mortgages that Citigroup had bought from third parties, or $30 billion, were “defective,” meaning that they didn’t meet Citigroup’s underwriting criteria. Nevertheless, they were still packaged up -- defects and all -- and sold as securities.

Almost Nothing

You know where this is going. The Citigroup executives did next to nothing. Rubin, who left the company in January 2009, told the federal Financial Crisis Inquiry Commission on April 8, 2010, that “either I or somebody else sent it to the appropriate people, and I do know factually that that was acted on promptly and actions taken in response to it.” Commission Chairman Phil Angelides asked Rubin to follow up with his commission and explain precisely what actions Citigroup took in response to Bowen’s e-mail. A few months later, Rubin’s attorneys sent a letterstating that the “e-mail was subsequently passed on to the appropriate personnel at Citigroup” and that “Citigroup should be able to provide a description of its response to Mr. Bowen’s concerns.” A Nixonian response if ever there was one.

Citigroup’s attorneys, in turn, wrote to the commission in November 2010 that the bank had responded to Bowen’s e-mail by firing “the head of the group” responsible for evaluating the credit quality of the purchased mortgages -- actually, Bowen had done that already -- and by putting in place a bunch of new “processes.” Yet according to a July 2012 article in Bloomberg Markets magazine by Bob Ivry about Sherry Hunt, who worked for Bowen, “There were no noticeable changes in the mortgage machinery as a result of Bowen’s warning.”

By the time of Rubin’s FCIC testimony, of course, Citigroup had been bailed out with $45 billion in cash from the American people, along with another $306 billion in guarantees from the federal government for a pot of the very same toxic home mortgages that Bowen had warned about. Rubin pocketed $126 million in his 10 or so years at the company. Bowen, who was stripped of his responsibilities at Citigroup soon after writing the infamous e-mail, left the company two weeks after Rubin. He now teaches accounting at the University of Texas at Dallas.

Warning Ignored

As horrific as it was for Rubin, Crittenden and others to ignore Bowen’s explicit warning, that’s not the end of the story. As part of blowing the whistle on Citigroup’s bad behavior, Bowen also alerted the Securities and Exchange Commission, the bank’s main regulator, hoping it would thoroughly investigate the “breakdowns of internal controls” and take legal action against those responsible. Before the bailout of Citigroup, he gave the SEC two long depositions and 1,000 or so pages of documents, some of which were taken from the Internet, detailing the extent of Citigroup’s problems and Bowen’s attempts to rectify them. Importantly, he said he also gave his permission for the SEC to release to the public his depositions and the revealing documents.

Naturally, the SEC did nothing to pursue Bowen’s claims before billions of taxpayer dollars were used to rescue Citigroup. But it must abide by the Freedom of Information Act, which allows the public to gain access to documents such as those Bowen provided. It has a horrendous track record of fulfilling FOIA requests in anything like a timely manner. My experience has been that the agency begrudgingly gives out the bare minimum long after I really needed it.

Earlier this year, Bloomberg’s Ivry filed a FOIA request with the SEC to get copies of Bowen’s two depositions and the 1,000 pages of documents. Ivry wanted to know just what Bowen had discovered about Citigroup’s bad behavior in the years leading up to its bailout. Initially, the SEC stonewalled, claiming that the Bowen cache amounted to Citigroup “trade secrets.”

When Ivry finally got his FOIA documents back from the SEC, he was underwhelmed. “It was a discussion about nothing and it was heavily redacted, including Bowen’s name,” Ivry told me via e-mail. Needless to say, he was unable to get any additional insight into what Bowen had uncovered and was unable to inform the rest of us.
Unreleased Documents

When I told Bowen, earlier this week, that the SEC had failed to release his documents and his testimony about Citigroup to Ivry, he was flabbergasted. For legal reasons, Bowen said, he can’t share the information directly, but he fully expected the SEC to make it available to journalists and the public. He also expected the SEC to investigate the wrongdoing.

“I’m outraged, quite frankly,” Bowen told me. “I had been told that once the investigations were concluded that my material would be available to the public via FOIA. And to hear now that the SEC has made the decision that no, it cannot be available, I know nothing about the legal side of this, but quite frankly, I’m totally outraged.”

Last week, I filed my own FOIA request for Bowen’s documents and testimony. On Oct. 22, I received an acknowledgement letter from the agency. My tracking number is 13-00937-FOIA. Trust me, I’ll let you know if the SEC gives me anything more than it gave Ivry. But I won’t be counting on it.

Morgan Stanley Unit Fined Over Trader’s $1.3 Billion Bet

Morgan Stanley Smith Barney “detected the trading activity by a former employee that occurred three years ago, stopped it promptly, reported it to regulators, and has since added new controls designed to prevent a reoccurrence,” Christine Jockle, a spokeswoman for the unit, said in an e-mailed statement.

Πηγή: Bloomberg
By Laura Marcinek and Donal Griffin
August 16 2012

Morgan Stanley (MS) Smith Barney, the brokerage venture of Morgan Stanley and Citigroup Inc. (C), was fined $450,000 after a trader amassed a $1.3 billion bet in 2009, Financial Industry Regulatory Authority records show.

The brokerage didn’t have enough controls in place to detect that Jared Weinryt, 31, had breached his $116 million trading limit as he made overnight bets on futures, Finra said this month. The trades led to losses for Morgan Stanley Smith Barney of about $14.9 million, according to Finra.

Morgan Stanley Smith Barney “detected the trading activity by a former employee that occurred three years ago, stopped it promptly, reported it to regulators, and has since added new controls designed to prevent a reoccurrence,” Christine Jockle, a spokeswoman for the unit, said in an e-mailed statement. Photographer: Chip East/Bloomberg

Regulators are pressing Wall Street to heighten risk controls after multibillion-dollar trading losses at UBS AG and JPMorgan Chase & Co. (JPM), the collapse of MF Global Holdings Ltd. (MFGLQ) after a $6.3 billion bet on European debt, and Knight Capital Group Inc. (KCG)’s $270 million loss caused by faulty software.

Morgan Stanley Smith Barney “detected the trading activity by a former employee that occurred three years ago, stopped it promptly, reported it to regulators, and has since added new controls designed to prevent a reoccurrence,” Christine Jockle, a spokeswoman for the unit, said in an e-mailed statement.

The brokerage employed Weinryt from 2006 to 2009, Finra records show. He bought and sold futures, agreements to trade assets at set prices and dates. Investors sometimes buy futures as a bet on price fluctuations and sell them before the delivery date. Weinryt traded in futures tied to U.S. sovereign debt and Eurodollars, according to Finra.

Market Turned

Weinryt’s futures bets totaled about $744 million at the end of the trading day on July 14, 2009, exceeding his $116 million limit, according to a document posted on Finra’s website. His bets swelled to about $1.33 billion as he continued trading overnight, the document shows.

The market turned against Weinryt the next morning and he tried to reduce the bets, incurring losses, according to Finra. The brokerage cut off Weinryt’s access to the trading system in late morning on July 15 and liquidated the contracts by the next day. Total losses were $14.9 million, Finra said.

The industry regulator suspended Weinryt from trading for two months and fined him $7,500 earlier this year, records show. He consented to the sanctions without admitting or denying the findings, according to Finra. Weinryt declined to comment.

He now works in the institutional fixed-income sales division of Palm Beach Gardens, Florida-based Kiley Partners Inc., which trades securities including municipal bonds, U.S. government bonds and corporate debt.

“We were delighted to have an opportunity to employ a smart and talented employee like Jared Weinryt,” Chief Executive Officer Michael Kiley said yesterday in a phone interview. He “does a great job for us and his clients.”

Morgan Stanley owns 51 percent of the Smith Barney brokerage, which has more than 17,000 advisers and $1.74 trillion in client assets. Citigroup, the third-largest U.S. lender, owns the rest and is in the process of selling an additional 14 percent stake to Morgan Stanley. Both banks are based in New York.

NY judge rejects $285 million Citigroup settlement with SEC over mortgage investment

U.S. District Judge Jed Rakoff said the public has a right to know what happens in cases that touch on “the transparency of financial markets".

Πηγή: Washington Post
By AP
Nov 28 2011

NEW YORK — A judge on Monday used unusually harsh language to strike down a $285 million settlement between Citigroup and the Securities and Exchange Commission over toxic mortgage securities, saying he couldn’t tell whether the deal was fair and criticizing regulators for shielding the public from details of the firm’s wrongdoing.

U.S. District Judge Jed Rakoff said the public has a right to know what happens in cases that touch on “the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives.” In such cases, the SEC has a responsibility to ensure that the truth emerges, he wrote.

Rakoff said he had spent hours trying to assess the settlement but concluded that he had not been given “any proven or admitted facts upon which to exercise even a modest degree of independent judgment.”

He called the settlement “neither fair, nor reasonable, nor adequate, nor in the public interest.”

The SEC shot back in a statement issued by Enforcement Director Robert Khuzami, saying the deal was all four of those things and “reasonably reflects the scope of relief that would be obtained after a successful trial.”

SEC Chairman Mary Schapiro, meanwhile, sent a letter to a key senator Monday asking for Congress to expand the agency’s authority to fine companies and individuals. She is seeking to raise the limits on fines under current law and make other changes.

Such changes would “further enhance the effectiveness of the (SEC’s) enforcement program,” Schapiro told Sen. Jack Reed, D-R.I., who heads the Senate Banking subcommittee on securities.

The SEC had accused Citigroup of betting against a complex mortgage investment in 2007 — making $160 million in the process — while investors lost millions. The settlement would have imposed penalties on Citigroup but allowed it to deny allegations that it misled investors.

Citigroup said in a statement that it disagreed with Rakoff because the proposed settlement was “a fair and reasonable resolution to the SEC’s allegation of negligence” and was consistent with long-established legal standards.

“In the event the case is tried, we would present substantial factual and legal defenses to the charges,” it added.

This wasn’t the first time that the judge struck down an SEC settlement with a bank, and Rakoff has made no secret of his disdain for settlements between the government agency and banks for paltry sums and no admission of guilt.

“The SEC’s longstanding policy — hallowed by history, but not by reason — of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact,” he wrote in Monday’s decision.

Adam Pritchard, a professor of securities law at the University of Michigan Law School, said courts could become clogged with cases that would normally be settled if other judges adopt Rakoff’s reasoning and deprive companies of their incentive to avoid trial.

He called it a powerful SEC tool to encourage settlements “and Judge Rakoff is taking that away from them.”

The SEC’s consent judgment settling the case was filed the same day as its lawsuit against Citigroup, the judge noted.

“It is harder to discern from the limited information before the court what the SEC is getting from this settlement other than a quick headline,” the judge wrote.

“In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers,” Rakoff said. “Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”

He set a July 16 trial date for the case.

Khuzami said in the SEC statement that Rakoff made too much out of the fact that Citigroup did not have to admit wrongdoing. He said forcing Citigroup to give up profits, pay fines and face mandatory business reforms outweigh the absence of an admission “when that relief is obtained promptly and without the risks, delay and resources required at trial.”

Khuzami added: “Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court.”

Rakoff said the power of the judiciary was “not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated.”

He added: “If its deployment does not rest on facts — cold, hard, solid facts, established either by admissions or by trials — it serves no lawful or moral purpose and is simply an engine of oppression.”

In the civil lawsuit filed last month, the SEC said Citigroup Inc. traders discussed the possibility of buying financial instruments to essentially bet on the failure of the mortgage assets. Rating agencies downgraded most of the investments just as many troubled homeowners stopped paying their mortgages in late 2007. That pushed the investment into default and cost its buyers’ — hedge funds and investment managers — several hundred million dollars in losses.

Earlier this month, Rakoff staged a hearing in which he asked lawyers on both sides to defend the settlement.

At the hearing, Rakoff questioned whether freeing Citigroup of any admission of liability could undermine private claims by investors who stand to recover only $95 million in penalties on total losses of $700 million.

In his decision, he called the penalties “pocket change” to a company the size of Citigroup and said that, if the SEC allegations are true, then Citigroup got a “very good deal.” If they are untrue, the settlement would be “a mild and modest cost of doing business,” he said.

In 2009, Rakoff rejected a $33 million settlement between the SEC and Bank of America Corp. calling it a breach of “justice and morality.” The deal was over civil charges accusing the bank of misleading shareholders when it acquired Merrill Lynch during the height of the financial crisis in 2008 by failing to disclose it was paying up to $5.8 billion in bonuses to employees even as it recorded a $27.6 billion yearly loss.

In February 2010, he approved an amended settlement for over four times the original amount, but was caustic in his comments about the $150 million pact, calling it “half-baked justice at best.” He said the court approved it “while shaking its head.”

Citigroup’s $285 million would represent the largest amount to be paid by a Wall Street firm accused of misleading investors since Goldman Sachs & Co. agreed to pay $550 million to settle similar charges last year. JPMorgan Chase & Co. resolved similar charges in June and paid $153.6 million.

All the cases have involved complex investments called collateralized debt obligations. Those are securities that are backed by pools of other assets, such as mortgages.

Rakoff’s ruling Monday was the latest in a series of setbacks for the SEC under Schapiro’s leadership. Rakoff has said he doesn’t believe the agency has been sufficiently tough in its enforcement deals with Wall Street banks over their conduct prior to the financial crisis.

The SEC told Rakoff recently that $285 million was a fair penalty, which will go to investors harmed by Citigroup’s conduct, and that it was close to what the agency would have won in a trial.

US: "It Doesn’t Get Any More Immoral Than This"

Πηγή: Economist's view
Oct 30 2011

Yesterday, Ross Douthat argued that "higher taxes on America’s richest 1 percent" won't solve the problems with government. Thomas Friedman explains why that's wrong, and why a more equitable distribution of income is essential to stripping the ability of those at the top to control government:

Did You Hear the One About the Bankers?, by Thomas Friedman, Commentary, NY Times: Citigroup is lucky that Muammar el-Qaddafi was killed when he was. The Libyan leader’s death diverted attention from a lethal article involving Citigroup... The news was that Citigroup had to pay a $285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers — securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of dollars that they would go bust.

It doesn’t get any more immoral than this. ...

This gets to the core of why all the anti-Wall Street groups around the globe are resonating. I was in Tahrir Square in Cairo for the fall of Hosni Mubarak... When I talked to Egyptians, it was clear that what animated their protest, first and foremost, was ... a quest for “justice.” Many Egyptians were convinced that they lived in a deeply unjust society where the game had been rigged by the Mubarak family and its crony capitalists. Egypt shows what happens when a country adopts free-market capitalism without developing real rule of law and institutions.

But, then, what happened to us? Our financial industry has grown so large and rich it has corrupted our real institutions through political donations. As Senator Richard Durbin, an Illinois Democrat, bluntly said in a 2009 radio interview, despite having caused this crisis, these same financial firms “are still the most powerful lobby on Capitol Hill. And they, frankly, own the place.”

Our Congress today is a forum for legalized bribery. One consumer group using information from Opensecrets.org calculates that the financial services industry, including real estate, spent $2.3 billion on federal campaign contributions from 1990 to 2010, which was more than the health care, energy, defense, agriculture and transportation industries combined. Why are there 61 members on the House Committee on Financial Services? So many congressmen want to be in a position to sell votes to Wall Street. ...

U.S. congressmen should have to dress like Nascar drivers and wear the logos of all the banks, investment banks, insurance companies and real estate firms that they’re taking money from. The public needs to know.
Capitalism and free markets are the best engines for generating growth and relieving poverty — provided they are balanced with meaningful transparency, regulation and oversight. We lost that balance in the last decade. If we don’t get it back..., the cry for justice could turn ugly. ...

To what extent is fear of inflation, fear of deficits, and other fears holding up more government help for struggling, unemployed households the result of the powerful interests who control Congress standing in the way? My answer, as ought to be clear from recent columns (here, here, and here), is that the imbalance in political power that comes with such a large degree of inequality is a large factor in the government's tepid response to the unemployment crisis.

Citigroup to Pay Millions to Close Fraud Complaint

Robert Khuzami of the S.E.C. said the bank should have been more forthcoming.

Πηγή: New York Times

By Edward Wyatt

Oct 19 2011

WASHINGTON — As the housing market began its collapse, Wall Street firms and sophisticated investors searched for ways to profit. Some of them found an easy method: Stuff a portfolio with risky mortgage-related investments, sell it to unsuspecting customers and bet against it.

Citigroup on Wednesday agreed to pay $285 million to settle a civil complaint by the Securities and Exchange Commission that it had defrauded investors who bought just such a deal. The transaction involved a $1 billion portfolio of mortgage-related investments, many of which were handpicked for the portfolio by Citigroup without telling investors of its role or that it had made bets that the investments would fall in value.

In the four years since the housing market began its steady descent, securities regulators have settled only two cases related to the financial crisis for a larger sum of money. This is also the third case brought by the S.E.C. accusing a major Wall Street institution of misleading customers about who was putting together a security and about their motive. Goldman Sachs and JPMorgan Chase & Company both settled similar cases last year.

The settlement will refund investors with interest and include a $95 million fine — a relative pittance for a giant like Citigroup. On Monday, the company reported that in the third quarter alone it earned profits of $3.8 billion on revenue of $20.8 billion. The settlement may also have trouble getting approval from Jed S. Rakoff, the federal district judge in New York who must ultimately sign off on the fine and who has taken a hard line on S.E.C. settlements.

Neither the S.E.C. nor the Justice Department would say whether the case raised questions about whether Citigroup had been involved in any criminal wrongdoing. But the case highlights a growing frustration felt by foreclosed homeowners, investors and Wall Street protesters alike that few, if any, senior banking executives have faced criminal charges for losses growing out of the financial crisis.

Citigroup has settled one case stemming from the crisis. Last year, it agreed to pay $75 million to settle federal claims that it hid from investors vast holdings of subprime mortgage investments that were losing value during the crisis and that ultimately prompted the federal government to rescue the bank.

“The securities laws demand that investors receive more care and candor than Citigroup provided” to investors in the security, said Robert Khuzami, director of the S.E.C.’s enforcement division, referring to Wednesday’s action. “Investors were not informed that Citigroup had decided to bet against them and had helped to choose the assets that would determine who won or lost.”

The complex amalgamation of investments known as Class V Funding III produced $126 million in profits for Citigroup’s brokerage subsidiary, and another $34 million in fees for putting it together. All of that, including interest and the $95 million fine, will now be going back to the investors; the government will not receive anything.

In a statement, Citigroup noted that the S.E.C. did not charge it with “intentional or reckless misconduct.” Rather, it settled charges that its actions were negligent and misleading to investors. Despite its profits on the current deal, over all Citigroup lost tens of billions of dollars on its holdings of mortgage-related investments.

“We are pleased to put this matter behind us and are focused on contributing to the economic recovery, serving our clients and growing responsibly,” the company said in a statement. “Since the crisis, we have bolstered our financial strength, overhauled the risk management function, significantly reduced risk on the balance sheet and returned to the basics of banking.”

The S.E.C. on Wednesday also brought a case against Credit Suisse, which played a smaller role in the transaction, and against one individual at each company. But those individuals were midlevel employees in each company’s investment and trading departments; no senior executives at either company were charged.

Credit Suisse, which managed the portfolio of mortgage bonds that served as collateral for the deal, agreed to pay $2.5 million, half of it in penalties, to settle the case. The company declined to comment.

Samir H. Bhatt, 37, a former portfolio manager at Credit Suisse, also agreed to settle, paying no fine but agreeing to a six-month suspension from association with any investment adviser.

Only Brian H. Stoker, 40, a former Citigroup employee who was primarily responsible for putting together the deal, has decided to fight the S.E.C.’s case. He left Citigroup in 2008.

“There is no basis for the S.E.C. to blame Brian Stoker for these alleged disclosure violations,” said Fraser L. Hunter Jr., a lawyer at WilmerHale who is representing Mr. Stoker. “He was not responsible for any alleged wrongdoing — he did not control or trade the position, did not prepare the disclosures and did not select the assets. We will vigorously defend this lawsuit.”

Mr. Stoker joined Citigroup at the height of the housing boom in 2005, and worked as a director on the structured product desk. His job tasks were largely behind the scenes, crunching numbers and assembling deals like Class V Funding III.

After the deal closed on Feb. 28, 2007, more than 80 percent of the portfolio was downgraded by credit ratings agencies in less than nine months. The security declared “an event of default” on Nov. 19, 2007, and investors soon lost hundreds of millions of dollars, the S.E.C. said, while Citigroup gained.

Among the losers was Ambac of New York, which insured financial instruments and was the largest investor in the deal, according to the S.E.C. Ambac’s role in the transaction was to assume the credit risk associated with a $500 million portion of the portfolio. When the value of the portfolio fell, Ambac had to make payments to those who had bet against the bonds, as Citigroup had.

In part because of losses tied to the financial crisis, Ambac filed for bankruptcy last year.

Criminal prosecutions related to the financial crisis have been few. Two former Credit Suisse brokers were sentenced to jail in their roles for misleading clients about purchases and thus inflating their sales commissions. Six executives at a mortgage company, Taylor, Bean & Whitaker, have pleaded guilty in a scheme to issue false mortgages to obtain federal mortgage money and bank bailout funds. Lee B. Farkas, a former chairman of Taylor Bean, was sentenced to 30 years in prison for his role in the case, which resulted in the demise of Colonial Bank of Montgomery, Ala.

Those crimes started long before the financial crisis. A prosecution of two former executives of Bear Stearns, the failed investment bank, ended in acquittals.

U.S. Sues 17 Big Banks Over Mortgages

Πηγή: FoxBusiness

By Ronald D. Orol
September 02, 2011

WASHINGTON -- A federal U.S. agency on Friday afternoon sued seventeen major banks, arguing that they misrepresented the quality of mortgage securities they put together and sold in the run-up to the bursting of the housing bubble. The Federal Housing Finance Agency sued the banks over soured mortgages including charges against Bank of America Corp. over $6 billion in soured mortgages. It also sued Citigroup Inc. [S: C] over $3.5 billion in mortgages, Barclays over $4.98 billion in loans.
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First Federal Reserve Audit Reveals Trillions in Secret Bailouts

Πηγή: The World News
By Matthew Cardinale

Monday, 29 August 2011

ATLANTA, Aug 28 (IPS) - The first-ever audit of the U.S. Federal Reserve has revealed 16 trillion dollars in secret bank bailouts and has raised more questions about the quasi-private agency's opaque operations.

"This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for
everyone else," U.S. Senator Bernie Sanders, an Independent from Vermont, said in a statement.

The majority of loans were issues by the Federal Reserve Bank of New York (FRBNY).

"From late 2007 through mid-2010, Reserve Banks provided more than a trillion dollars. in emergency
loans to the financial sector to address strains in credit markets and to avert failures of individual
institutions believed to be a threat to the stability of the financial system," the audit report states.

"The scale and nature of this assistance amounted to an unprecedented expansion of the Federal
Reserve System's traditional role as lender-of-last-resort to depository institutions," according to the
report.

The report notes that all the short-term, emergency loans were repaid, or are expected to be repaid.

The emergency loans included eight broad-based programmes, and also provided assistance for certain
individual financial institutions. The Fed provided loans to JP Morgan Chase bank to acquire Bear Stears,
a failed investment firm; provided loans to keep American International Group (AIG), a multinational
insurance corporation, afloat; extended lending commitments to Bank of America and Citigroup; and
purchased risky mortgage-backed securities to get them off private banks' books.

Overall, the greatest borrowing was done by a small number of institutions. Over the three years,
Citigroup borrowed a total of 2.5 trillion dollars, Morgan Stanley borrowed two trillion; Merryll Lynch,
which was acquired by Bank of America, borrowed 1.9 trillion; and Bank of America borrowed 1.3
trillion.

Banks based in counties other than the U.S. also received money from the Fed, including Barclays of the
United Kingdom, the Royal Bank of Scotland Group (UK), Deutsche Bank (Germany), UBS (Switzerland),
Credit Suisse Group (Switzerland), Bank of Scotland (UK), BNP Paribas (France), Dexia (Belgium),
Dresdner Bank (Germany), and Societe General (France).

"No agency of the United States government should be allowed to bailout a foreign bank or corporation
without the direct approval of Congress and the President," Sanders wrote.

In recent days, 'Bloomberg News' obtained 29,346 pages of documentation from the Federal Reserve
about some of these secret loans, after months of fighting in court for access to the records under the
Freedom of Information Act.

Some of the financial institutions secretly receiving loans were meanwhile claiming in their public
reports to have ample cash reserves, Bloomberg noted.

The Federal Reserve has neither explained how they legally justified several of the emergency loans, nor
how they decided to provide assistance to certain firms but not others.

"The main problem is the lack of Congressional oversight, and the way the Fed seemed to pick winners
who would be protected at any cost," Randall Wray, professor of economics at University of Missouri-
Kansas City, told IPS.

"If such lending is not illegal, it should be. Our nation really did go through a liquidity crisis - a run on
the short-term liabilities of financial institutions. There is only one way to stop a run: lend reserves
without limit to all qualifying institutions. The Fed bumbled around before it finally sort of did that,"
Wray said.

"But then it turned to phase two, which was to try to resolve problems of insolvency by increasing Uncle
Sam's stake in the banksters' fiasco. That never should have been done. You close down fraudsters,
period. The Fed and FDIC (Federal Deposit Insurance Commission) should have gone into the biggest
banks immediately, replaced all top management, and should have started to resolve them," Wray said.

Renewed questions about the Federal Reserve have inspired some young activists to organise grassroots
protests across the U.S.

"Since its creation by the U.S. Government in 1913, the Federal Reserve has created so much new
money out of thin air that it has destroyed 95 percent of the dollar's value," Joseph Brown, a college
student and one of the organisers of a recent protest of the Federal Reserve Bank of Atlanta, said.

"This hidden inflation tax benefits Wall Street and the government, but hurts the poor and those living
on fixed incomes, such as senior citizens, the most," Brown said.

The U.S. Government Accountability Office (GAO) audit itself was the result of at least two years of
grassroots lobbying. IPS reported in June 2009 a wide bi-partisan coalition of Members of Congress had
co-sponsored legislation to audit the Federal Reserve.

The audit was ordered as an amendment by Sanders as part of the Dodd-Frank Wall Street Reform and
Consumer Protection Act - a major banking overhaul passed by President Barack Obama and the U.S.
Congress in 2010.

"I think this (the first ever GAO audit) was a good start to uncovering what the Fed did so that we can
begin to determine whether similar actions should ever be permitted again," Wray wrote, adding, "my
preliminary answer is a resounding no."

The GAO also found existing Federal Reserve policies do not prevent significant conflicts of interest. For
example, "the FRBNY's existing restrictions on its employees' financial interests did not specifically
prohibit investments in certain non-bank institutions that received emergency assistance," the report
stated.

The GAO report noted on Sep. 19, 2008, William Dudley, who is now the President of the FRBNY, was
granted a waiver to let him keep investments in AIG and General Electric, while at the same time the
Federal Reserve granted bailout funds to the same two companies.

"No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit
on the Fed's board of directors or be employed by the Fed," Sanders said.

The GAO is currently working on a more detailed report regarding Federal Reserve conflicts of interest,
which is due on Oct. 18, 2011.