BY JOHN R. TALBOTT
SATURDAY, MAY 1, 2010
Why is the Fed so opposed to being audited, and what does it have to hide?
….I believe the reason Paulson didn’t pursue his original toxic-asset purchasing plan is because such a purchase would have created a market price for these assets, and then all of the banks would have had to mark their poor-quality assets to this low market price. This would have resulted in the bankruptcy of almost all the major commercial and investment banks, because their leverage was so high that they couldn’t withstand such a hit to their equity.
When Paulson couldn’t achieve one of his objectives during the crisis, he typically called on Ben Bernanke to see if the Fed could be of assistance. Paulson was in a difficult position and needed Bernanke’s help. He had, just two weeks earlier, told Congress that if they didn’t approve TARP and deal with the banks’ toxic assets, the entire financial system would collapse. Now he was about to be exposed as either a liar or just completely wrongheaded, because the toxic assets were still on the banks’ books and he was using TARP money elsewhere. What I believe the Fed did next was fraudulent and deceitful, its full impact still hidden from the American public, who want bank reform.
The Fed, I am convinced, went to these commercial banks and offered to take many of their toxic mortgage assets off their books, often accepting them as collateral for loans to the banks. In exchange, the Fed credited the commercial banks with an increase in the reserves held at the Fed, so long as the banks agreed not to withdraw the excess reserves immediately. Magically, the Fed was able to take a bad asset like a CDO and transform it into a sparkling good asset: bank reserves at the Fed. The irony is that the CDO itself began as a compilation of leaden BBB subprime mortgages and had been transformed into a golden AAA security only through the alchemy of the CDO process. And I think the record will show that the Fed intentionally overpaid for these securities, so that the banks wouldn’t have to acknowledge life-threatening losses on the sales or the remarking of their inventory of similar assets. The Fed also began buying mortgage securities directly in the marketplace in an attempt to create demand in the absence of a healthy securitization program.Read Entire Article at Salon.com