Complaint filed against Federal Reserve: "Bailout of Bear Stearns is Illegal"
Schahrzad Berkland
2 Comments
A housing group is challenging the Fed's bailout of Bear Stearns, saying the Fed has no authority to bail out non-banks, and that it needs 5 voting members to vote. Governor Mishkin was absent at the Bear Stearns vote, and my guess is he was opposed. In this day of emails and phones, there is no legitimate reason for him to be absent.
Matthew Lee, executive director of Inner City Press, vowed to take all needed legal actions against the deal.
"The Fed has hit a new low with this, they did nothing to protect consumers from predatory lending and now their response is to bail out one of the most notorious enablers of predatory lending with no benefit to struggling consumers," said Lee.
"This should be taken as far as it can go to finally bring the Federal Reserve to account that they work for the public interest and not only Wall Street, particularly in a time of crisis," he told Reuters on Sunday.
The Fed could not immediately be reached for comment.
Inner City Press, a nonprofit group that has challenged the nation's key bank mergers over the past decade in an effort to ensure poorer communities are served fairly, also questioned why only four of the five Fed governors approved the measure.
This is why I consider it a bail-out. Although JP Morgan issued the bailout, the Fed was behind it. They exchanged Bear Stearn's plunging mortgages for the Fed's Treasuries (via JP Morgan). Who knows what the mortgages were really worth? They were AAA, but we know the ratings are a sham. And we don't know how much those mortgages will be worth at the end of the 28-day exchange period. Probably less. What happens then? Probably the Fed will just allow another rollover. For how long? Those mortgages are not going back to today's value, ever.
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Reader Comments (2)
I suppose it is possible that Governor Mishkin was en route on a plane and could not be reached, although one wonders how the Board could authorize a $200 billion bailout with just a few hours notice - there must have been previous discussions all week on this topic.
Now, the only authority for the Federal Reserve to do this bailout would seem to be from Section 13(3) of the Federal Reserve Act. This section permits discounting notes of "any ... corporation" in "unusual and exigent circumstances" if the "corporation is unable to secure adequate credit accommodations from other banking institutions". Nowhere, however, do we see the authority to guarantee the performance of a corporation to a member bank, and so the authority for that is not at all clear.
Also the action requires the vote of at least five Board members. However, Section 11(r)(2) of the Federal Reserve Act permits the discounting of notes to a corporation in the stated circumstances of Section 13 by less than five Board members, but under a number of conditions, including, as noted in the post, that "despite the use of all means available (including all available telephonic, telegraphic, and other electronic means), the other members of the Board have not been able to be contacted on the matter" and "action on the matter is required before the number of Board members otherwise required to vote on the matter can be contacted through any available means (including all available telephonic, telegraphic, and other electronic means)". Perhaps the Board can, notwithstanding the apparent unlikelihood of these facts, make the case.
But, there is more. Section 11(r)(2)(iii) also requires that "any credit extended by a Federal reserve bank pursuant to such action [must be] payable upon demand of the Board". That is, it can only be a demand note. My understanding from the reported action (I have not located the original order) is that the facility is a 28-day term facility. Accordingly, Section 11(r)(2) is not available to take this action by less than five Board members.
Bernanke seems to break all the rules, and Asia Times writes that Bernanke should be resigning, not Spitzer, as the former has created the real damage.