New York Fed Warehousing Junk Loans On Their Books

March 24, 2010 by · Leave a Comment
Filed under: Industry News 

Representative Grayson is correct that the New York Fed overstepped their bounds by law when they took on a bunch of junk grade loans on their books.  We have a Federal Reserve System which was created to create independence from our politicians so we would not be tempted to print money without bounds and debauch our way of life through inflation.  In the same sense, our Fed is not suppose help out bad banks and purchase their toxic loans and give them good U.S. dollars for them.

The Fed should be the lender of last resort and that is only in the case if there is a panic and you as a bank have good collateral and you need help to weather the storm.  This did not happen during the financial crisis of 2008.  They purchased knowingly bad loans to increase profits (aka: greed) and they should pay the price for those actions.  Don’t let the bad money / banks chase out the good.

We need to reward prudence and foresight and punish greed and ignorance.  These are bankers we are talking about, they should be our more astute professionals in the financial world and they should know the risks and bare the pain for their choices no matter what.  PERIOD.

Huffington Post – As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn’t sell in the market, according to a report from court-appointed examiner Anton R. Valukas.

The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a “warehouse” for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.

Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities. The provision passed the House but is under attack in the Senate, where Banking Committee Chairman Chris Dodd (D-Conn.) says he hopes to stop it.

Without an audit, the Fed is able to conceal the specifics of what it holds on its balance sheet. If the Lehman deal is any indication, the Fed is hiding billions of dollars in toxic loans on its books.

“The Fed legally is forbidden from taking such assets. There’s a legal requirement that the Fed’s assets be investment grade,” Rep. Alan Grayson (D-Fla.) told HuffPost. Grayson, who is the cosponsor of the Grayson-Paul Audit the Fed measure that passed the House, said the Lehman scandal shows precisely why such an audit is needed.

Source: Huffington Post

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