Ukraine/Greece Follow-up and Audit the Fed

By the Curmudgeon with Victor Sperandeo


Postscript to Last Week’s Column on Ukraine and Greece

“Donetsk and Luhansk regions are our home. We will take back our land,” said Andrei Dyomin as he tethered one broken-down fighting vehicle to a truck. “Every ceasefire they move up their armor and start killing us again. There won’t be a ceasefire, there will be war.”


That pretty much sums up what we hinted at in last week's post in the section titled: Will Ukraine or Greece Spoil the Party?


We wrote that the cease fire in Ukraine would not hold and that pro-Russian separatists, aided and abetted by Putin, would continue fighting. 


Meanwhile, Eurozone finance ministers agreed to extend Greece’s bailout by four months.  The ministers will let Greece unlock further aid from its bailout, worth 240 billion euros (~$273 billion), but the creditors will dole out the funds ONLY if Greece meets certain conditions. That sets the stage for tense negotiations that could unsettle the financial markets and create more political friction with Germany and other European countries.  If Athens moves slowly, it might not get the money for months, according to informed sources. Or the deal could fall apart altogether, again raising the prospect of a messy Greek departure from the Euro single currency.


As Victor clearly stated, the Greece-Eurozone finance ministers meeting would result in yet another "kick the can down the road."  That's exactly what happened with the 11th hour agreement to extend Greece's financial rescue program by four months.


Once again the global equity markets celebrated the obvious by making new highs.  This proves that stock markets are no longer a discounting mechanism, but rather a free-money party, with excess liquidity drug addict participants that have no perception of risk.  Their mantra:  "buy 'em, whenever the coast is clear!" Or "selling is for suckers" or "buy the dip."  We'll see in the end if that works.....


David Kotok on the Call to Audit the Fed?


From a Cumberland Advisors blog post:


The Fed comprises 12 regional banks. It is the regional banks that hold the assets of the Fed. They deploy them and implement policy actions. It is the regional Fed banks that are involved with other commercial banks in their regions. It is the regional banks that engage in the process of clearing payments. Each of those regional banks reports its financial condition weekly. Those reports are released on Thursday afternoons after 4:00 PM. They are publicly available and are articulated in sufficient detail as to allow any inquiry that is reasonable to be fulfilled with information readily obtainable in those reports.


The call to “audit the Fed” would suggest that there is misinformation in those reports. “Audit the Fed” would imply that when the Fed says it holds Treasury notes, bills, or bonds, federally backed mortgage securities, deposit reserves of the banking system, or excess reserves of the banking system, and engages in repurchase operations or reverse repurchase operations, that in fact those holdings and transactions are somehow incomplete or fraudulent.


“Audit the Fed” would also say that the representations of the Fed concerning its balance sheet are not accurate. That notion is absurd.  When it comes to accounting issues, the Fed is already “audited,” just like any arm of the federal government. In fact, the Fed is an arm of the government with 100 years of history and is a creature created by act of Congress.


The Fed is being attacked with regard to its capital structure. The antagonists say that the Fed is nearly broke, that it is leveraged 80 times its equity capital, and that if it were a private institution it would be insolvent. The fact is that the Fed is not a private banking institution; it is backed by the United States.


The would-be auditors of the Fed keep alleging that the central bank’s leverage constitutes a risk. They are guilty of purveying misinformation.


Mr. Kotok wrote in a follow up blog post:

We thank readers for their email responses to our piece entitled “Audit the Fed.” Nearly all respondents affirmed the view that the call to “audit the Fed” is purely a mean-spirited political attack by certain U.S. politicians. Readers agreed that those politicians are putting their personal ambitions ahead of the nation’s interests. Not one single detractor appeared in the email flow or blogosphere.

Victor's Rebuttal:  Audit the Fed!

This country has never been more divided since the Civil War.  No matter where you look in politics there appears to be a left/right political issue. 

Bordering between the unbelievable and the absurd there's currently a difference of opinion about an "audit" of the entity that controls the U.S. money supply, has a $4.5 trillion balance sheet, makes loans to virtually anyone (including foreign companies that don't do business in the U.S.), and manipulate both short term and long term interest rates.

Created by Congress and granting a monopoly license (with a piece of the action to bankers), the Federal Reserve is a banking cartel formed as a private corporation and whose shares are owned by private investors and other entities including foreigners. The names of the Fed owners are keep secret, or hidden from the public!

Curmudgeon Note:

The Fed's website contradicts itself on this point..."It is not ‘owned’ by anyone and is not a private, profit-making institution."  The operating arm of the Fed are the 12 regional Federal Reserve banks...."The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6% per year." 

So the Fed is not owned by anyone, but ownership of stock in the Fed is a condition of membership?  WHO OWNS THAT STOCK? The Fed refuses to divulge that information! (Yes, we've asked many times, but were always stonewalled).

Wouldn't you like to make 6% per year in dividends when money market funds and banks are paying less than a few basis points of interest?  For more info see:  Is the Fed a No Risk Hedge Fund or a Ponzi Scheme? 


How can anyone who is not dishonest, argue in any fashion to maintain this Omertà with the excuse that an audit would "maybe" influence the already (biased) men and women of the Fed?  They can't be fired for any of their policy decisions, and thereby can't be influenced (one would think).

As far as "influence" is concerned read “JANET YELLEN SPENT MORE TIME MEETING WITH FOREIGN OFFICIALS THAN MEMBERS OF THE WHITE HOUSE" (19 meetings with various bankers including Goldman's Blankfein and JP Morgan's Dimon)

"Why Yellen’s obsession with all things international? The answer may lie in Yellen’s 2014 calendar, which the WSJ has parsed and found that of her 950 meetings from February to December (one wonders just when does the Fed chair actually do work outside of meeting rooms of course), the Fed chair spent more time conversing with foreign officials (68 meetings) than with members of the White House (51 meetings)."

The fact that none of the above is publicly reported in the main stream press shows the Fed's lack of accountability is condoned by media moguls.  That in itself urgently demands an audit of the Fed!

The bogus excuse of an audit causing undue influence on the FOMC members is refuted by the fact that for the last ~7 years of zero interest rates, Congress has remained silent.  There haven't been any serious critical comments from either the House or the Senate.

In this context, we have actually not had a single Federal Funds rate increase in 9 years!  In fact, "during the 121 meetings the Fed has held during this century (with Republicans and Democrats equally in power) the Fed has either cut interest rates or held them constant 100 times" (quote from David Stockman).  That's no interest rate hike 83% of the time!

What an imagination for a fabricated excuse of not auditing the Fed, i.e. to not influence an entity to raise rates which it rarely does. This influence has not happened under any administration, because virtually all politicians (except Ron Paul who is retired) want the "pseudo look" of good times - higher financial and real estate asset values and a growing economy - so as to get re-elected.

What argument for raising short term interest rates is never heard?  It's to help retired folks living off (now negligible) interest income.

Let's say you work and save for 45 years, and are now 65 (in a progressive tax system) and saved $1 million dollars. The compounded T-Bill rate from 1961 to 2007 was 5.58%.  So you might expect to supplement your social security payments with ~$55,800 of "risk free" interest income per year on average. Not bad?  Today taxes on T-Bills are not relevant as the income is a whopping $200 in 2014.  From January 2009 to date it was only $300 per year! That's not enough to pay even one month of condo homeowner dues!

This is literally criminal.  The theft of interest income from senior citizens curbs the lifestyle of the average retired person and savers.  They have to cut back on almost all discretionary expenses (as the Curmudgeon has done) in order to pay essential bills.

Yet the Fed policies benefit the biggest and richest companies and individuals at the expense of the average taxpayer which continues no matter who is in power.  For example, one of the biggest companies in the world -GE- earned $80.2 billion pre-tax profits for 10 years from 2002-2011 and the average tax rate was 1.8% per year. (Source: Press Release 2/27/12 Tax Justice)

Somehow I don't recall Nancy Pelosi or Harry Reid complaining about this "unfairness." Why not? Therefore you can bet GE is NOT for an audit of the Fed as a major borrower of capital!

Another question hardly anyone ever asks is:  Would Congress care if the Federal Reserve lost money? That would occur if the Fed had to sell the bonds it purchased during QE at a loss (i.e. sharply rising long term interest rates due to accelerating inflation).  In a Feb 23, 2013 blog post, Sarah Binder wrote: 

"Congress likely cares about Fed profits and will question underlying policies if they generate losses—even if such losses ensue from an exit strategy designed to stem inflation." 

The system is structured for the people and entities who can get money at 25-50 basis points, especially the federal government. What they don't want disclosed via an audit is what the Fed is surreptitiously buying (stocks at times to prevent a decline or "correction") foreign bonds, OR selling (gold, which is competition for paper money and the easy money policies like QE).  Also, which entities are getting zero cost Fed loans. This is the reason we need an audit and anyone against it is part of the pro- government gang against the people.

Curmudgeon's Closing Comments: 

In addition to Victor's points above, there's also the contentious issue of the gold held by the New York Fed on behalf of account holders, which include the U.S. government, foreign governments, other central banks, and official international organizations.

For several years, there have been rumors and reports that Germany's gold held at the NY Fed has been loaned out - perhaps several times - and is no longer on deposit there. 

Zero Hedge showed that in November 2014 there was a near record amount of gold withdrawn from the NY Fed.

At 42 tons, that was the single biggest monthly outflow at the NY Fed in over a decade...Much of that withdrawn gold was repatriated by the German Bundesbank.  "Almost as if the Bundesbank, gasp, did not trust the quality and content of the NY Fed-held gold, nor its well-meaning intentions."

Meanwhile, Ronan Manly wrote in a recent blog post: 

"There is a lot of circumstantial evidence to suggest that the Fed’s auxiliary vault is located at 1 Chase Manhattan Plaza, B5, accessible from the Fed’s Vault E via a link corridor or tunnel structure."  Might that be a conflict of interest for Chase (owned by JP Morgan)?

In conclusion, an audit of the Fed would ascertain if the Fed was lending out or selling gold held in its NY Fed vaults and if so, how much gold was actually stored there at this time.

Till next time...


The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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