Tuesday, December 1, 2009


On December 3, 2009 the Senate Banking Committee will hold a hearing to vote on Federal Reserve Chairman Ben Bernanke's nomination to serve a second term as Federal Reserve chairman. Chairman Bernanke’s first four-year term began on February 1, 2006. He was nominated by President Obama to serve a second term as chairman in August 2009.

This speech is offered to any senator who would like children to recite this denunciation in classrooms 300 years from now.

[Note: Bracketed comments are not intended for the senator’s remarks. Time allotted for each senator to speak is short and the attention span of listeners is even shorter. Bracketed comments are background information for the senator.]

Chairman Bernanke,

You are the chief regulator of the U.S. banking system. You have more authority than other agencies over the entire U.S. financial system. Specifically, the Federal Reserve directly supervises U.S. bank holding companies.

I make this precise definition of your authority because I anticipate a disingenuous distinction you are likely to make. That is, “Senator, the Federal Reserve only has authority over the bank holding companies, not over the banks. Banks are regulated by the
Comptroller of the Currency or the Federal Deposit Insurance Corporation.”

As you well know Chairman Bernanke, that is a false distinction. A bank owned by a holding company is, obviously, a part of the holding company. You can investigate practices and loans of banks by investigating your holding companies. If you reply, “investigating banks from the holding company level does not give a clear picture of the risks taken by banks” – then why didn’t you do anything about it? Since 2007, the government has put $45 billion – not million – dollars into Citigroup, alone. If you did not think the
Comptroller of the Currency and the Federal Deposit Insurance Corporation were doing an adequate job, it was your duty to tell this committee.

But, I do not think you were capable of warning us. This is an important reason you should not be Federal Reserve chairman: you do not understand banking. I want to review some of what the nation’s head bank regulator should have known by the end of 2006.

You had been chairman 11 months, having replaced Alan Greenspan on February 1, 2006.

The Federal Deposit Insurance Commission (FDIC) reported that construction loans, land development loans, and direct mortgages held by commercial banks had grown 87% from December 31, 2000 to June 30, 2006: from $1.6 trillion to $3 trillion: three trillion dollars of mortgages, construction and land development loans sat on the banking systems’ books. [These are direct loans. This does not include mortgage securities on bank books: another $1 trillion.]

The growth alone would have alerted a curious mind. Such a mind would have sought a measurement of the quality of those loans. Some information that was readily available to you:

The median price for an existing, single-family house in California rose from $237,060 in 2000 to $542,720 in 2005.

How could Californians buy houses? You answered the question yourself in a November 2006 speech: “In 1994, fewer than 5 percent of mortgage originations were in the subprime market, but by 2005 about 20 percent of new mortgage loans were subprime.” You thought this was a good thing. In the same speech, you also said with approval: “[T]he expansion of subprime lending has contributed importantly to the substantial increase in the overall use of mortgage credit. From 1995 to 2004, the share of households with mortgage debt increased 17 percent, and in the lowest income quintile, the share of households with mortgage debt rose 53 percent.” Mr. Chairman, how could you say this with approval? [If Bernanke claims he gave a warning during this speech, this is correct. He advised “greater financial literacy” for “borrowers with lower incomes and education levels.”]

From other public statements, you thought the banking system was in great shape. In June 2006, you told an International Monetary Fund conference: “[O]ur banks are well capitalized and willing to lend.” Since you as Federal Reserve chairman did not grasp the insatiable appetite of your bankers to lend, you did not understand the capital was insufficient.

By the time you spoke to the IMF, daily newspapers had already reported that lenders were rounding up pools of illegal aliens who had bought blocks of houses, and criminals who ran mortgage rackets. The latter group did not need to be rounded up since they were already in prison. [See Denver Post, July 14, 2005: Colorado banks lured illegal aliens into loans that were insured by the federal government. “They didn’t even have to come up with any money. They just moved in” and some immediately defaulted, moaned the local District Attorney. Also, see Denver Post, January 7, 2007, “Four People Plead Guilty in Mortgage Fraud Conspiracy,” Prisoners had received 100% loans for houses with inflated house prices.]

We know the carnage in the mortgage market since then. Yet, in October 2007, you told a group of central bankers and economists you did not know if there had been a housing bubble. [John Cassidy, “Anatomy of a Meltdown,” New Yorker, December 1, 2008]

Another blot on your record is the leverage throughout the financial system. Again, I anticipate your denial: that you only hold authority over the banking system. But, you hold the only position that can ration credit, so can substantially influence stability in our financial system.

Let me remind you of the machinery you control: The Federal Reserve adds or subtracts money to the economy. You do this by adding or subtracting dollars held by the commercial banks. You also set limits on how much credit the banks can extend to the economy. You have options to restrict lending. Most often the Federal Reserve has done so by setting reserve ratios. But more directly, you are the country’s leading bank regulator. From my own study of bank balance sheets – both their growth and deteriorating quality since you became chairman – I conclude, once again, that you do not understand banking. [As stage prop, senator could slap a stack of bank quarterly reports held by intern.]

Anticipating one of your smirky, pompous rebuttals, don’t tell me: “I remind you, senator, that we live in a global economy with a global financial system. The Federal Reserve does not have as much control as you claim.” Such specious arguments might close debate with an ambitious, non-inquisitive, Ivy League economic student. I am talking about reality: you have more control over money than the other central banks combined. The dollar is still the world’s reserve currency, despite your prolific printing efforts to debase it. As the world’s reserve currency, at least until you destroy the dollar’s status, it is only the United States that can print money in any quantity it so desires.

I will return, now, to the consequences of credit produced by the Federal Reserve. When Bear Stearns and Lehman Brothers had leveraged the balance sheet by over 30:1, it was the accommodating policies of the Federal Reserve that allowed them to borrow that much money. It was the accommodating policies of the Federal Reserve that permitted banks to offload mortgages to non-banks, such as Fannie Mae and Freddie Mac. This permitted the banks to constantly offer more mortgages, of poorer and poorer quality, confident that they could immediately sell them. This was the greatest relay operation since Tinkers-to-Evers-to-Chance. [Particularly appropriate if delivered by Senator Bunning.] You stated the banks were well capitalized. You probably believed this, since you do not understand banking.

Chairman Bernanke, you may claim you had no authority over investment banks, but the credit they leveraged originated in your banking system. This is also true for non-bank mortgage lenders such as New Century: every dollar it borrowed – so that it might finance new mortgage loans – was first lent from the banking system. This permitted New Century to make $56 billion in mortgage loans during 2005. By 2006, New Century was making loans on which the borrowers immediately defaulted. The carnage is strewn across the country.

You also showed no signs of understanding the consequences of your banks lending to private-equity firms. We can approximate this growth by looking at leveraged loans: that is, loans to finance buyouts. These were often companies that private equity firms leveraged with large amounts of debt.

In 2006, the year you became chairman, you had all the information you needed to know trouble was ahead. The Comptroller of the Currency issued a report in October 2006 that credit risk rose for 5% of the banks making leveraged loans in 2005 and had increased for 69% of banks in 2006. Bank loans to finance leveraged syndicated deals rose from $200 billion in 2005 to $360 billion in 2006 to $570 billion in the first half of 2007. Many of the companies bought were so leveraged they could not meet interest payments a few months after the buyout.

Yet, you stood by. Do not tell me the Federal Reserve has no authority over where banks lend – you not only can persuade but you have precedent – In 1980, when Paul Volcker was chairman, the Federal Reserve restricted bank credit used for acquisitions. Instead, the government-subsidized credit you were producing was going straight into the hands of stupid, greedy, malevolent bankers [senator chooses one – ‘greedy’ seems to be in vogue] and private-equity firms.

You did not have to guess at the irresponsibility and low motives of your bankers. In March 2007, a Wall Street Journal reporter told the world: “Hedge-fund managers, buyout artists, and bankers get paid for short-term performance. The long-term consequences of their actions are, conveniently, someone else’s problem. People inside the big banks…. Don’t want to get caught missing the next big deal. Their banks, and their own bonuses, might suffer. So they ply ahead.” [Note on italics: delivered with passion.]

What were the consequences? According to Moody’s, acquired companies have been “crippled.” In the next few months, many of these companies must refinance the debt loaded onto their balance sheets. Many will not be able to borrow. They will be forced into bankruptcy, and possibly, into liquidation. The unemployment rate is a reflection of your truancy, Chairman Bernanke.

[Circuit City was forced to liquidate. Mervyn’s Department Store – liquidated. Linen’s ‘n Things – vaporized. Those jobs are gone. Many other very large employers, such as Clear Channel Communications and Harrah’s Entertainment are in bankruptcy court. The list is long and growing. Some will make it, some will not.]

The banks that made these loans, too, have been crippled. They wrote off $3.8 billion of leveraged loans in 2007 and another $54.4 billion in 2008. 2009 promises to be a bonanza. It is the taxpayers who are paying for the banks’ ineptitude. It was your job to stop it.

Instead, you are behaving like Oedipus when he understood his act of perversion. But, instead of gouging your eyes out, you drove interest rates to zero. Zero! The backbone of America, those who saved prudently and asked the government for nothing, cannot earn enough interest to buy Spam. The insurance companies, another backbone to prudent households in our country, cannot earn enough interest to pay policyholders: they are being forced to either buy riskier assets and hope for the best, or, join Circuit City in liquidation. Community banks, one more source of stability, are being driven out of business because you have saved and subsidized the megabanks that should have been liquidated and that can now prey on smaller non-subsidized banks.

This is your legacy, Mr. Chairman. As is the derivative mess. I agree that your predecessor has much to answer for here. But look at the record since you acquired power: The nominal value of derivative contracts held by U.S. commercial banks leapt from $33 trillion at the end of 1998 to $101 trillion at the end of 2005, about the time Mr. Greenspan left office. This was roughly a 17% annual increase. By June 30, 2007, seventeen months you’re your chairmanship, the nominal value had risen another 50% - to $153 trillion.

Most importantly – and this may be the greatest deficiency in your magnificently woeful record – credit derivatives rose from $14 trillion to $42 trillion from January 2006 to June 30, 2007. The inability of banks to honor these contracts led to the bailout of Goldman, Sachs, AIG and who knows what else. [Leave Treasury Secretary Geithner’s recent credit-default swap hallucinations aside. He may have changed his story again during this hearing.] At least, that is what every American with a pulse believes, and will continue to believe, since you so desperately try to avoid an audit. This is a black eye on the face of the United States. Americans believe you have protected the worst financial manipulators while unemployment and disillusionment rise.

Mr. Chairman, it is time to give the American people hope that they are represented in Washington. It is also time to give them hope the Federal Reserve chairman knows what he’s doing! Your notice for dismissal was written over 300 years ago, when Oliver Cromwell scolded the Long Parliament: “You have sat here too long for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!”