April 24 (Bloomberg) -- The Federal Reserve took on more than $74 billion in subprime mortgages, depreciating commercial leases and other assets after Bear Stearns Cos. and American International Group Inc. collapsed.
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In its biggest disclosure of the securities accepted to stabilize capital markets, the Fed said yesterday it had unrealized losses of $9.6 billion on the assets as of Dec. 31. The bonds, swaps and notes were taken in from Bear Stearns, once the fifth-biggest Wall Street firm by capitalization, and AIG, which had been the world’s largest insurer.
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“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.”
No it isn't. Treasury can't - at least not lawfully. Why? Because what The Fed did is illegal, that's why.
This is the oft-cited section of The Federal Reserve Act that is used to justify "extraordinary actions":
In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.
[12 USC 343. As added by act of July 21, 1932 (47 Stat. 715); and amended by acts of Aug. 23, 1935 (49 Stat. 714) and Dec. 19, 1991 (105 Stat. 2386.]
Note that word, "DISCOUNT." As in "discount a note."
Section 13.4 allows the outright purchase only of securities that are bills of exchange with a maturity of no more than 90 days.
There are a couple of exceptions in the Federal Reserve Act for specific agricultural bills of exchange - but with that exception, all that can be lawfully purchased (that is, that for which The Federal Reserve or its member banks) can take equity ownership in is specified under Section 14.
The key fact: All such instruments that are other than bills of exchange - that is, short-term self-liquidating trade credit held for and intended to be immediately liquidated on delivery and demand, or short-term notes issued by a government, must be:
2. To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.
Read that entire section folks. That's it.
The Federal Reserve had no lawful authority to take on these "assets" and cannot acquire such authority "ex-post facto."
These acts by the Fed were in fact, direct violations of the law in that there was no legal basis for the actions taken. As such every single person at The Fed (and The Federal Reserve banks involved, such as Geithner at the NY Fed) must be held to legal account and not one taxpayer dollar must be allocated to bail out these blatantly unlawful acts.
Mr Deninger at Market-Ticker.com raised this back when Bear Stearns collapsed and pointed to the black-letter law and the fact that there was absolutely no authority under the law for what was being done.
Oh by the way, The Fed has also purchased $355 billion in MBS and $61 billion (cumulatively about $410 billion) from Fannie and Freddie - which are not guaranteed as to interest and principal under full faith and credit. Those purchases are also illegal.
This lawlessness must stop.
If law enforcement does not effectuate arrests and if Congress does not rein-in these criminal activites, then I am prepared to use my nationally-broadcast radio show to begin publicly advocating Vigilante Justice. Put bluntly, I am prepared to begin advocating the Federal Reserve, its Chairman and its entire Board of Governors be physically seized and hung by their necks until they are dead. LYNCHED!
I have the names, home addresses and unlisted personal telephone numbers of fed Chairman Ben Bernanke and the entire Board of Governors. I am prepared to release that information on my nationally heard radio show, and to also begin promoting the idea of using "street justice" against these people.
If I choose to do this, I announce now that it would be with the intent to harm them.
Yes, I realize such an act by me would also violate the law but at this stage of the situation in the financial crisis, with so many others breaking the law without consequence, it seems only fair that I should avail myself of free lawbreaking too.
So, what's it gonna be, law enforcement and Congress? Are you going to step up and enforce the law via the courts, or do I have to start making violent things happen in the street?
Of course, I realize you might think about sending over the FBI, the Federal Reserve Police or hauling me in front of a Judge over what I've just written. No matter - me and my audience have enough rope for their necks too.