Some Very Basic Confusion About the Fed at WSJ

By Bob English

The "Suspense at the Fed," according to David Wessel at the WSJ, is not over continued QE trimming, but "the fate of President Barack Obama’s nominees to the shrinking Fed Board of Governors."  There are only four governors currently, down from the statutorily-mandated seven.  Come May, the Fed may be down to three governors.

Why is this a problem (or cause for suspense)?  Because the balance of power over monetary policy could be tipped by the five regional Federal Reserve Bank presidents who hold seats at the Federal Open Market Committee (FOMC), which currently sets monetary policy.  This gives Wednesday's FOMC Announcement at least the potential to be somewhat interesting (but don't hold your breath).  True, the regional Fed bank presidents tend to follow the central monetary planning heard, but they also tend to be less obsequiously unquestioning of the Fed Chair than the Washington-based governors.
Wessel's own answer to the "so what?" question digs into a bit of Fed history (emphasis mine):

"[T]his influences the balance of power inside the FOMC, and the market-moving statements it makes about its plans at the end of each meeting. When the Fed board is at its full strength, monetary policy is made by votes of the seven Fed governors in Washington and presidents of five of the 12 regional Fed banks, a delicate balance created by the Federal Reserve Act of 1913."

Unfortunately for Wessel, this explanation is just plain wrong.

The "delicate balance of power" was not created by the Federal Reserve Act of 1913, but by the Banking Act of 1935.  Pursuant to the original 1913 Federal Reserve Act, the regional Fed banks could conduct their own monetary policy.  There was a Federal Reserve Board in Washington, but no Board of Governors until 1935.  This prior situation could be described as a more "delicate balance of power" than after Washington created de facto monetary policy hegemony for itself in 1935.  With the institution of the FOMC and its seven Fed governors versus five regional Fed bank presidents, the balance of power was decidedly tipped in favor of Washington.

Hopefully, this puts the present kerfuffle over Senate intransigence when it comes to Fed nominees in the proper perspective.  If anything, the Senate's on its way to rolling back the clock to 1934.  Now, if only Congress would roll the clock back to 1912.

Bob English as an occasional contributor to EPJ.

Forbes Follows Up on EPJ Report on Suspicious MF Global Filing Practices

Following up on the report of EPJ's Bob English on suspicious filing practices surrounding MF Global documents, Francine McKenna comments at Forbes:

Instead of looking out for MF Global investors – and customers who are still waiting for their money – it looks like regulators and the bankruptcy trustees are busy suppressing information. Instead of full transparency, regulators and the trustees are holding onto crucial details that might tell us all who was asleep at the wheel when the broker/dealer and futures commission merchant (FCM) headed over the cliff.

Bob English, an independent trader and contributing editor to the blog, Economic Policy Journal, published a post this morning that raises serious questions about the Securities and Exchange Commission’s program of regulation for broker/dealers and, in particular, the agency’s role in keeping the truth from the public about what went wrong at MF Global.

McKenna continues:

PwC’s report to the SEC of internal control discrepancies for 2010, and there is one according to the filing index, is private. None of the auditor’s reports specific to the broker/dealer and FCM are available to the public on Edgar for 2011.

Is this just sloppy scanning? It’s no coincidence to me that auditor PricewaterhouseCoopers may also be playing a role in keeping uncomfortable or incriminating information from the public about its audit clients which include MF Global as well as Bank of America, JP Morgan, and Barclays. (See latest record fine against PwC for looking the other way at customer funds commingling at JP Morgan. They are also under investigation for similar sins at Barclays.) The largest audit firms routinely request confidential treatment of their reports and contract details such as engagement partners, whether as a vendor to the government or as a defendant in a contentious lawsuit.

There’s also a very strong interest on all sides of the MF Global mess in not leading anyone to third-parties such as bankers like JP Morgan, lawyers, and PwC, the auditors, too soon. Is there something in PwC’s secret audit reports and internal controls discrepancy reports for the broker/dealer for 2010 and perhaps 2011, that someone, anyone should have paid attention to earlier?

Here we are, more than two months after the forced liquidation of the MF Global broker dealer - it’s important to note this was no voluntary bankruptcy filing but a liquidation forced on MF Global by the Securities Investor Protection Corp – and the missing $1.2 billion of customer funds has not yet shown up...

When the trustees, the regulators, and the FBI finally stop looking under sofa cushions for the missing customer funds, they’ll have to start preparing lawsuits against third-parties to meet the huge shortfall including directors, JP Morgan, Jeffries, who underwrote the bond issue in August, and auditor PwC.

The Department of Justice will be forced to file criminal charges against someone.

What evidence will they base these lawsuits and criminal complaints on? Typically, a bankruptcy trustee hires a bankruptcy examiner to develop the theories and uncover the evidence used to hold executives, directors, bankers, underwriters, auditors and attorneys responsible for the failure of the firm and any fraud.

That hasn’t happened here. Why not?

EPJ Uncovers Suspicious Filing at the SEC with Regard to MF Global Documents

Some strange doings at the SEC, with regard to MF Global documents.

Documents that disappear, as noted by EPJ's own Bob English, then resurface with deviations from the normal "received stamp," pages that look to include copy with a different type and a new scribbling on a document that was specifically identified earlier by English. English summarizes:

The fact that the stamp says "REGISTRATIONS BRANCH" is also a deviation from the filing stamp that broker filings usually receive. Here is MF Global Inc.'s 2010 report, which contains the typical diamond shaped filing stamp (truncated at the top):

Finally, we hinted at the top that there are a few curious annotations in the replacement MF Global Inc. filing. Compared to the original filing, the replacement filing has text that is slightly smaller and more blurred. Also, the right margin is wider, which all suggests it is a photocopy. Thus, we are left to wonder whose hands this copy passed through before being scanned, and just who was interested in the first paragraph of the financial notes, which specifically addresses the definitions of the various MF Global entities:

And further, why would this person have scribbled below the sentence that specifically addresses the European repo-to-maturity trades that were transacted with an affiliate of the broker unit?

Here is the original:

Interestingly, we included only two excerpts from the MF Global Inc. financial notes in our November 9 article, and the sentence above the handwritten scribble constitutes one, the other being this:

These annotations, combined with the three month delay in scanning, along with the atypical filing stamp all suggest that the 2011 MF Global Inc. report has been receiving special attention at the SEC. Yet, the public record reveals very little of this file tampering, and would likely have gone unnoticed had MF Global not been so high profile. Indeed, the deleted filings of JP Morgan Securities, Goldman Sachs & Co., Banc of America and Newedge USA have gone unnoticed for years.

The full report by English is here.

Caught Red Handed (on the Eve of Christmas) The SEC Big MF Scrub

Wow, we don't take days off here at EPJ, and for good reason. The real sneaky stuff usually happens when everyone else is out partying.

EPJ's Bob English has caught a big scrub of key MF Global filings with the SEC, which has apparently occurred in recent weeks/days.

Got that? MF Global is under investigation for the co-mingling of client funds and some one is scrubbing SEC filed documents from the internet.

Bob English has the full story, here.

Is M.I.T. Secretly Running the Fed?

EPJ's Bob English writes:

It's official: Fed led by quartet of MIT grads.

File under curious. I wonder if they all had a similar mentor whose legacy is now driving the Fed.

The Federal Reserve has just announced that Steven B. Kamin will officially become the director of Fed’s chief international economic advisory division.

Kamin became acting director in August following the departure of Nathan Sheets, who led the office after almost four years and became the global head of international economics at Citigroup Inc. Kamin’s appointment is effective Dec. 11, the Fed said in a statement today.

As director of the Division of International Finance, Kamin briefs Fed Chairman Ben S. Bernanke and other officials on economic developments outside the U.S. and represents the Fed at international meetings.

Kamin holds a bachelor's degree from the University of California at Berkeley and received a Ph.D. in economics from the Massachusetts Institute of Technology.

With this appointment, all three of Bernanke’s top staff advisers are M.I.T grads.

William English (no relation to Bob)is the director of the Division of Monetary Affairs, He also received his PhD from MIT,as did David Wilcox director of the Division of Research and Statistics.

Bernanke also received his PhD from M.I.T..

Dear Congress: Bernanke Just Lied to You

On December 6, 2011, Ben Bernanke, Chairman of the Federal Reserve, responded to recent media accusations regarding the Fed's emergency lending during the financial crisis. In attempting to correct "numerous errors and misrepresentations" by the media, Bernanke himself relied on a variety of misleading, if not outright deceptive, tactics and fact-twisting.

EPJ's Bob English has written a devastating open letter expose to Congress detailing the many ways that Bernanke attempted to mislead and deceive them. Don't miss this important expose, here.

Who is Laurie Ruth Ferber and What the Hell is She Up To?

Laurie Ruth Ferber is just what elitists look for in a lawyer, someone who can talk technical details to get what a firm needs. EPJ's Bob English has done some detailed research on Ferber, a gal who sure knows how to end up around trouble.

Bob writes:

Laurie Ferber is [general counsel of recently collapsed] MF Global...and was previously a managing director of Goldman Sachs and general counsel of  Drexel Burnham Lambert [which also collapsed]. More recently, she co-authored the December 2, 2011 letter to the CFTC arguing against many of the contemplated changes to CFTC Rule 1.25, which governs the investment of customer segregated funds. Yes, the same funds that have gone missing to the tune of over $500 million, which has given the excuse for Trustee Giddens, working billing at $891 per hour, to freeze ALL customer cash..billions of dollars spread over 50,000 active accounts. Wehighlighted this letter in our previous expose of MF Global's shady dealings here.

Want more? Bob continues:

 It seems Ms. Ferber almost single-handedly made commodities an asset class when she obtained this secret exemption letter from the CFTC, which did not surface until 2008. The letter was written to her by Jean Webb, CFTC Secretary, when Ms. Ferber was General Counsel of J. Aaron & Company, owned by Goldman Sachs. It granted an exemption to speculative position limits in commodities based on the hedging activities related to the Goldman Sachs Commodities Index. Matt Taibbi wrote about this here, but got his facts wrong, confusing the recipient (Ferber) with the sender (Webb).

Below is an excerpt from a post we wrote last year about how the GSCI was unexpectedly rebalanced in the summer of 2006 right as Paulson came into the Bush administration. It was the energy component that was substantially revised downward, which led to immediate forced selling and lower gas prices into the election. From this filing, we know Ferber sat on the GSCI Policy Committee at the time. She would have been the energy expert.

Bob's full report is here.