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.
is offered to any senator who would like children to recite this
denunciation in classrooms 300 years from now.
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.]
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
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
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,
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.]
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:
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
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
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]
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
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.]
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 economics 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.
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
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 -- u2018greedy' 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.
was forced to liquidate. Mervyn's Department Store -- liquidated.
Linen '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.
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 of your chairmanship, the nominal
value had risen another 50% – to $153 trillion.
— 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.
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,
[send him mail] is
finishing a biography of Alan Greenspan. He writes frequently for
the Gloom, Boom & Doom Report, Whiskey & Gunpowder and the Prudent
Bear website. He has worked in the financial industry for more than
two decades. This was reprinted from Whiskey