Fed’s Powell Says Forensic Work Ongoing on Liquidity Crisis; This Chart Shows Why He’s Worried
Let’s pause right here for a moment. Asking the mega banks on Wall Street, which blew themselves up in 2008 because they would much rather gamble in high risk derivatives and convoluted investment products with their depositors’ money, how much they would be comfortable holding in liquid reserves at the Fed is like giving a four-year old the choice between a pony or a book for Christmas. Naturally the Wall Street banks are going to want to yank as much liquidity as they can get from the Fed to enrich their trading books. And since when does the regulator of the most serially charged bank holding companies in America seek the opinion of the serially-charged miscreants?
As an example of what we mean, JPMorgan Chase was found by the U.S. Senate Permanent Subcommittee on Investigations to have used its bank depositors’ money to make hundreds of billions of dollars of high-risk wagers in derivatives in London in 2012 and lose $6.2 billion. The Subcommittee found that JPMorgan Chase “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.” And now the Fed is going to ask the same bank how much liquidity it would like to keep locked up at the Fed and not have available to trade (read “gamble”) with? JPMorgan Chase proceeded to pull $145 billion from its reserves at the Fed. On October 15, during an earnings call with analysts, JPMorgan Chase CEO Jamie Dimon said the bank has just $120 billion now in reserves at the Fed and that amount wasn’t enough to allow it to assist in the repo loan market on September 17 and still meet its regulatory requirements for keeping adequate liquid reserves on hand for an emergency.
Throughout Powell’s exchange with Congressman Flores he appeared nervous and fidgety and was waving his hands around. This is not Powell’s normal behavior under questioning in Congress. We found out why when Powell appeared to admit that the Fed is not completely confident that it understands “why” the liquidity crisis is happening.