For the first time history the Federal Reserve has been forced to reveal secrets that it has never released in its 98-year existence. What it revealed will not only shock you, but will give you insight on how real world conspiracies work.
At the height of the 2008 crisis on October 29, 2008, the US central bank lent up to $110 billion through its emergency “discount window,” an emergency fund only used when banks have nowhere else to go for borrowing. These emergency funds, along with trillions of dollars in emergency aid to U.S. and foreign banks as well as other companies, were kept secret from the American people. As the “People’s Bank,” it’s only fair that its citizens should know what is being done with their money. But that of course is never the case.
The Fed argued that naming banks that used its discount window could cause a self-fulfilling bank run prophecy, endangering the institutions and defeating the program’s purpose. As unethical as it sounds, I agree. What we don’t know can’t hurt us…
So the Fed kept their lending documents and practices hidden away from the world and the citizens it sought to protect. They kept secret the names of all the banks that drew emergency loans during the financial crisis…until now.
On Thursday, the Fed was forced to reveal the names of every bank that turned to the U.S. government’s emergency bailout program for help during the peak of the credit crisis.
Big U.S. banks, such as Wachovia and Morgan Stanley, took out short-term loans of $6 billion and $1.25 billion, respectively. Washington Mutual borrowed from the discount window on Sept. 18, 2008, with an initial loan of $2 billion. But it then borrowed another $2 billion every night until its collapse on Sept. 25, 2008 when it was finally bought out by JPMorgan.
The Federal Reserve warned that releasing details of its lending could lead to a rapid loss of public confidence in borrowers and possible bank failures. They were probably right. If these documents were released two years ago, the public might come to the conclusion that the banks were all going to fail. This would have undoubtedly caused a major bank run and the ultimate crash in the financial system.
Luckily, that didn’t happen.
Now that the banks are in much healthier positions, these recently released documents appear to have done little harm to any of the banks involved in the borrowing.
Since the unprecedented release of the documents, the KBW index of 24 banks has risen 1 percent. JPMorgan Chase (NYSE: JPM), which borrowed at least $5.9 billion from the discount window in 2007 and 2008, gained 0.5 percent Friday. Morgan Stanley (NYSE: MS), which borrowed as much as $6.9 billion in October 2008, fell just 0.2 percent.`(Keep in mind that these numbers are strictly based only on the “discount window” borrowing, and does not include other numbers. For example, along with the $5.9 billion, JPMorgan also accepted $25 billion from the U.S. Troubled Asset Relief Program, better known as TARP.)
While the information released has had little effect in the financial sector, it doesn’t mean the banks are in the clear.
There were thousands of pages released which will take time to sift through. The list of those who tapped into the discount window includes many extremely shocking names, from foreign industrial competitors to hedge funds in tax-haven nations to various powerful Wall Street figures (and even some of their relatives!) Until they are sorted out and reviewed completely, I wouldn’t jump into any particular banks just yet as the market hasn’t had time to truly absorb the information. However, at this point, there doesn’t appear to be anything major that could harm them. The borrowing did happen more than two years ago and a lot of it has been paid back.
The amount of money lent out through the discount window during the peak of the crisis doesn’t surprise me one bit. Nor does it have me concerned. But what I am about to reveal just might shock you.
The biggest recipients of the discount window funds were foreign – not American – institutions that benefited from hundreds of billions of taxpayer dollars. During the crisis’ busiest week, 70% of the $110+ billion borrowed through the discount window went to overseas banks.
That’s right. They were used to bailout foreign banks.
Dexia, Erste Group and Depfa, were among the top foreign banks who tapped into the discount window. Other big foreign borrowers were Norinchukin Bank of Japan, Bank of Scotland, and Germany’s Landesbank Baden-Wurttemberg and France’s Societe Generale.
But get this. Among the 25,000+ pages released by the Fed were documents showing that Arab Banking Corp. (ABC) had borrowed more than $35 billion from the U.S. Federal Reserve in the 18 months after Lehman Brothers collapsed with interest rates as low as 0.25%. Guess who is now the majority owner of the ABC? Drum roll please…
The Central Bank of Libya
During the crisis and until now, the Central Bank of Libya has somehow managed to grow its ownership in the ABC from a mere 29% to a majority controlling 59% to date.
To make matters worse, the Fed’s assistance to the now Libyan-controlled bank did not end there. On March 4, the Treasury Department exempted ABC from economic sanctions and any other bank that is owned or controlled by the Libyan government operating under the laws of a different country. How messed up is that?
I am not done.
All of the loans to the ABC were backed by collateral in U.S. Treasury securities purchased by the ABC. In other words, at the same time that the ABC was borrowing money from one arm of the U.S. government for next to nothing, it was also lending money to the U.S. Treasury and receiving a higher interest rate.
How messed up is that?
Why in the world would the US lend money overseas when it has some very serious financial problems on its own turf? Why would the US lend money to foreign countries when it is suffering from failing mortgages and its citizens are losing their homes?
Therein lies the controversy for which I am about to reveal.
It’s all about oil. You scratch my back, and I’ll scratch yours.
Call me a nut bar, a conspiracy theorist, or whatever you want. At the end of the day, the nation who controls the world’s oil supply is the world power.
The attacks in Libya and the unrest in the Middle East has everything to do with the control of the world’s oil supply. Yes, it also has to do with regime changes and political uprising, but at the end of the day the US is in there for one reason: Oil.
Without going into a 1000-page report, the premise is simple: The US helps Libya and in return gains political power and specialized trade agreements with an important oil country. The new trade agreement and investment framework came into place immediately after the bailouts on May 20, 2010 and also includes help from Washington to advise Libya on their WTO (World Trade Organization) membership bid. See Press Release Here
Coincidence? I don’t think so. Doing some simple research will show you how this process has happened many times over in the past. There’s no such thing as a free lunch – especially not from the Fed or the US government.
I don’t care what type of solar power or new energy technology is out there right now, the fact is oil will remain the number one source of energy for many, many years.
While there are alternatives to oil on the horizon, we’ll need to see at least $150 oil for a sustained period before any of them would start to become a viable alternative. Even if we saw $150 oil, the costs to bring alternative sources into play would be staggering. Furthermore, if alternative energy sources become viable with oil over $150, it would also mean that the demand for oil would shift and oil prices would sink. This, in turn, will drop oil prices and make those so-called “viable” alternatives, not so viable anymore.
The fact is we need oil. HSBC just warned that the world has roughly 50 years of oil left. It believes that the emerging market growth will put another 1 billion cars onto the road by 2050. That is on top of the 700 million on the road today (see Actions Speak Louder Than Words). China will lead the way and it has already begun to accumulate oil assets in preparation for their growth. (see Actions Speak Louder Than Words)
While oil may trade sideways for a while with the unknown outlook for the Middle East, oil is here to stay. As I mentioned in the last newsletter (see The Controversy and Far From Over), many of the major oil stocks are more than capable of keeping their dividends consistent with $80 oil. At current prices, it leaves a lot of room for growth in these stocks.
Until an alternative energy source becomes viable -which is a long time from now, or if oil hovers over $150 for a sustained period – oil will remain number one.
Oil has already climbed past $105 and closed in on $110, as I predicted a few weeks back in The Controversy. Over the next five years, we could see this number increase substantially along with the rise of inflation.
Keep your eyes on energy stocks, especially those who pay good dividends. Many of them, such as Provident Energy Trust have done nothing but climb in the last six months. I think Suncor, Encana, and Chesapeake Energy, despite nearing their 52-week highs, still have room to climb. However, I would be careful short term as swings in oil and gas prices could swing these stocks slightly to the downside.
Agricultural stocks are also continuing their bullish climb and sees no signs of a slowdown. You should be able to ride this momentum to the upside, as long as you don’t get greedy.
The recent release of the discount window bailout by the Fed has given the world another reason to be cautious of the world’s banking systems. It gives the world another reason to question fiat and digital currencies while putting more faith into gold and silver. I expect both gold and silver to climb next week.
Until next week,
Managing Director, Equedia Weekly
Equedia Network Corporation