Reform reading: Senator asks Fed for details of loans to rich investors, tax haven funds

Introduction

The same U.S. senator who pried open details about the Fed’s $3.3 trillion emergency loans to banks now wants to know how much help it gave billionaires Michael Dell and John Paulson.

Vermont Sen. Bernie Sanders, an Independent who usually caucuses with Democrats, sent a letter to Fed chief Ben Bernanke asking for details of loans to high-profile individuals plus an explanation of why the Fed loaned so much money to foreign banks during the 2008-09 financial crisis. The loans were backed by collateral – much of it junk-rated – and repaid at rock-bottom interest rates ranging from 0.5 percent to 3.5 percent.

At the same time small businesses couldn’t get loans “not only did large financial institutions and major corporations receive these ultra-low interest loans, but foreign companies and banks, and some of the wealthiest people in the world also received a major bailout from the Fed,” Sanders wrote. The senator included a provision in the Dodd-Frank financial reform law requiring the Fed to release information last week about its emergency lending.

Sanders’ letter specifically asks:

• Did any corporate executives who serve on the Fed’s regional boards use their influence to obtain emergency Fed loans? The board of the Fed’s regional bank in New York includes the chief executives of General Electric and JPMorgan.

• How much did the Fed lend to various individual investors, including computer maker Michael Dell, hedge fund manager John Paulson, investor Wayne Huizenga, and Christy Mack, the wife of Morgan Stanley’s former chief executive?

• How much did the Fed lend to hedge funds and investment funds based in tax havens like the Cayman Islands?

• Why did the Fed bail out the state-owned Korea Development Bank, the state-owned Bank of Bavaria, the central Bank of Mexico and the Arab Banking Corp. in Bahrain?

• Why did the Fed buy commercial paper from Toyota and Mitsubishi, and lend money to investors for securities in foreign automakers?

• When will the Fed disclose details on individual securities pledged as collateral by recipients of about $885 billion in its emergency lending?

Lack of sophistication led to Michigan bank collapse

The collapse of Michigan’s CF Bancorp, which will cost the federal deposit insurance fund $535.7 million, is due to the bank’s purchase of collateralized mortgage obligations and lack of sophistication in managing their risks, according to a new Federal Deposit Insurance Corp. inspector general report.

The government is required by the Dodd-Frank law to analyze each bank failure costing the federal deposit insurance fund more than $200 million, and reports typically lay most of the blame on aggressive real estate lending. But CF Bancorp was dogged by a variety of problems before it was closed on April 30, including a manager who hid documents from regulators and “purged appraisal information from loan files.” That employee, who was not identified in the report, resigned in October 2009 and the FDIC is still pursuing administrative penalties against him.

The Port Huron bank had exquisitely poor timing when it started to buy risky collateralized mortgage obligations in mid-2007 and ramped up purchases of the mortgage-backed securities in early 2008. Just weeks later, the CMO portfolio saw its credit ratings downgraded. Bank examiners also found CF Bancorp failed to transfer all builder loans to its commercial portfolio for closer monitoring, and made a dozen errors in its quarterly call reports totaling some $1.4 billion.

The FDIC had 860 banks on its problem list at the end of September, the highest number since 1993. The deficit in the agency’s deposit insurance fund improved to a negative $8 billion, an improvement from negative $15.2 billion in the previous quarter.