Courtesy of Pam Martens
Randal Quarles, Vice Chairman for Supervision, Federal Reserve, Testifying before the Senate Banking Committee on May 12, 2020
Following the Wall Street banking collapse in 2008, the then head of the Federal Deposit Insurance Corporation (FDIC) Sheila Bair wrote the book Bull by the Horns. She described how the Federal Reserve and the Office of the Comptroller of the Currency (OCC) had ignored the systemic problems at Citigroup and allowed this “sick bank” to continue paying out cash dividends. Bair wrote as follows:
“By November [of 2008], the supposedly solvent Citi was back on the ropes, in need of another government handout. The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007. Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking. It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate. It had loaded up on exotic CDOs and auction-rate securities. It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits. If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”
In point of fact, the New York Fed did not just stand by. It secretly funneled $2.5 trillion in low-cost revolving loans to Citigroup from December 2007 through at least July 2010. The Fed battled in court for more than two years to keep its trillions of dollars in secret loans to Wall Street banks from public disclosure.
The U.S. Senate Banking Committee held a hearing with the federal regulators of banks on Tuesday of this week. Throughout the hearing, which was done virtually, there was an undertone of disgust on the part of the Senators from both parties with one regulator: Randal Quarles, the Vice Chair of Supervision for the Federal Reserve.
A key issue that Senators had with Quarles was that the Fed was allowing these same Wall Street banks that crashed the U.S. economy in 2008 to continue to pay out dividends today while laying off workers and getting cheap emergency loans from the Fed.
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