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Saturday, January 19, 2013

Paranoia Vindication

For those of you who were trading the markets back in 2007, you probably remember August of 2007, the first big correction before the bear market of 2008 began. I had begun writing this blog earlier in the year, and was still pretty naive in the way TPTB worked (at least more naive than I am now). On August 16, 2007, the FOMC announced an emergency rate cut in the discount rate, the first of what would be a long series of rate cuts that left us where we are now. The market, as would be expected, rallied pretty ferociously on the news. However, that rally actually began before the close on August 15th, and anyone with an ounce of common sense had to smell a rat. I suspected Hank Paulson, with his close ties to Goldman Sachs, or perhaps just a no-rank Fed clerk feeding information to some of his trader buddies. Well, according to a just released transcript of the FOMC conference call of August 15, it was non other than current Treasury Secretary Timothy Geithner spilling the beans:

Jeffrey Lacker, the head of the Richmond Fed, originally raised the allegation during a Fed conference call in August 2007, and he stuck to his 5-year-old claim against the current U.S. treasury secretary in a statement provided to Reuters on Friday.
"From conversations I had prior to the video conference call on August 16, 2007, I was aware of discussions among a few large banks about borrowing from their discount windows to support the asset backed commercial paper market," Lacker said in the statement. "My understanding was that (New York Fed) President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives."
(from Rueters via Yahoo Finance)

Apparently Bank of America was the first to get the information:

During the Fed's August 16, 2007, conference call, Geithner said that banks had started to ask about borrowing from the Fed earlier in the month after the central bank had released a statement saying it stood ready to provide liquidity to credit markets.
Geithner said banks "obviously don't have any idea that we're contemplating a change in policy" - a statement that Lacker then questioned.
"Did you say that they are unaware of what we're considering or what we might be doing with the discount rate?" Lacker asked, according to the transcript.
Geithner said yes, and Lacker followed up: "I spoke with Ken Lewis, president and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that."

It's been 5 long years, but my paranoia has been vindicated.

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