Michael Lewis for Bloomberg: The Fed Rescue Program Too Bizarre to Be True

April 12th, 2011

April 12, 2011, 7:04 PM EDT
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By Michael Lewis

April 13 (Bloomberg) — Last week the Federal Reserve bravely released 894 PDF files containing 29,346 pages that detailed its heroic actions during the financial crisis.

These documents revealed how open-minded the Fed can be when it needs to be. Local governments in Belgium, Japanese fishing cooperatives, the Libyan government and many other unlikely parties received the Fed’s financial aid. Failing U.S. banks, such as Citigroup and Morgan Stanley, were of course handed whatever they wanted, and permitted to post as collateral pretty much anything they could get their hands on: junk bonds, defaulted debt, volatile equities.

To naive critics this came as just more evidence that the Fed had mistaken the wants of a handful of rich people for the needs of the wider society.

Many Fed spokesmen have wisely declined to comment, many times.

Upon seeing how incapable the public is of understanding its wisdom, the Fed judiciously elected to withhold a second, far longer document. This previously unexamined collection of 10,427 encrypted PDF files should no doubt offer not merely a record of financial heroism, but a snapshot of peerless financial leadership during a crisis.

‘American Public’

Unfortunately, it won’t.

“We decided not to release any more details,” said one Fed spokesman, “because frankly, the American public is too stupid to understand them.” Instead, to prevent another pesky Freedom of Information Act request of the sort that led to its first brave disclosure, the Fed has offered physical access to its building.

A team of Bloomberg investigative reporters, led by Kram Namttip, was allowed to spend a day examining what remains of the collateral collected by the Fed during the crisis. What follows is a brief summary of their findings. To wit:

— A vault in the Fed basement filled with young women, who claimed, in broken but excited English, they had been repo-ed by the Italian government.

If Italy has weathered Europe’s sovereign debt crisis so much better than its fellow deadbeats, here is why: the Fed’s nervy decision to extend credit to the Italian government against its prime minister’s social assets.

Relaxed Fed

“That the Fed relaxed its policy and made no distinction between the 16-year-olds and the 18-year-olds indicated just how severe they felt the crisis was at the time,” says Merkle Stewart, associate professor of finance at the University of Louisiana at Bogalusa.

“Then again, they may have calculated that as the girls came of age, their value might actually rise, with less risk, at least outside of Italy.” A Fed spokesman declined to comment, except to say, “They told us they were 18.”

— Traces of a powdery substance belonging to the giant Mexican international commodities firm, Los Zetas.

Wisely, the Fed understood by late 2008 that the last thing that U.S. banks needed was a crisis on the southern border. To preserve order, and to prevent losses at JPMorgan, the Fed stepped in to create demand for Mexican exports. To its credit the Fed didn’t take the value of the Mexican corporate collateral on faith.

‘Good Sugar’

“At the peak of the crisis the chairman tested the collateral personally,” says a Fed spokesman. “I remember him coming out of the men’s room late one night with this huge grin and his eyes open really wide, and whooping it up to anyone who would listen, “Whoa! That’s some seriously good sugar!”

— A box of brightly colored beads labeled “If Found, Return to Ivory Coast.” “No idea what that’s about,” said the Fed spokesman.

— A snatch from an early draft of what appears to be a lurid poem, written in German. A rough translation:

Your savings rate so arouses me/

Your exports taste like honey.

Collateral unnecessary/

I would beg to lend you money.

In an official statement the Fed explained that the quatrain was inspired by a surprising request from a German bank, the Bayerische Landesbank, for a $500 million loan. “The chairman is disturbed that his private moments should be deemed of public interest,” read the statement. “He nevertheless considers this among his finer works. I mean, that this bank from a seriously solvent country thought to borrow from us instead of from the German government. Like, they could have gone anywhere. He just wanted to show how he felt.”

— Hastily scrawled receipts for several hundred million dollars in short-term loans to the Taliban.

To the untrained eye, it isn’t obvious how an outlaw sect in a nation devoid of financial assets became systematically important to U.S. interests. Apparently, in the heat of the moment, the Fed saw the high quality of the Taliban’s collateral, and jumped at the chance to get its hands on it.

“To challenge this difficult decision is very backward- looking,” says the Fed spokesman. “Osama bin Laden’s value to the U.S. government was so much greater than the loans we extended against him that it more than made up for the worries we had about the equities Morgan Stanley posted, or our doubts about the teenage girls — not that we ever had any doubts about those girls.”

When shown documents that suggested that the Federal Reserve was actually an arm of the U.S. government, and thus in no position to cut a deal to sell bin Laden to that government, the Fed spokesman declined to comment.

That bin Laden slipped away and vanished his first night inside the Fed’s vaults was, the spokesman claimed, “unforeseeable.”