9/11 Launched the First of the Unaccountable Bailouts by the Fed to Wall Street

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by Pam Martens and Russ Martens, Wall St On Parade:

Most Americans believe that the unprecedented Fed bailouts of Wall Street didn’t begin until December of 2007, on the cusp of Wall Street’s financial collapse in 2008. That’s wrong. The Fed’s first massive bailout of Wall Street started on 9/11.

By the closing bell on September 10, 2001, the day before the attacks, the Nasdaq stock market was already in the midst of a full-scale implosion, having lost 66 percent of its market value and wiping out $4 trillion of wealth.

The Wall Street mega banks were in the cross-hairs at the time of then New York State Attorney General Eliot Spitzer for bringing to market Initial Public Offerings of companies that the banks’ own research analysts were internally calling “crap” and “dogs” while the same banks issued buy recommendations on the “dogs” to the unknowing public. One internal email from Jack Grubman, an analyst at Salomon Smith Barney, captured the brazenness of the deception: “Most of our banking clients are going to zero and you know I wanted to downgrade them months ago but got huge pushback from banking.”

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The Congressional Research Service indicates that the Fed funneled “$100 billion per day” over a three-day period beginning on 9/11 to Wall Street firms. The consolidated annual reports of the Federal Reserve Banks show that the Fed’s balance sheet grew from $609.9 billion at the end of 2000 to $654.9 billion at the end of 2001 to $730.9 billion at the end of 2002 and $771.5 billion as of December 31, 2003.

According to a report by the St. Louis Fed, these are the numerous ways that the Fed rescued Wall Street following 9/11:

“The Fed held $61 billion of securities acquired under repurchase agreements on Sept. 12, vs. an average of $27 billion on the previous 10 Wednesdays and about $12 billion a year earlier.

“The Fed directly lent funds to banks through the discount window. The $45 billion in discount loans outstanding on Sept. 12 dwarfed the $59 million average of the previous 10 Wednesdays.

“As a regulator, the Federal Reserve—along with the Comptroller of the Currency—urged banks to restructure loans for borrowers with temporary liquidity problems. To assist such restructuring, the Fed made additional funds available.

“The Fed passively extended credit to the economy through its role in clearing checks. When the Fed clears checks, it credits the receiving bank before debiting the bank making the payment. Float describes the amount of money that has been credited to check depositors but has not yet been debited from the check writers. The float totaled almost $23 billion on Sept. 12, for example, some 30 times the average float over each of the 10 previous Wednesdays.”

The Chicago Fed reported that an additional “$90 billion in liquidity” was added by the Fed setting up 30-day dollar swap agreements with the European Central Bank, the Bank of Canada and the Bank of England.

Outside of a gush of bailout money from the Fed, Wall Street loves interest rate cuts because they are a boon to their trillions of dollars in derivative contracts. On September 17, just before the stock market reopened for the first time since the 9/11 attack, the Fed announced it was cutting both the Fed Funds Rate and the Discount Rate by 50 basis points (half of one percent). Two weeks later, on October 2, the Fed slashed both the Fed Funds and Discount Rates by another 50 basis points. Stunningly, on November 6, one month later, it again cut both rates by 50 basis points, bringing the Fed Funds Rate to 2 percent and the Discount Rate to 1-1/2 percent. On December 11, both rates were cut again, but this time by just 25 basis points. The Fed Funds Rate, at 1.75 percent, was now trading at the lowest level in 40 years.

According to the 2001 Annual Report of the Chicago Fed, one unnamed bank was so grateful for the largess flowing from the Fed that it sent “a thousand packages of LifeSavers candy to each of the 45 Fed offices.”

report prepared by Stacy Panigay Coleman for the Federal Reserve’s Division of Reserve Bank Operations and Payment Systems found that a handful of the largest Wall Street banks were dramatically overdrafting their accounts at the Fed, resulting in daylight overdrafts peaking at “$150 billion on September 14, their highest level ever and more than 60 percent higher than usual….” According to other annual reports at regional Fed banks, fees were waived by the Fed for these enormous overdrafts.

Gail Makinen, Coordinator Specialist in the Economic Policy for the Government and Finance Division of the Congressional Research Service delivered a 60-page report on other money flows. Makinen found that New York City received the following in Federal aid as of the date of her report in September 2002:

“$11.2 billion appropriated in September 2001 for debris removal and direct aid to affected individuals and businesses [the businesses go unnamed]; just over $5 billion in economic development incentives was approved in March 2002; and another $5.5 billion for a variety of infrastructure projects for New York City was approved in August 2002.”

The Chicago Fed’s 2001 Annual Report contains further information on the enormous amount of money flowing from the Fed immediately after 9/11, detailing it as follows:

“The Fed begins to flood the financial system with record levels of liquidity by executing repurchase agreements [Repo loans]. These overnight loans collateralized with government securities are used routinely in open market operations, but seldom top a few billion dollars each day. On Wednesday [September 12], the Fed injects $38 billion, more than double the previous record. Thursday [September 13], the Fed shatters that mark with $70 billion. The next day, the Fed injects even more — $81 billion.”

Which banks on Wall Street needed this enormous infusion of money? The public, to this day, has no idea, just as it has no idea which banks had borrowed $495.7 billion in repo loans on one day last year.

For how another horrific tragedy for America became the golden goose for Wall Street, see our reporting on the Fed’s bailouts to Wall Street that began on September 17, 2019, four months before the first case of COVID-19 appeared in the U.S., and grew exponentially during the pandemic.

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