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The title of this article is borrowed and modified
from the book "Deception and Abuse at the Fed" by Robert C. Auerbach.
The minutes of each Federal Open Market Committee
(FOMC) meeting are released within weeks of the meeting having occurred. The
full transcript is available only five years later. I recently started
reading in depth the transcripts of the FOMC meetings and discovered some
shocking information.
Let's consider the December 21, 1999, meeting. The
minutes can be found here --
http://www.federalreserve.gov/fomc/minutes/19991221.htm
-- while the full transcript is here:
http://www.federalreserve.gov/monetarypolicy/files/FOMC19991221meeting.p...
In the minutes the Board unanimously accepted the
accounts of the System Open Market Account:
"The Report of Examination of the System Open
Market Account, conducted by the Board's Division of Reserve Bank Operations
and Payment Systems as of the close of business on September 10, 1999, was
accepted."
One would think that there was nothing
of interest to see here; just mundane approval of accounting. But if we look
at the transcript we get an entirely different picture that shows that the
Fed contemplated that there could have been fraudulent diversion of funds or
errors in accounting in the famous Exchange Stabilization Fund (ESF) that has
received so much attention from GATA as one mechanism for manipulation of the
gold market.
* * *
CHAIRMAN GREENSPAN. Without objection. Peter Fisher,
you wanted to discuss the report of examination, I understand?
MR. FISHER. Yes. I wanted to elaborate a little on
Louise Roseman's memo to Don Kohn about the
unresolved difference between the internal accounting records of the Markets
Group Accounting and Control Unit and those reflected in the Integrated
Accounting System regarding the System's net interest accruals on foreign
currency investments. I thought it would be helpful if I gave a couple
minutes of background, if you will bear with me.
Last spring, as members of the Committee will
recall, we entered into a series of transactions with the ESF to re-balance
our euro and yen holdings so we could come to a better split both in terms of
total holdings and the currency mix. This involved a number of transfers of
ownership of a series of investments and resulted in quite a significant
amount of accounting activity. In the course of reviewing that, our own
accounting staff identified an error that had been introduced in the prior
year in our treatment of the premium on bonds held in the accrual account,
overstating the accrual account by about $5 million.
In the course of confirming that, they identified an
additional $26.6 million overstatement in the accrual account for interest on
foreign currency investments. We have had a number of staff members working
full time trying to trace the source of that $26.6 million overstatement.
They have worked back through the records to December 1994, before which
detailed records at the transaction level just no longer exist due to the
routine and appropriate destruction of documents.
The Board examiners were at our Bank to conduct an
examination of the System Open Market Account in September and
PricewaterhouseCoopers also has looked over our methodology to try to trace
this overstatement back through time and find its source. Pricewaterhouse-Coopers
is confident that we have traced it back as far as
we can. They have tested our work papers and agree with our conclusion that
we simply can't go back any further.
There are two possible causes of this overstatement
that we have to confront. One is the diversion of funds and the other is
error. Now we cannot rule out the possibility of a diversion of funds. But
people from our own audit function and from Pricewaterhouse-Coopers
have reviewed the control procedures we've had in place for the last decade
and are very comfortable with the conclusion that these control procedures
are sufficiently robust that the likelihood of diversion is remote. It cannot
be ruled out, but for diversion to have occurred it would have had to involve
the collusion of many people -- just an extraordinary number of people -- on
several different staffs. If anything, our control procedures run a little to
the "belt and suspenders" direction in regard to control of the
flow.
So there is reasonable confidence that no diversion
of funds occurred. The much more likely cause is a simple accounting error.
The failure to credit the accrual account when cash was received would have
left this account overstated. But we have worked the accounting back as far
as we can take it and cannot find the erroneous entry or entries.
Dave Sheehy, the New York
Fed's General Auditor, and I are both looking into a fundamental reappraisal
of our control procedures. We have introduced an additional mechanical check
to maintain detailed records of the accrual stream by instrument, so that
when a final principal payment is received we can trace the record all the
way back on each instrument and double check the accounting.
More fundamentally and more importantly, what
troubles us is how we could have gone for so many years without scrubbing
this account more vigorously. That is something we are looking into and we
are going to be revising our control procedures -- both the audit procedures
and those in our own Markets Group. The Board's staff and our accounting
function at the New York Fed have worked out an accounting treatment to
correct for both the $5 million and the $26.6 million errors. That involves
reducing the accrued interest asset account by the entire $31.6 million, with
an offsetting reduction in interest income on foreign currency investments.
We will make that adjustment before the end of the year and spread it among
all the Reserve Banks.
Of course, for all of us with responsibilities for
SOMA this is an embarrassing, indeed humbling, event. As a technical matter,
though, I understand that Pricewaterhouse-Coopers
is comfortable with the conclusion of both our accounting and audit function
and the Board staff that this is not a material event for purposes of
disclosure for any Reserve Bank. I would be happy to try to answer any
questions.
CHAIRMAN GREENSPAN. Is there any evidence of a
surprising rise in standards of living of key people involved?
MR. FISHER. No, there is not.
CHAIRMAN GREENSPAN. Has somebody looked?
MR. FISHER. Yes, we have looked into that. Many of
the staff people are still at the Bank, though others are not. But we have
found nothing of that nature.
CHAIRMAN GREENSPAN. Were it an embezzlement, prior
to what period would it have occurred?
MR. FISHER. We only know that the difference existed
prior to December 1994.
CHAIRMAN GREENSPAN. It could have been any time
prior to that? Is there a beginning point, other than 1914?
MR. FISHER. The details certainly don't exist for
pre-December 1994 records, so I don't know how we could determine the beginning
point -- in 1973 or 1963 or where. Prior to 1994, the only interest income we
were receiving in that account was coming from the BIS, the Bundesbank, and the Bank of Japan. So the source of the
income was official institutions. It was really a very simple accounting
process to bring that income in at that point; the complexities have been
introduced since that time. So, as I say, Pricewaterhouse-Coopers
and our audit function are confident in looking over the control procedures
we have had in place that it's implausible that a diversion could have
occurred. But we cannot rule it out.
* * *
What is the solution to this accounting problem?
Just fudge the accounts! They reduced reported income to make the 31.6
million dollar problem go away. Here is a repeat of the relevant section:
The Board's staff and our accounting function at the
New York Fed have worked out an accounting treatment to correct for both the
$5 million and the $26.6 million errors. That involves reducing the accrued
interest asset account by the entire $31.6 million, with an offsetting
reduction in interest income on foreign currency investments. We will make
that adjustment before the end of the year and spread it among all the
Reserve Banks. Of course, for all of us with responsibilities for SOMA this
is an embarrassing, indeed humbling, event. As a technical matter, though, I
understand that Pricewaterhouse-Coopers is
comfortable with the conclusion of both our accounting and audit function and
the Board staff that this is not a material event for purposes of disclosure
for any Reserve Bank.
It is shocking that PriceWaterhouse-Coopers
should be "comfortable" that this is not a "material
event" for the purposes of disclosure. Clearly the system is set up to
deliberately deceive the public and avoid any transparency. Full transcripts
of the FOMC meetings are available only after five years -- and what is the
time limit before they destroy detailed records? You guessed it: five years.
But there is more deception revealed in the
transcript on an entirely different topic: Greenspan claimed that the Fed
cannot recognize a bubble until after it has burst. That is a lie as shown by
another section of the transcript.
* * *
MR. PRELL: All of this may well be stretching the
point statistically, but I think it's worth sounding a note of caution that
strong productivity gains and intense competition -- even accelerating
productivity and intensifying competition -- do not by themselves ensure that
there can be no step-up in inflation. Unless supply is completely elastic,
which seems unlikely in the short run, demand can become excessive.
That, we fear, is the current situation, with the rising stock market
overriding the effects of monetary tightening.
Once again in recent weeks, the market has defied our
notions of valuation gravity by posting an appreciable further advance.
Moreover, it has done so in a way that seems to highlight the risk that it
will continue doing so. I refer to the incredible run-up in "tech"
and e-commerce stocks, some of which have entered the big-cap realm without
ever earning a buck.
To illustrate the speculative character of the
market, let me cite an excerpt from a recent IPO prospectus: "We
incurred losses of $14.5 million in fiscal 1999 primarily due to expansion of
our operations, and we had an accumulated deficit of $15.0 million as of July
31, 1999. We expect to continue to incur significant ... expenses,
particularly as a result of expanding our direct sales force. ... We do not
expect to generate sufficient revenues to achieve profitability and,
therefore, we expect to continue to incur net losses for at least the
foreseeable future. If we do achieve profitability, we may not be able to
sustain it."
Based on these prospects, the VA Linux IPO recorded
a first-day price gain of about 700 percent and has a market cap of roughly
$9 billion. Not bad for a company that some analysts say has no hold on any
significant technology.
The warning language I've just read is at least an
improvement in disclosure compared to the classic prospectus of the South Sea
Bubble era, in which someone offered shares in "A company for carrying
on an undertaking of great advantage, but nobody to know what it is."
But I wonder whether the spirit of the times isn't becoming similar to that
of the earlier period. Among other things, it may be noteworthy that the tech
stocks have done so well of late in the face of rising interest rates.
Earlier this year, those stocks supposedly were damaged when rates rose,
because, people said, quite logically, that the present values of their
distant earnings were greatly affected by the rising discount factor. At this
point, those same people are abandoning all efforts at fundamental analysis
and talking about momentum as the only thing that matters.
If this speculation were occurring on a scale that
wasn't lifting the overall market, it might be of concern only for the
distortions in resource allocation it might be causing. But it has in fact
been giving rise to significant gains in household wealth and thereby contributing
to the rapid growth of consumer demand -- something reflected in the internal
and external saving imbalances that are much discussed in some circles.
Whether our assumed 75-basis-point increase in the fed funds rate would be a
sufficient shock to halt this financial locomotive is open to question.
* * *
The Fed clearly recognized the tech bubble and even
made reference to the infamous and most speculative South Sea Bubble. But
they did not want to do anything because it was making the whole economy
expand due to the wealth effect:
If this speculation were occurring on a scale that
wasn't lifting the overall market, it might be of concern only for the
distortions in resource allocation it might be causing. But it has in fact
been giving rise to significant gains in household wealth and thereby
contributing to the rapid growth of consumer demand.
Greenspan lied that the Fed could not recognize a
bubble in advance. They did recognize it and even compared it to the South
Sea Bubble and they purposefully let it continue because it was adding to
household demand, a large part of that being driven by housing demand, and it
was all founded on companies that had no or little fundamentals that were
commanding ridicules valuations that were bound to crash bring the entire
economy with it. And that is what happened.
This transcript shows that the Fed cannot even
manage the multi-billion dollar ESF fund, so how can they be trusted to run a
multi-trillion-dollar bailout operation as was instigated in 2008?
The answer is we can't; the recently released list
of banks and institutions that received TARP funds and how much, pried loose
by a Freedom of Information Act request by Bloomberg News reveals that yet
again the Fed deceived Congress and the public by requesting the TARP funds
to bailout America but sent much of the funding to foreign institutions.
The transcript shows that when it discovers an
accounting problem, the Fed fudges the accounts and decides that this is not
a material event that needs to be disclosed in the annual reports of the
Federal Reserve Banks.
The Federal Reserve acts as the supervisor and
regulator of the banking system. Clearly such breaches in fiduciary duties
and accounting standards explains why the banks they supervise can thumb
their noses at any banking regulations and run fast and loose with
off-balance-sheet transactions, report falsely inflated and often record
profits coming out of the biggest recession and banking crisis in 80 years,
and pay their executives obscene bonuses.
The FOMC transcripts give us only a glimpse of what
is really happening in secret at the Fed. But from just scratching the
surface one can be justified in extrapolating that it is hiding a web of
corruption, lies, and deceit.
This band of liars and cheats is responsible for the
only global reserve currency, the U.S. dollar. If you own and hold precious
metals bullion instead of dollars there are no counterparties, let alone
counterparties who lie every time they move their lips and operate under a secrecy
that is only partially lifted after five years, which is coincident with the
destruction of all detailed records.
Adrian Douglas
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