Yesterday we broke the news of what is prima facie evidence, sourced by none other than the Federal Reserve’s official August 16, 2007 conference call transcript, that then-NY Fed president and FOMC Vice Chairman Tim Geithner leaked material, non-public, and very much market moving information (the “Geithner Leak”) to at least one banker, in this case then Bank of America CEO Ken Leiws, in advance of a formal Fed announcement – an act explicitly prohibited by virtually every capital markets law (and reading thereof). It was refreshing to see that at least several other mainstream outlets, including Reuters, The Hill and the NYT, carried this story which is far more significant than Season 1 of Lance Armstrong’s produced theatrical confession and rating bonanza. It is notable that Richmond Fed’s Jeff Lacker who made the inadvertent (or very much advertent) disclosure has not backed down from his prior allegation and told the NYT yesterday that “My understanding was that President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives.” What, however, the mainstream media has not touched upon, yet, is just how profound the market response to the Geithner Leak was, and by implication, how much money those who were aware of what the Fed was about to do made. Perhaps, it should because as we show below, the implications were staggering. But perhaps what is even more relevant, is why the Fed’s previously disclosed details of Mr. Geithner’s daily actions at the time, have exactly no mention of any of this.
Before we get into the prime of today’s narrative, a quick detour.
For those who may not remember, early August 2007 was a very tumultuous time in the markets. On one hand, it marked the all time highs of the S&P. On the other, August is when the cracks in the facade started to become apparent to all, even the Fed, following what is now known as the quant meltdown, in which quantitative strategies suddenly stopped working and led to a brief but notable market crash, one which caught the Fed’s attention.
The immediate result of this major market swoon was not one, but two ad hoc FOMC conference calls, the first on August 10, and the second on August 16. The first one was more of a brainstorming session held at 8:45 am on Friday, in advance of a 9:15 generic market supporting statement by the Fed (full text here), whose purpose was, in the words of Chairman Bernanke, that “we’re just saying that we are here, we are going to try to maintain the fed funds rate at 5¼ percent, we will provide adequate reserves, and we’re going to try to work against any remaining stigma associated with borrowing at the discount window.”
What is important about the first call is where Bernanke left it, namely with a direct preview of what was about to come next. To wit:
There is just one procedural point. Again, this is not something that we’re contemplating, but one possible thing we could do would be to lower the discount rate, reduce the 100 basis point spread between the discount rate and the federal funds rate. It’s not obvious that it is the right thing to do. There are probably some technical and logistical issues concerned with it. It’s not obvious that it would be helpful. But I just want to put it on a list of things that we might consider and to remind you that the procedure for doing it would involve requests from your boards and then approval by the Board of Governors. So should we come to that point and we begin to discuss that particular option, we would need the Presidents to get the assent of their boards so that we could go ahead and take that action. Are there any other comments or questions? All right. Well, we will keep you well apprised, and I’m sure you will be following the markets on your own.
That point came a few days later, when the disturbance in the markets continued and when the Fed felt compelled to hold yet another conference call not a week later, in which the Bernanke proposal to cut the discount rate spread to the fed funds rate was enacted, and the margin was cut in half from 100 bps to 50 bps.
The formal announcement of the decision to do this took place at 8:00 am on August 17 and was worded as follows:
To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee’s target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks’ usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.
The statement was the result of the previous day’s (August 16, 2007) conference call deliberations which took place at 6:00 pm Eastern. And while the 37 page transcript provide much color in terms of the Fed’s misreading of what was happening in the markets (in this case several computers going haywire, a faux pas that would only be matched by the January 21 2008 unprecedented and unscheduled 75 bps cut in response to Jerome Kerviel’s overnight futures trading fiasco, what is particularly relevant to this story is a statement by then Fed governor Donald Kohn who said…
After this meeting is over, the Board will likely vote on two requests that we have in house to reduce the primary credit rate to 5¾ percent. We would announce this at 8:00 tomorrow morning, along with whatever statement the Committee approves, and we would expect and hope that if this goes forward as we anticipate, the other ten Reserve Banks would go to their boards after the announcement to come on board for the 5¾ percent primary rate so that we reduce any risk of leaks ahead of time.
… as well as a statement by none other than Tim Geithner who explained how the banks and other “market participant” institutions are acting and thinking at this troubled time, as follows:
…Although they had lots of clarification about what is permitted now under current policies at the discount window, they obviously don’t have any idea that we’re contemplating a change in policy or what might be possible and what we might say or not say going forward. They obviously can’t and understand that they can’t say anything about us…
What these two extracts confirm is that it was expected and well-known, after all it was “obvious”, that the banks can not have advance knowledge of what the Fed would announce in just 12 short hours. Yet it is the latter that is of particular attention, and we are certain the Department of Justice and the SEC, are clearly ahead of us here, because it comes from none other than the person who it now is clear was the source of the leak.
The Geithner Leak
Those who happened to have the misfortune of trading stocks on August 16, 2007, and especially those who were short the stock market just because they saw the writing on the wall – writing that would crush the S&P to 666 in one and a half short years and lead to the failure or consolidation of half of America’s banking system – remember that day very well. What happened on August 15, and continued through the 16th was an aggressive bout of selling, that took the S&P from 1390 to 1360 at the close of the prior day trading day, and subsequently sent it lower by another 30 points to 1330 at just about 2 pm Eastern. What happened next would have otherwise remained a mystery, if not for yesterday’s declassification of the Fed’s 2007 transcripts. Because suddenly, out of nowhere, an unprecedented bout of buying started with no news to serve as a catalyst. The buying sent the S&P soaring by some 50 points (!) in the span of an hour.
Once again – there was no market-moving news to explain this move. At least no publicly disclosed market-moving news.
Now we know whose job it was to unleash the buying spree at precisely 2:00 pm on that Thursday. His name: Timothy Franz Geithner.
And we know this because Jeffrey Lacker knows this. From the August 16 transcript:
MR. LACKER. Vice Chairman Geithner, did you say that [the banks] are unaware of what we’re considering or what we might be doing with the discount rate?
VICE CHAIRMAN GEITHNER. Yes.
MR. LACKER. Vice Chairman Geithner, 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.
This exchange took place some time after 6:00 pm on Thursday, and some time after the 50 points ES ramp had taken place “out of nowhere.” In other words, not only did the leak that many FOMC members (including, humorously, Tim Geithner) were concerned about take place, but it was none other than the Geithner Leak to at least Ken Lewis, and who knows how many other bank CEOs, which we also now know made the rounds among those bank trading desks who were privy to its confidential and illegal market moving content at just after 2:00 pm on that day.
For those who need a visual reminder of just what happened on August 16 2007, here it is:
Many shorts ended up being carted out of the front door that day, unsure what has just happened. Sure enough, the next day at 8:00 am the Fed did what it had decided the previously it would do, and announce the 50 bps cut to the discount rate to fed funds rate spread. The market response was just as blistering as the rest of the market piggy backed:
To summarize what happened for all those who were too stunned from the day’s rapid events, the S&P futures moved from a low of 1320 (and 1330 at the 2:00 pm moment that the market saw a mysterious “invisible hand” pushing it higher), all the way to well over 1410 the next day: an unprecedented 90 ES point move in a few hours! The reason: the Fed’s market moving announcement, as well as the Geithner Leak at just around lunch time on August 16th.
The Fed’s Records
We now know what the illegal catalyst was for the massive market surge on the afternoon of August 16: Tim Geithner leaking what the Fed was about to do to the rest of his banker colleagues: a leak that breaches every possible law and rule.
So in an attempt to cement this fact with concrete official evidence, we went to the source: the New York Fed’s own calendar of what Tim Geithner was supposedly doing on August 16th.
We have access to this thanks to an April 2009 FOIA request by the New York Time’s Gretchen Morgensen. What the FOIA revealed to the NYT and the world, was 658 pages of daily events that Tim Geithner was engaged in, in the period from 2007 to 2009. Supposedly, this was a complete list of his daily events, and phone calls.
What the daily schedules show is that between August 8 and August 20, 2007 Tim Geithner was supposed to go on vacation to Cape Cod, from where he participated telephonically on at least the August 10 conference call.
It appears that Geithner ended his vacation prematurely, and was back in the office at 33 Liberty on August 13:
We fast forwarded to that fateful day – August 16 – when Tim was holding all these phone calls with Ken Lewis, and who knows who else, to see what, according to the Fed’s official records, Tim Geithner was doing. We find…
… nothing! Actually no, we learn that at 5:30 am Geithner spoke on the telephone to then-BOJ Governor Toshihiko Fukui. And that was the only direct telephonic conversation Geithner had that day, at least according to the Fed’s own internal records.
Between the 8:30 am “teleconference with Board of Governors” and the 4:00 pm “Markets Status Meeting”, Tim Geithner apparently did exactly nothing. We now know that is not the case, as we know that he spoke to at least one Ken Lewis in the day(s) before the August 17th announcement. We certainly don’t know who else he spoke to, to leak material, non-public and market moving information.
Perhaps it is time for a stronger FOIA request, maybe this time from someone like Bloomberg. Because we are 100% certain that if Bloomberg’s Mark Pittman was still alive he would be all over this. We are confident at least one reporter at the Bloomberg newsroom is willing to carry on the Pittman legacy and find out why the New York Fed has no official records of what is arguably the most important time block of Tim Franz Geithner’s daily calendar: his daily leaks of material Fed information to Bank CEOs.
Or perhaps this particular conversation was on Geithner’s cell phone. Maybe it is time not for Bloomberg, but for the DOJ to step in and request Mr. Geithner’s cell phone record: who knows – one just may find undisclosed conversations between the soon to be former Treasury Secretary and CEOs such as Ken Lewis, Lloyd Blankfein, Jamie Dimon, and all those others who it appears were worthy of knowing what the Fed would do almost one full day ahead of everyone else, and as a result make billions in illegal profits as a result of frontrunning the announcement of the world’s most important central bank?
And perhaps it is time for all those who were short the market on the afternoon of August 16 to form a group and actually sue the Federal Reserve for not only breaching its responsibility to the US taxpayers, but for illegally enriching bank CEOs even more than it has to date?
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Maybe there is a reason why the Fed has a 5 year delay in disclosing full transcripts. Because something tells us the statute of limitations on pursuing Fed inside information disclosure charges against the soon to be ex-Treasury Secretary will have just expired.
Of course, when the Fed’s attempts to delay the inevitable convergence between stock markets and reality finally fails with a collapse that makes the August 2007 market moves seem like a joke, we are quite confident that the statue of limitations on that other form of justice, vigilante, will be the last thing the general public which has been betrayed by the Fed over and over and over, whose sole purpose is solely to make the rich even richer, will be the last thing on anyone’s mind.