Inner City Press' Federal Reserve Reporter
February - May 17, 1999 (Archive #1)
Click here to view ICP's current Federal Reserve Reporter.
Click here to Search This Site
May 17, 1999
Carol Parry, Chase Manhattan Banks senior Community Reinvestment Act officer, is once again rumored to be at the top of the Clinton administrations list for nomination to Susan Phillips long-vacant seat on the Federal Reserve Board. As far back as January 1998, rumors swirled that Ms. Parry (and Fleets John Hamill, who has just announced his departure from Fleet) were being considered for the Board. At that time, Chase insiders reported that Parry planned to retire to Arizona. Then there were rumors of Cathy Bessant of BankAmerica or Mary Decker of Bank One, or, later, an economist specializing in agricultural issues. The seat has been vacant for a year.
On Wednesday, May 12, Reuters reported that a U.S. source... who asked not to be named said that Parry has changed her mind about Arizona, and is now being vetted to join the board. On Thursday, May 13, Bridge News reported that a Chase spokesman said Ms. Parry declines to comment, and that an administration source called Parry the odds-on favorite to be nominated by President Clinton.
This article will review some of Ms. Parrys comments on the Community Reinvestment Act, particularly on the issue of whether banks with high CRA ratings should be shielded from any comments on their merger applications (the so-called safe harbor that Senator Gramm has insisted on including in S. 900, at least pending horse trading in the Conference Committee). Its worth noting, however, that Investnets Insiders Chronicle of February 22, 1999, reported Ms. Parry as selling 34,071 of the shares she owned in Chases stock. Other Chase officials, including William Harrison, William McDavid and mortgage chief Tom Jacobs were also reported as selling shares, so there may or may not have been a connection with Parrys reported change of heart, and desire for this nomination..
If these rumors are true, and Ms. Parry is in fact nominated for a Fed seat, it will doubtlessly be reported as in keeping with the Clinton administrations commitment to the Community Reinvestment Act. Never before has a CRA officer been nominated to the Board -- these nominations are usually reserved for economists, or, in rare cases, bank CEOs (such as Shawmut Banks ex-CEO earlier this decade). As such, one would expect community and civil rights groups to be delighted with such a nomination. Opinions, however, appear more mixed. Ms. Parry has been perceived as one of the more abrasive of the big bank CRA officers, apparently growing from her experience with merger opponents and neighborhood advocates during the Chase-Chemical merger process. Some question whether the presence of Ms. Parry on a seven-person Board that votes on protested merger application, most often from large banks with the attendant (inflated) high CRA ratings, might not result in less rather than more scrutiny of the issues raised by community groups. In the alternative, some feel that the Board and its Chairman, never overly attentive to communities concerns on mergers, might become even more empowered to dismiss public comments, due to the ground cover resulting from having a purported CRA person voting with them on the Board. Others counter that beggars cant be choosers. All valid points, particularly in light of the below:
On March 1, 1999, ICP reported that it been informed, by knowledgeable inside the Beltway (make that, inside the Capitol) sources, that the CRA officer of Chase Manhattan Bank, Carol Parry, is actively promoting and supporting the 'safe harbor' concept that Senator Gramm has proposed."
On March 3, 1999, ICP received a communication from Ms. Parry, stating in pertinent part that:
I was distressed to read... the totally erroneous report that I am promoting and supporting the safe harbor concept proposed by Senator Gramm. I am not, in any way, promoting or supporting this concept. I have not spoken with any member of Congress or their staff regarding this issue. Nor have I made any public statements regarding the CRA proposals that are being discussed in conjunction with financial modernization. Whoever gave you this information is make a serious error.
"In fact, I personally do NOT support a safe harbor for all satisfactory and outstanding rated banks. I have long felt that banks with outstanding ratings should be given a positive incentive to become and remain outstanding. I am certain there are a number of ways that this could be done, with the safe harbor for outstanding being only one option.
"I am requesting that you correct the information on your web site immediately.... I look forward to hearing from you. I am also faxing this to you.
--03/03.99, 11:28 AM, to [Inner City Press]
ICP agreed that this matter deserves clarification, or, amplification. As ICP has explained to Ms. Parry, one of its correspondents was informed, with specificity and credibility by well-placed inside the Capitol sources, of Ms. Parrys position supporting a safe harbor, and that this position is playing a material role in the negotiation of legislative language, particularly in the Senate. Ms. Parry has stated that she has not, during the current Congressional session, lobbied for a CRA safe harbor. ICP believes it altogether possible that Senators who are not opposed to the safe harbor proposal have latched onto Ms. Parry's prior public statements (like the ones set forth immediately below) to support or justify their own positions.
From the public record, see U.S. Banker magazine of August 1997, at 44 et seq.:
"USB: So youd like a safe harbor provision?
Parry: Yes... There was a lot of debate about [a safe harbor] in the process of re-developing the regulations. And there was too much negative reaction by the community advocates. It may be that a safe harbor for banks would be a good idea. It went down in flames because the industry couldnt support it."
See also, New York Newsday of April 30, 1996, at A29:
"'It's our view that oustanding banks should be given some consideration,' said Parry. Bankers want a safe harbor -- freedom from challenges to their merger applications -- if they get good ratings."
In a subsequent interview, Ms. Parry has told ICP that at Chase, it is the Government Relations department which is dealing with the proposed financial modernization legislation, and not her Community Development department, and that, if asked to testify before Senator Gramms Banking Committee, she would not support a safe harbor for banks with a Satisfactory rating. Asked for amplification of her written statement to ICP that banks with outstanding ratings should be given a positive incentive to become and remain outstanding. I am certain there are a number of ways that this could be done, with the safe harbor for outstanding being only one option, Ms. Parry stated that she has not given this much thought, but that one idea would be some form of expedited approval for banks with Outstanding ratings. Repeated reference was made to the Administrations probable veto of any legislation that would weaken the CRA. (But see related CRA Report).
AND SO -- in a process parallel to the reported vetting of Ms. Parry in Washington, D.C., this space will be attempting to vet the variety of views reported above in the coming weeks, or, at least as long as this nomination rumor has legs.
May 12, 1999
Last Thursday was a happenin day for the Federal Reserve. In a speech quickly carried to the four corners of the globe, Alan Greenspan vituperated slyly, calling the performance of the U.S. economy over the past seven years phenomenal while at the same time expressing concern about imbalances -- in this case, too low an unemployment level (euphemistically called tight labor markets by the corporate Fed watchers). In a novel coinage, Greenspan referred to companies hiring people as... depleting the pool of available workers. By Monday, a global headline read, Bonds Fall on U.S. Fed Chiefs Speech. (That's from the Business Times of Malaysia of May 10).
Greenspans speech was delivered in Chicago, at the Federal Reserve Banks 35th annual conference on bank structure and competition (at this same conference, Minneapolis Fed president Gary Stern proposed again that the FDIC Improvement Act of 1991 be amended to favor letting banks lose at least 20% of their funds, even if they are bailed out). Back in Washington on the same day, Fed staffs Patrick Parkinson (Associate Director, Division of Research and Statistics) told the House Banking Committee that although the Fed actively arranged what most call the bail-out of Long Term Capital Management in September 1998, [i]n our system, government oversight of leverage is the exception, not the rule... it is intended to supplement and reinforce market discipline, not to replace it.
As discussed further down on this page, and throughout the financial press, the Feds encouragement of 14 institutions, including banks, to bail-out LTCM, and then the Feds heat-of-the-moment favoring of the gang of 14s plan over a market-based outside bid -- was the opposite of the market discipline that the Fed elsewhere praises and relies on. After Mr. Parkinsons presentation (of a report that Parkinson said Chairman Greenspan... supports), even House Banking Chairman Leach expressed disappointment at the lack of a commitment not to do or arrange similar bail-outs of hedge funds in the future. Taxpayer resources must not be used to protect speculators from losing wagers, Leach said. Mr. Parkinson entirely sidestepped this question, which Rep. Ken Bentsen (D-TX) called a glaring omission.
[Some archival material cut to save server space - with questions, contact us]
May 5, 1999
This is particularly ironic at the federal agency charged with protecting consumers from abuse of their personal information by the financial conglomerates, such as Citigroup, that the Fed has recently allowed and encouraged to be created. Fed Chairman Alan Greenspan, testifying before the House Commerce Finance and Hazardous Material subcommittee on April 28, 1999, was asked questions on the issue of what happens to consumers most personal information. Greenspan replied: I am conflicted on this question... As a libertarian, I am very much sensitive to the question of the issue of privacy....
The Fed issued a press release on May 3 about its new web site and its improved format accompanied by an attractive presentation. The site is actually hard to read on some browsers, and does not, for example, include the option of submitted Freedom of Information Act requests by e-mail (as most other agencies do, in the spirit of the Electronic FOIA Amendments of 1996). In a five-paragraph page called Disclaimer, most of which is directed at relieving the Fed of any liability for inaccurate information (the Board makes no warranty, express or implied, nor assumes any legal liability or responsibility for the accuracy, correctness, or completeness of any information that is available through this Web site), the Fed cursorily states, This system and related equipment are subject to monitoring. Information regarding users may be obtained and disclosed to authorized personnel, including law enforcement authorities, for official purposes. Access to or use of this Web site constitutes consent to these terms.
1. What information does the site gather / track and how is it used?
2. With whom does the site share the information it gathers / tracks?
3. What is the sites unsubscribe and data-removal policy?
4. How can users correct and update their personal information and member preferences?
5. What is the sites policy on deleting or de-activating users information from its database?
The Feds new web site does not answer any of these questions. While this belies the Feds asserted sensitivity to privacy -- could it reflect a certain libertarian (or would that be, public be damned) bent?
* * *
April 28, 1999
ICP has learned more about the General Accounting Offices inquiry into the Federal Reserve Boards enforcement (or lack thereof) of the Community Reinvestment Act and the fair lending laws in connection with bank mergers.
The GAOs assignment includes (1) to [d]etermine the fair lending issues raised during the merger application process for the six large bank holding company [mergers -- listed below] and the associated regulatory response; (2) to [a]nalyze past enforcement actions take by banking regulators and enforcement agencies that involved fair lending issues to determine the size and scope of institutions implicated; (3) to [e]valuate the process used by the banking regulators to coordinate with the other agencies responsible for fair lending enforcement during the merger application process; and (4) to [a]ssess the response of the regulatory and enforcement agencies to recommendations made in our 1996 report, Fair Lending: Federal Oversight and Enforcement Improved but Some Challenges Remain, (GAO/GGD-96-145, August 13, 1996).
It would appear that the Federal Reserve fails all four of these tests. For example, as to the first test, the Feds response to fair lending issues raised during the merger application process, on NationsBank-Boatmens, the Fed ignored and did not take any action on the issues raised concerning NationsBanks high-interest rate subsidiary, NationsCredit. Internal Fed documents reflected that the Fed had never examined NationsCredit, a bank holding companies subsidiary, for fair lending compliance. During the applications process, the Fed did ask NationsBank for a list of all pending litigation against NationsCredit, and NationsBank submitted a list of 119 cases. However, even after ICP showed that NationsBank was not complete, and omitted, for example, a racial discrimination class action in Georgia, the Fed did not request a more complete list, and took no other action. This was repeated on NationsBank/BankAmerica, and, with regard to Banc One Financial Services, another subprime lender, on Bank One-First Chicago.
On the second test listed above, the Fed has not referred any institution of any substantial size for fair lending inquiry by the Department of Justice (DOJ). It referred a minuscule bank in Texas to DOJ, but does not even follow up on disparities in, and discrimination litigation against, institutions the size of Bank One or NationsBank or Chase Manhattan.
On the third test listed above, the Fed virtually never coordinates with the Department of Justice or Federal Trade Commission during merger reviews -- rather, if it finds problems that cannot be swept under the rug, it states in its approval order that it is sending the comments to the FTC. The Fed did this on Banc One Financial Services in 1995; then, in 1997, it still gave Bank One two approvals, even while stating that it had found unresolved fair lending questions. The Fed said it conditioned its approvals on Bank One doing whatever proved necessary. Then, on Bank One-First Chicago, the Fed refused to disclose what these things were. This is not enforcement.
On the fourth test listed above, the Fed continues for example to accept Home Mortgage Disclosure Act (HMDA) data that includes less-than-credibly high percentages of applications listed as race not reported, even though the 1996 GAO study admonished the regulators to take HMDA compliance much more seriously.
[Some archival material cut to save server space - with questions, contact us] And see, ICP's Deutsche-Bankers Trust Page. ]
Also at the Fed: while the Feds recent filing with the Department of Justice claims that it upheld each and every FOIA denial on appeal in 1998, even Fed FOIA Appeals Officer Rivlin has had to overturn a denial in early 1999. In yet another FOIA appeal ruling on April 22, 1999, FRB Governor Rivlin wrote:
This is in response to your letter dated and received by the Board on March 24, 1999, in which you appeal the decision of the Secretary of the Board, under the Freedom of Information Act... to deny in part your request dated February 22, 1999, for information related to the Boards communications since January 1, 1998, with the Senate Banking Committee regarding the Community Reinvestment Act...
[ICP] challenged the Boards redaction of the nonresponsive portions of two responsive, nonexempt documents. In connection with your appeal, Board staff conducted a de novo review of the information withheld as not responsive to your request, and determined that withholding the material in question is warranted under exemption 5 with respect to one document. An unredacted version, however, of the other responsive document -- a February 9 e-mail from Robert deV. Frierson -- will be provided to you.
While this makes clear that the FRBs previous withholding of information was unwarranted, it will be interesting to see whether the Feds next FOIA report to DOJ discloses this reversal on appeal. If the past is any guide, the Fed will deem the ruling an upholding (due to unrelated issues), and will report again to DOJ a 1.000 batting average for 1999 (we kid you not - the Fed claims in 1998 not to have even "partially reversed" any FOIA denials). And the DOJ will accept it, saying it leaves up to the agencies how to prepare their reports. Even inaccurate and misleading is OK with the DOJ, it seems. More on this topic next time. For now, heres a link to the DOJs collection of federal agencies 1998 FOIA reports.
April 26, 1999
The General Accounting Offices inquiry into the Federal Reserves treatment of CRA in mergers is ongoing, and now focuses on six mergers:
First Chicago - NBD (1995)
Bank One - First Chicago (1998)
BankAmerica - NationsBank (1998).
GAO staffers have gone over the various memoranda underlying the Boards approval of each of these mergers, and have met with the FRBs Community and Consumer Affairs staff. Questions remain. For example:
When the Board approved the Fleet - Shawmut merger in late 1995, it required Fleet to submit quarterly reports about its branch closing decisions for eighteen months. In April 1996, during the Boards consideration of Fleets next acquisition application, to acquire NatWest in New York and New Jersey, ICP requested Fleets first quarterly report on its Shawmut-related branch closings. These reports showed that Fleet, while it claims to conduct outreach to community groups before making branch closing decisions, did not contact groups who had explicitly commented against specific branch closings during the 1995 Fleet-Shawmut merger. Fleet only contacted groups which had supported its Shawmut merger. Not surprisingly, these groups did not express opposition to the branch closings that followed the merger.
Since this quarterly report on branch closings is one of the few CRA-related conditions the Fed imposes on its merger approvals (for example, the Fed also imposed this condition on its NationsBank-Boatmens approval in late 1997), the Feds failure to follow up on these reports, or to set any substantive or procedural standards, is more than a little troubling. Not only to community groups -- but apparently also to the GAO. ICP has encouraged the GAO to finalize and release its report on the Feds implementation of CRA, now, while CRA is being debated in Congress, particularly in the Senate Banking Committee. The wheels of bureaucracy, however, turn slowly. It is hoped that the GAO report will become public while the comment period on Fleet-BankBoston is still open...
* * *
Despite the Federal Reserve Boards claim that its regional Reserve Banks are to some degree autonomous, and that the Board learns from their regional perspectives, the Board in D.C. exercises censorship powers of the Reserve Banks. Most recent example: an article about the Community Reinvestment Act and the FRBs public meetings on mergers, solicited and accepted by a Reserve Bank for its CRA newsletter, was unceremoniously pulled by FRB DC staff. Initially, the DC staff had asked for the article to be delayed, to allow them to write a rebuttal. Two months later, however, FRB DC staff said that writing a rebuttal might make it appear they were instituted changes in response to an outside critique, and therefore the article shouldnt run at all. Developing...
Some weeks ago, this column asked, Why was FRB Governor Gramlich, who has said he is uninterested in bank regulation, chosen by Greenspan as the Feds point man on CRA? Finally, a (less than logical) answer: Governor Gramlichs father was once on the board of directors on a Neighborhood Housing Services chapter. Looks like the Fed believes in the genetic transmission of expertise and empathy...
April 21, 1999
The lack of transparency at the Federal Reserve, its seeming obsession with secrecy and back-sliding on what few commitments to disclosure it has made, continue to trouble. And so, on April 21, Inner City Press submitted two Freedom of Information Act (FOIA) requests to the Fed:
(1) For the transcripts of the forty most recent meetings of the Federal Open Markets Committee (and that these transcripts be placed on the Feds web site, which as of April 21 had up only 1992 transcripts, despite the Feds unilateral commitment to make transcripts available on, at most, a five-year lag); and
(2) For the transcripts of the sixteen most recent meeting of the Feds Federal Advisory Council, made up of officials of twelve bank holding companies regulated by the Fed (and that FAC transcripts be placed on the Feds web site, where none are currently available, even on a three-year lag).
The request for the FOMC records is made in the context of the Feds long-time strategy of withholding these transcripts, and even denying that they exist. In the 1970s, the Fed was sued under FOIA for similar documents, and the District Court in D.C. ordered their release. Thereafter, the Fed said it stopped taking minutes. But Rep. Henry Gonzalez in 1993 discovered that the FOMC had continued to tape its meetings, and make transcripts (which the Fed had neglected to disclose, for all those years and even in response to Congressional questions on this topic).
In February 1994, the Fed unilaterally decided to release transcripts on a five year time lag. This long lag has never been tested or upheld by a court; hence ICPs FOIA request. But even on this five year commitment, the Fed is back-sliding. As of April 21, 1999, the Fed has yet to place on its web site the 1993 transcripts. The 1992 FOMC transcripts were uploaded on April 10, 1998; apparently, the Fed hopes to push the time frame further and further back each year, until people forget. ICP has asked for current FOMC transcripts, and has made a side request that the 1993 transcripts be immediately uploaded, along with all more recent transcripts that end up being released in response to ICPs FOIA request.
The above-referenced 1970s FOIA case ended up going the Feds way in the Supreme Court, and documents were withheld, based on a Fed affidavit that release would harm the governments commercial interest in profitably dealing in government securities. ICPs request points out that things have changed since them: the FOMC now announces its decisions after its meetings, and releases non-specific minutes six weeks later. The commercial harm can no longer be asserted -- only an interest in a lack of accountability (or the more nebulous claim that free-ranging debate would be impaired -- similar arguments are advanced, without success, against the Open Meetings Law every day).
ICPs secondary request, for the FAC transcripts, points out that the Board at these FAC meetings asks the bankers not only about economic conditions (in preparation for FOMC meetings, see above), but also about the banks positions on consumer protection laws. As such, the transcripts should be made public, on (much) less than a three year lag. Currently, the Fed does not even place the three year old summaries on its web site. Thankfully, to date the Financial Markets Center in Philomont, Virginia, has been placing FAC summaries on its web site. Under the Electronic FOIA Amendments of 1996, however, this should be done by the Fed, and FMC has indicated it would be happy for the Fed to make the FAC Summaries section of its web site obsolete. ICP has asked the Fed to begin publishing transcripts of the FAC meetings, without any three year lag, on the Feds web site.
ICP has been informed by knowledgeable sources that, in connection with the House Banking Committees inquiry into hedge funds and the Feds role in arranging the bail-out of Long Term Capital Management last September, the House Banking Committee is allowing LTCM officials to testify behind closed doors, in private briefings, with no subpoenas. And so the ultimate insiders, including ex-Fed Vice Chair David Mullins and ex-Salomon wunder-trader John Meriwether, continue to get kid glove treatment, and to never be required, or even be asked, to publicly explain their actions and their request (in telephone calls from Mullins and Meriwether) for Federal Reserve intervention. Now the Financial Times reports that Meriwether and Goldman Sachs Jon Corzine (in his personal capacity) are studying buying out the 14 institutions that the Fed encouraged to bail out LTCM in September.
April 19, 1999
The major mainstream Fed story these days is the Governors public re-thinking of the Feds current models: NAIRU (the non-accelerating inflation rate of unemployment), the Expectations-Augmented Phillips Curve, etc.. Governor Gramlich, at Yale University on April 17, said the Fed faced huge uncertainty about the target rate of unemployment. Governor Rivlin, in an interview with the Financial Times of London (apparently the Boards concerns about recent leaks have abated), said, I dont think we really have a lot of clues. Governor Meyer warns of inflation; ex-Governor Lindsay advises Republican candidate George Bush of Texas. Ex-Governor Angell continues at Bear, Stearns, his days as a $100-a-minute consultant on hiatus for now.
Back in the pig pen of partisan politics, the Fed has blatantly allied itself with Senator Gramm, by action and inaction. Gramm has continued to assert that Alan Greenspan and the Fed support his view of financial modernization and of CRA. Most recently, Gramm wrote a letter to the editor to the Christian Science Monitor, published in the Monitors April 15 edition, concluding: But dont take my word for it: Federal Reserve Chairman Alan Greenspan last week provided an assessment of the CRA provisions in both the House and Senate bills. The Feds silence seem to confirm the quid-pro-quo (or tit-for-tat) described below: that Gramm can use the Fed on CRA, if Gramm pushes for wider Fed jurisdiction over financial holding companies than is provided for in the House bill. Independent agency, indeed -- the Fed has its own legislative strategy.
Which perhaps needs fine tuning: in light of Senator Shelbys inquiry into the FDICs co-sponsorship of NCRCs CRA conference in March, it must be noted that the Federal Reserve co-sponsors, with Citigroup (which the Fed is supposed to regulate at arms length) an economics competition for high school students. See Citigroup release on PR Newswire, April 13, 1999. Its a laudable program, but under the Gramm / Shelby paradigm, raises questions about regulators improper connections with the banks they regulate, and Shelbys co-sponsorship questions...
Meanwhile, as detailed on ICPs Bankers Trust-Deutsche Bank page, Fed staff have continued to inquire into Bankers Trusts role in the pooling of subprime loans, asking about a particular Pooling Agreement between BT and Delta Funding (which BT at first tried to withhold from the public). The question is, is the Feds inquiry based on good-faith concerns, that will be acted on in connection with the application -- or is the Fed trying to find a way to relieve BT (and other Wall Street players, including Citigroups Salomon Brothers) from any fair lending responsibility in connection with their enabling of predatory lending?
[Some archival material cut to save server space - with questions, contact us]
Shelby v. FDIC, Gramm v. OCC -- What About the Fed?
Senator Richard Shelby (R-AL) recently criticized the FDIC and its Chairman, Donna Tanoue, for co-sponsoring the annual conference of the National Community Reinvestment Coalition. Senator Shelbys letter to the FDIC made accusations of political activism, and asked can you site [sic] statutory authority for sponsoring meetings to foster community development?" Ms. Tanoue responded that the FDIC has a duty to ensure that banks meet their CRA and fair lending requirements.
Senator Shelby does not seem to have thought through his critique of the FDIC. Even the Federal Reserve Board, hardly a CRA activist organization, has recently begun publishing a newsletter called Capital Connections, which begins with the statement that [t]he Federal Reserve has a longstanding interest in, and commitment to, fostering community development. The Feds newsletter recounts that in Puerto Rico, the New York Reserve Bank hosted, with the Puerto Rico Community Foundation, two workshops on CRA and community development -- one for bankers and one for community development organizations.
The Feds newsletter also claims that each Reserve Bank creates it own Community Affairs strategy and responds to particular needs in its geographic district. ICPs experience does not confirm this decentralization. As recounted elsewhere on this web site, an article solicited by the San Francisco Reserve Bank was effectively delayed by the Feds D.C. staff (click here for this story); ICP has also been told by Fed D.C. staff that it should not contact Reserve Banks Community Affairs officers (because sometimes they answer questions differently than D.C. staff does). The Federal Reserve speaks through Orders, ICP was told. But what then of this new newsletter, and its claim of autonomous, decentralized power at the Reserve Banks? Let a hundred voices bloom!
It is ironic that Senator Gramm attacks the OCC, and Senator Shelby attacks the FDIC -- both for things that the Federal Reserve also does. The kid-glove treatment of the Fed by the Senate Banking Committee should come to an end. As grandiose as it might sound -- democracy is at stake.
[Some archival material cut to save server space - with questions, contact us]
March 10, 1999
Just-released Federal Reserve e-mail reflects solicitude for Bankers Trusts and Deutsche Banks applications: a burst of interest in Bankers Trust activity in predatory lending that ended (according to the documents) very quickly; assistant to Deutsche Bank is retrieving from the public portions of its Application, withholding of minutes of meetings, and an unexplained breach of procedure, in providing the Applicants with the protest letters early, but not requiring the Banks to respond during the comment period. The Feds process is deeply tainted:
The Federal Reserve has, on reconsideration of ICP's Freedom of Information Act request, granted ICP access to portions of... copies of e-mail messages among [Federal Reserve] System staff. The remaining information in those documents... will be withheld from you.....
The documents include these e-mails:
Robert E. Cook, 1/19/99, 8:37 a.m.: I think we ought to get together early today to discuss Bankers Trusts involvement with Delta Mortgage.
Charles S. Fleet, 1/19/99, 9:00 a.m.: Whats all that about and who is Delta Mortgage?... Please respond as to what this as about. Thanks. Charles.
Beverly Smith, 1/19/99, 9:40 a.m.: ...I am in the dark about Delta Mortgage.
Charles S. Fleet, 1/19/99, 11:19 a.m.: Beverly: ...Delta Funding, a Long Island mortgage company that solicits business from low income homeowners... [A] retired teacher who claims that a Delta salesman coaxed her into putting her home up for collateral for an $88 thousand loan at 13% (to pay off some bills and a previous loan), even though she had no income and no way to make the monthly mortgage payments. Bankers Trust has acted as a conduit through which to sell securities backed by these mortgages. Several civil lawsuits have been filed by homeowners against Delta and Bankers Trust... perhaps we can sit down with Bob and discuss it after you are back in the office. Charles.
Charles S. Fleet, 1/19/99, 11:41 a.m.: I dont know how this will play into analysis of the Deutsche/B.T. case.
Adrianne G. Threatt, 1/19/99, 1:05 p.m. [Forwarding the above-quoted e-mail chain to FRB lawyers Tom Corsi and Mark VanDerWeide].
And there the chain ends. No further e-mails have been provided. In the record before the FRB now are deeds from Bankers Trusts foreclosures in dozens of states, Bankers Trusts involvement with other questionable subprime lenders, from Aames to United Companies, and Deutsche Banks response, making clear that Bankers Trust has no fair lending program in place to monitor its activities with subprime lending. Despite late released documents, despite the banks inappropriate attempt to keep confidential Bankers Trusts Pooling Agreements with Delta Funding, despite the Feds own unexplained error of withholding the above-quoted e-mails until after the expiration of its comment period -- the Feds wheels keep turning on this Application. See below, Word on the Street....
The Feds solicitude for this Application, or these Applicants, can be seen in other e-mails released to ICP:
Kathleen Fallon, BSRNY, 1/19/99, 10:25 a.m., to the aforementioned Tom Corsi, Mark VanDerWeide, Adrianne Threatt, and Melissa Clark: As you know, we have received a dozen comment letters to date on the Deutsche-BT proposal. In a departure from regular practice, we have forwarded these comments to Kevin Barnard prior to receipt of the application. Further, we have not specified a deadline by which the applicants should respond to the comments. [This is followed by a redaction -- the remainder of the communication has been withheld].
The departure from regular practice is significant in this way: the Federal Reserves Ex Parte Rules, prohibiting communications with parties without the other parties (including protesters) being present -- are triggered by the transmission of the protest letters to the Applicant. But here the Fed did not then, and has continue not to, follow its Ex Parte Rules. Also, by not specifying a date by which the applicants should respond to the comments, the commenters were denied any right to reply to the Banks response. Perhaps the remainder of this e-mail, which the Fed has withheld, explains why the Fed depart[ed] from [its] regular practice. ICP FOIA appeal is pending...
Other solicitude is demonstrated in a January 25, 1999, e-mail from FRB lawyer Tom Corsi: As you may have heard, when Deutsche Bank filed its application last week it inadvertently includes some information that it now regards as confidential in the public portion of the application. I now have a list of the problematic pages. Im working with the FOIA office to make sure that these pages are not released...[LONG REDACTION}... P.S. I have spoken with Mike Campbell at the New York Reserve Bank to make sure that they are also withholding this information. This is followed by a message from FRB Associate General Counsel Scott Alvarez back to Mr. Corsi, stating: Tom, please follow this up with a phone call to each of the folks here. Thanks, Scott.
There appears to be a greater focus at the Fed, and at a higher level, on helping Deutsche Bank to withdraw information Deutsche Bank itself submitted without the required request for confidential treatment -- than in inquiring into Bankers Trusts activities in predatory lending. At least, thats all that ICP can infer, given that the Fed has provided no documents about Delta Funding and Bankers Trust from January 19, 1999, forward. No analysis has been provided about Deutsche Banks February 25, 1999, submission, that made clear that Bankers Trust has no fair lending program in place to monitor its activities with subprime lending. Despite this, despite the banks inappropriate attempt to keep confidential Bankers Trusts Pooling Agreements with Delta Funding, despite the Feds own unexplained error of withholding the above-quoted e-mails until after the expiration of its comment period -- the Feds wheels keep turning on this Application. See below, Word on the Street....
* * * *
Word on the Street: The Inner City Reporter has been informed, by reliable and well-placed sources, that at a recent cocktail party in New York City, a Federal Reserve official was heard to (loudly) brag that the Fed had brokered the combination of Bankers Trust and Deutsche Bank, and was proud of it. Developing... In that case, the Federal Reserve Board has a direct conflict in ruling on Deutsche Banks application...
* * * *
February 25 update to the LTCM and Bankers Trust stories further below:
LTCM: The Inner City Reporter has finally obtained from the Federal Reserve documents about the Long Term Capital Management bail-out that Inner City Press requested from the Fed months ago, in October 1998. As noted below, the Fed is still withholding thousands of pages, which ICP is now seeking, via a Freedom of Information Act appeal.
Among the documents the Fed released to ICP is a Chronology of Material Events in the Efforts Regarding [LTCP], and a list of private sector participants in the bail-out meeting, including the heads of J.P. Morgan and Merrill Lynch (who recently testified to Congress about the need for free markets), Bankers Trust official Eugene Ludwig, Deutsche Bank by telephone from London, Tom Labrecque of Chase, the now-axed Jamie Dimon of Citigroup, and others -- all public champions of financial deregulation and of free markets. Financial post-modernization...
Here below are exempts from the Chronology the Fed released -- note, as will be followed up, that the Mullins referred to in the first entry is ex-Fed Vice Chairman David W. Mullins Jr., who went directly from the Fed to this position at LTCM, where he raised money in person for the fund (see, e.g., Crains Cleveland Business of October 19, 1998, describing the visit of Cleveland executive Terry Sullivan to LTCM where he took a seat across the table from... David Mullins Jr., a former vice chairman of the Federal Reserve Board:
Friday, Sept. 11: Meriwether and Mullins (LTCM partner) inform McDonough of their urgent need to raise $1.0 to $1.5 billion in new capital and that they have the assistance of Goldman Sachs (and possibly of other firms) in soliciting new investors.
Thursday, Sept. 17: Meriwether and Mullins inform McDonough of lack of success in finding new investors but that efforts continue. They describe the continuing losses and tightening liquidity the fund is experiencing.
Friday, Sept. 18: McDonough speaks to Meriwether and Mullins. McDonough calls the heads of a number of banks and securities firms about overall market conditions. All raise the issue of LTCP and express deep concern about the deteriorating situation and the serious effect on world markets of a failure of LTCP.
Saturday, Sept. 19: Mullins calls McDonough and asks that the FRBNY send a team to review the LTCP situation and to meet with Mullins and Meriwether. McDonough agrees...
Monday, Sept. 21: Over the day, Fisher [FRBNY] becomes aware of extent of knowledge of LTCP situation by Goldman Sachs, Merrill Lynch and J.P. Morgan. Fisher calls McDonough in London; they agree on the desirability of gathering the three firms. Late in the day, Fisher invites Goldman Sachs, Merrill Lynch, and J.P. Morgan officials to Tuesday breakfast at FRBNY and informs LTCM partners doing so. Meriwether informs Fisher that UBS team is at LTCM.
Tuesday, Sept. 22: Bear Stearns officials... inform Fisher that Chase line has been drawn upon by LTCM for $500 million. Fisher confirms draw on Chase line with LTCM partners. Fisher calls Chase officials, confirms that they have received notice...
Wednesday, Sept. 23: Representatives of the Core Group meet at the FRBNY at 9:30 to discuss the consortium approach... Representatives of other firms gather in the FRBNY Board Room. Firms represented in the Board Room, in addition to the Core Group: Bankers Trust, Barclays, Bear Stearns, Chase Manhattan, Credit Agricole, CS First Boston, Lehman Brothers, Morgan Stanley Dean Witter Discover, Paribas, Societe General, Travelers Group / Salomon Smith Barney / Citicorp, and Deutsche Bank (over a telephone from London) as well as the New York Stock Exchange.
[Berkshire Hathaways / Buffetts bid; McDonough adjourns meet to 1 p.m.]
Shortly after 1 p.m., all the firm reassemble in the Board Room, with the addition of a representative of the Securities and Exchange Commission. McDonough explains the Feds interest in avoiding the chaotic consequences of the abrupt close-out of LTCPs positions and that, to his knowledge, there consortium proposal to be put forward by the Core Group appears to be the only remaining alternative to such an outcome....
At 5:30 p.m., a consensus is reached among participating firms that $3.5 billion will be an adequate capital injection, that 11 firms will participate at $300 million per firm and that other firms can participate at lesser amounts.
The participants discuss the preparation of a press release for LTCM to issue that evening and how to initiate the workings of the operating committee to oversee LTCM and LTCP. The meeting effectively breaks up at 6:30 p.m. Members of the Core Group discuss a draft press release with Meriwether. LTCM releases the press statement at 7:30 p.m..
The Fed has also released, in response to our Freedom of Information Act request, a list of the participants at the meeting at the New York Fed, on September 23, 1998, at 1 p.m.:
Bankers Trust Company: Gene Ludwig, M.A. Yellin, Duncan Hennes
Barclays: Tom Kalaris
Bear Stearns: James Cayne, W. Spector
Chase Manhattan: Tom Lebrecque, David Pflug, Bill Harrison
Credit Agricole: Mr. Chauvel, Mr. Suarje, Mr. Estevels
CS First Boston: Mr. Calemo, Robert OBrien, Allan Wheat
Deutsche Bank: Edson Mitchell (by telephone)
Goldman Sachs: Jon Corzine, John Thain, Bob Katz
J.P. Morgan: Sandy Warner, Clayton Reese, Roberto Mendoza
Lehman Brothers: Richard Fuld, Messrs. Russo, Gregory, and Vanderbeek
Merrill Lynch: David Komansky, Mr. Dunn, Mr. Voldstad, Herb Allison, T. Davis
Morgan Stanley Dean Witter Discover: Philip Purcell, Peter Karches
NYSE: Richard Grasso
Paribas: Everett Schewk, David Brunner, Carol Simon
Salomon Smith Barney: Deryck Maughan
Societe Generale: Laurent Herve, Mr. Bowden, John Bennifer
Travelers: James Dimon
UBS, AG: David Solo, Gary Brown
Lets talk about corporate welfare in America. Lets talk, too, about the various glass ceilings: by gender, race, and other ways. Lets talk about open government. Lets even talk about ... free markets.
A number of the participants at this meeting have, before and since, testified to Congress about the need for financial modernization, the need for free markets, the need to get government off their backs. Off their backs, indeed...
More forthcoming: the Inner City Reporter has filed a Freedom of Information Act appeal, for the thousands of documents (some listed below) that the Federal Reserve continues to withhold. This is precisely the type of controversial, domestic governmental act about which they should be full disclosure. This will be updated...
Deutsche Bank-Bankers Trust: Late on February 23, months late and without explanation for the delay, the Federal Reserve provided ICP with a one-page Minutes of Meeting, held on December 14, 1998, at the Federal Reserve Bank of New York, with prospective merger partners Deutsche Bank and Bankers Trust. Without naming the participants, the Feds minutes state that its representative briefly discussed the ex parte communications rules and how they would apply to the meeting. The Deutsche Bank, A.G. representatives were informed that a summary of public matters discussed at the meeting would be placed in the public record of the application... [A] desire to receive all authorizations for the acquisition by the end of the second quarter of 1999 was expressed.
An irony here is despite the minutes sanctimonious reference to the ex parte rules, until February 23, despite ICPs FOIA requests and status as a protestant to the application, these sanitized minutes were not provided to ICP. For this and other reasons (including Governor Rivlins clearly erroneous ruling(s) under FOIA, see below), requests have been made for an extension of the Feds comment period on the Deutsche Bank-Bankers Trust application past March 1. No response yet. [A] desire to receive all authorizations for the acquisition by the end of the second quarter of 1999 was expressed.
February 17, 1999, update to the stories further below:
LTCM: Responding months late to Inner City Press' Freedom of Information Act request for documents reflecting Fed communications with and about Long Term Capital Management, including managing partner (and ex-Fed Vice Chairman) Dave Mullins, the Fed has "withheld in full" the following:
-- Nine linear inches of documents submitted by Credit Suisse First Boston;
-- 510 pages submitted by LTCM;
-- Draft proposals for equity infusions into LTCM;
-- 16 internal memoranda, three "inter-agency" memoranda, and thirteen pages of "miscellaneous notes."
FRB Secretary Johnson has also indicated that "[i]n the course of our search for responsive records of the Board, documents were located that are not records of the Board. These documents have not been produced or identified in response to your request." This is from the Fed's FOIA denial letter -- ICP will update this story further, once it receives (apparently by regular mail) those documents that the Fed is (finally) making available...
BT-Deutsche: The FRB's FOIA unit has released to ICP (two months late) its staff counsel's Dec. 15, 1998, Memo To File regarding a meeting of that date with Deutsche Bank and its lawyers. The memo has been partially redacted by the Fed, and leaves in the statement regarding "a proposal under consideration to hold Bankers Trust through two holding companies, one of which would be located in the U.S., and one of which would be located outside the U.S.... Deutsche Bank is likely to transfer the Edge Act subsidiary of Bankers Trust Company to Deutsche Bank. With respect to the section 20 subsidiary of Bankers Trust... it would likely become a subsidiary of the section 20 subsidiary of Deutsche Bank... The meeting lasted approximately 90 minutes."
ICP Fed Reporter "note to file:" In order to evade FOIA and public scrutiny, it now appears that the Fed discourages the mega-applicants with which it will hold such meetings from putting anything in writing (as Citicorp and Travelers did) -- rather, the Fed lawyers will create sketchy "memos to file," which the Fed will withhold for two or more months. As analyzed in more detail below, the Fed appears to have no policy regarding when its lawyers' memorializations of meetings are "agency records," and when they will be withheld as "personal records." See also, ICP's Current Campaigns page, regarding the Bankers Trust-Deutsche Bank merger proposal.
* * * *
More inches of global newspaper reporting is devoted to the U.S. Federal Reserve than perhaps any other institution. Inner City Press focus on the Fed is primarily in the Feds role as a bank regulator -- but the line between regulation, manipulation and embrace is rarely clear. Elsewhere on this web site you will find accounts of the Feds questionable compliance with the Freedom of Information Act, and one-sided (legally, ex parte), pre-application meetings with Citigroup and, more recently, Deutsche Bank and Bankers Trust. But the topic for today is: Long Term Capital Management, the hedge fund that almost went bust in late 1998, until the Fed encouraged the largest banks and securities firms to together buy it.
Why did respected banks, regulated by the Fed for safety and soundness, so gleefully put their money in LTCM, despite the lack of even the most rudimentary financial reports? Inner Citys theory of the case centers on a particular LTCB official -- ex-FRB Vice Chairman Dave Mullins.
Serious good government questions exist as to why Congress allows the Fed to have such a well-lubricated revolving door, with not only Fed Governors, but legal and other staffers making rapid transitions from public service into the highest echelons of the private sector. This web site will soon contain a listing of ex-FRB officials and staff and their current position in private companies and law firms that surround, in symbiosis, the Fed.
As a more LTCB-specific matter, ICP on October 26, 1998, sent the following Freedom of Information Act request to the Federal Reserve Board, for:
all records in the possession or control of the Federal Reserve System (the FRS), regardless of whether the records are in the FRS official or unofficial files, however the FRS defines those terms, that relate to the FRS activities with regard to Long Term Capital Management (LTCM). As widely reported, the FRS, including the FRBNY, recently arranged meetings of bank- and nonbank companies to resolve the weakened financial condition of LTCM. One partner of LTCM is/was ex-Board Vice Chairman David Mullins; among the companies participating was the newly-formed Citigroup. See, e.g., New York Post, October 13, 1998, at 31: Citigroup [and] Chase Manhattan... are also among the bailout partners... and see Tim OBrien and Laura Holson, A Hedge Funds Stars Didnt Tell, and Savvy Financiers Didnt Ask, New York Times, October 23, 1998, quoting Citigroup co-CEO Weill that his company began taking a close look at Long-Terms activities only in June. As to Mr. Mullins, see, e.g., id., reporting that:
Long-Terms global clout was enhanced by the presence of former government officials at the firm. Mullins joined in 1994 as soon as he left the Federal Reserve, a move made possible because the Fed, unlike the Treasury Department, does not have a mandatory waiting period for its former officials return to the financial sector. Mullins declined to comment. He was looking to move on and asked Long-Term for advice, said the person close to the fund who requested anonymity. The funds partners knew Mullins -- besides other duties, he was the Feds point man on the bond-trading scandal at Salomon Brothers -- and invited him aboard.
See also, Western Crony Capitalism, Financial Times (London), October 3, 1998, at 10: ...Alan Greenspan was sanctioning the rescue of an outfit whose board included David Mullins, his former vice chairman at the Fed, and still a friend. Equally striking, Mr. Mullins had been responsible for the Feds input into a government investigation into Salomon Brothers market rigging scandal in 1991... Mr. Mullins official role in the Salomon affair makes his choice of destination in the private sector all the more surprising, to put it mildly.
And see, L. Spiro, G. Silverman and D. Foust, A $3.5 Billion Tranquilizer, Business Week, October 5, 1998, at 42: The hedge funds crisis began around Sept. 18... Thats when LTCM, whose partners include former Federal Reserve Vice-Chairman David W. Mullins, Jr., called the Fed. Emphasis added.
ICPs request is particularly directed to, but is not limited to, any and all communications between FRS personnel and either Mr. Mullins or representatives of Citigroup of its predecessors.
Because of Mr. Mullins history as an FRB Vice Chair, until 1992 (after which he immediately went to LTCM), release of all record relating to FRS communications with Mr. Mullins would be in the public interest, and directly within the purposes of FOIA. The FRB has recently approved the formation of Citigroup, and has denied requests for reconsideration citing the issues raised by LTCM; release of all records relating to any FRS communications with Citigroup or its predecessors in this regard would alone illuminate the functioning of the FRS on these issues.
The Fed Delays and Withholds Information
Federal Reserve Board Associate Secretary Frierson, by letter dated December 7, 1998, deemed our November 25, 1998, appeal to be premature, because the Board had claimed for itself an additional ten business days in which to respond to our request. Mr. Frierson stated that the Board would respond to our request of October 26 as soon as practicable in light of the circumstances presented by your request.
Nearly two months later, we have still not be provided with any of the responsive documents.
ICP wishes to emphasize that is has request all responsive documents, and that, if even the FRB internally decides that certain responsive documents are not agency records, such internal decisions and withholding must be disclosed. ICP is currently litigating this non-agency record (or credenza -- see, e.g., Sibille v. Federal Reserve Bank of New York, 770 F. Supp. 134, 138 (S.D.N.Y. 1991), regarding FRBNY EVP Feldbergs claim to have put notes on his credenza, and Board Associate General Counsel Alvarez strikingly similar claim in an affidavit in the ongoing litigation cited in the text of this letter, below) issue with the FRB... Even during the pendency of that appeal, ICP has been informed by the U.S. Department of Justices Office of Information and Privacy (DOJ OIP) that DOJ OIP has promulgated guidance to this effect for all federal agencies.
The Federal Reserve Board is flaunting the Freedom of Information, as ICP has raised to the U.S. Department of Justice (click here to view ICPs news link; ICPs request to DOJ was reported on the Reuters newswire of January 15, 1999, and in the Saint Louis Post-Dispatch of January 16, 1999).
Most recently, in connection with ICPs ongoing Deutsche Bank - Bankers Trust campaign, Fed Governor Rivlin sent ICP a letter on February 12, 1999, stating along other things that the Fed believes that FOIA does not require agencies to search for or disclose the existence of information that is not agency records within the meaning of the Act. Accordingly, your request in this regard is denied. Emphasis added.
DOJ staff have indicated that the Attorney Generals Office has issued guidance that agencies, if they are deeming otherwise responsive documents to be non-agency records, must at least disclose this in a FOIA denial letter. Otherwise, how would the requester even know to appeal, or even be able to appeal (since there would be no denial)? See, e.g., DOJ FOIA Update Vol. IV, No. 4, Pg. 4: "agencies should always identify such 'personal records' in response to FOIA requests so that requesters are aware that such determinations have been made." Emphasis added.
But, to the Fed, the proper functioning of open government laws seem just a technicality, or an unwelcome intrusion. If an issue is not important to the Fed, or to any of the banks it serves, they are more than willing to provide the information. (In fact, ICP wishes to acknowledge here that several of the FRB's FOIA staffers have been nothing but courteous and helpful -- at least with transmitting the higher-ups' denial letters to ICP). But, on issues like the Feds communications about LTCM, or with Deutsche Bank, or with Citigroup, the Fed will ignore the timelines of FOIA, will ignore DOJs or anyone elses guidance, and will openly and not so open try to change the laws it doesnt like (while disregarding or refusing to enforce them in the interim).
This is called -- post-modern government. This is the corporate state taken to an extreme. And if we remain silent, we have only ourselves to blame. The curative power of sunshine -- now theres a concept. What happened to participatory democracy, in this field? What happened to an informed citizenry?
On that moralizing note, the Inner City Reporter returns to the salt mines. For (or with) further information, please contact us.
Copyright 1999 - 2003 Inner City Press/Community on the Move, Inc.. All rights reserved. For further information, or to request reprint or other permission, contact: Permissions Coordinator, Legal Administration, Inner City Press, P.O. Box 580188, Mount Carmel Station, Bronx, NY 10458. Phone: (718) 716-3540. Fax: (718) 716-3161. E-mail: FRBwatch [at] innercitypress.org