by Pam Martens and Russ Martens, Wall St On Parade:
As the financial crisis of 2008 was ravaging century-old financial institutions on Wall Street and collapsing the U.S. economy, the central bank of the United States, the Federal Reserve, launched an effort to restore market liquidity by becoming the buyer of the toxic sludge flooding Wall Street in the form of Mortgage-Backed Securities (MBS).
On November 25, 2008, in delicately-parsed language, the Fed announced it planned to buy $500 billion of MBS that was backed by government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac, and Ginnie Mae. That was the first of what would become Quantitative Easing (QE) to infinity at the Fed. The Fed’s MBS holdings have grown from the planned $500 billion to $2.4 trillion as of last Wednesday.
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Just as it did with the bulk of its $29 trillion bailout programs to Wall Street during and after the 2008 financial crisis, the Fed farmed out its MBS buying program to the New York Fed, which, in turn, farmed out one critical leg of the program to the very Wall Street mega bank that had corrupted a significant part of the MBS market: JPMorgan Chase.
A little more than a month after the Fed’s MBS announcement, on December 31, 2008, the New York Fed signed a contract with JPMorgan Chase to be the sole custodian of the securities it bought under the MBS program. That contract with JPMorgan Chase was amended on April 1, 2010; April 26, 2011; April 17, 2014 and again on January 30, 2017. (As of this morning, the original contract and its amendments are available at the New York Fed’s website. Should those documents disappear, we have archived the same documents on our website here.)
Wall Street On Parade wrote about JPMorgan Chase being the sole custodian of the Fed’s MBS program in 2014 and again in 2020. In both years, the New York Fed confirmed that JPMorgan Chase remained the sole custodian of its MBS securities. But something strange happened this week when we sought our routine confirmation from the New York Fed.
On Monday, we emailed the communications department at the New York Fed and asked if JPMorgan Chase was still holding the MBS portfolio for the New York Fed.
The New York Fed has a vendor department, which, ostensibly, vets its vendors and keeps track of its vendor contracts. It should have taken less than five minutes to phone that department and verify if the MBS custodian contract with JPMorgan Chase was still in effect.
Instead, we received an email on Monday saying a response to our question would be forthcoming on Tuesday. When 5:00 p.m. Tuesday rolled around with no response, we emailed the New York Fed again for an answer, asking the following:
“Per below, can you confirm that JPMorgan Chase remains the sole custodian of the Agency Mortgage-Backed Securities held by the Fed?
“The FRBNY still has the Vendor Agreement indicated as current on its website so this shouldn’t be a problem to confirm. I’m just checking with you folks out of an abundance of caution to verify my facts.”
This time, the response from the New York Fed was Kafkaesque. We were told we could not put quotes around the information from the New York Fed or name the person giving us the information. And, the information that was provided to us was off topic. We were told that beginning in 2010 the New York Fed began to use internal staff to make its own purchases of MBS.
We shot back with yet another email:
“I’m asking strictly about the Custodian. Does that remain JPMorgan Chase?”
We were told via email that the New York Fed had nothing else to say on the matter.
We then took the screenshot below at the New York Fed’s website showing expired vendor contracts versus those not marked as “expired.” It would appear from this that the contract making JPMorgan Chase the sole custodian of the Fed’s $2.4 trillion in MBS debt securities is still in effect.
Why would the New York Fed confirm the same question in 2014 and 2020 but be so bizarrely cagey about confirming this information in 2024?
Could it be that the crime factory at JPMorgan Chase has simply gotten too embarrassing for the New York Fed to acknowledge its association with it?
The New York Fed failed to find a new custodian for the $1.49 trillion of MBS that JPMorgan Chase was holding for the Fed on January 7, 2014 when the Justice Department charged the bank with two criminal felony counts for its role in the Bernard Madoff Ponzi scheme. The bank admitted to the charges; paid $1.7 billion into a Madoff victims fund; and was given a 3-year Deferred Prosecution Agreement and put on probation for the same period.
The New York Fed also failed to replace JPMorgan as custodian when it was holding $1.7 trillion of the Fed’s MBS on May 20, 2015 and was charged with its third criminal felony count in less than a year and a half. On that occasion, JPMorgan Chase admitted to one criminal count brought by the Justice Department for its role with other banks in rigging the foreign exchange market. The bank paid a fine of $550 million and was put on probation again.
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