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Market Commentary

Gretchen Morgenson & NY Fed
February 17, 2013 David R. Kotok, Chairman and Chief Investment Officer

Gretchen Morgenson deserves five radiant gold stars for her Sunday NY Times “Fair Game” column, "Don't Blink, or You'll Miss another Bailout"   (New York Times, Sunday Business Section, page 1, February 17, 2013).  This is a must-read addition to the weekend.

Gretchen reports on secretive decision making at the NY Fed.  She has ferreted out a deal that is obscure and was hidden until court documents provided the clues.  I will leave it to readers to spend the six minutes needed to learn of these revelations.

But let me add a second document to the reading list.  You will find it as an attachment to the June 5, 2008 press release of the Fed Board of Governors.  That release announced the approval of the terms by which Bank of America acquired Countrywide.  Remember, Countrywide was the first Fed primary dealer to get into trouble.  Bear Stearns, Merrill Lynch, and Lehman came later.  Also, remember that primary dealers are approved by the NY Fed; they deal directly with the NY Fed.  Also remember that the Fed issued a special approval in order to induce Bank of America Chairman Ken Lewis to take Countrywide.  The file linked from the June 5, 2008 press release recites the entire approval order.

Lastly, remember that Timothy Geithner was president of the NY Fed and vice-chair of the Federal Open Market Committee at the time of the June 5, 2008 decision.  Also, note the present silence of the NY Fed, as Gretchen has reported.

In due time, the Fed's minutes of this period of American monetary history will be revealed.  In due time, more and more of the legal issues will be settled and documents will become available.  In due time, we citizens will learn more and more about how our system actually worked and what decisions were actually made and by whom.

The greatness of America includes the constitutional right of a free press.  And that means we have terrific, inquisitive and insightful journalists.  Gretchen Morgenson is one of them.

Again, Gretchen's column is found at www.nytimes.com .

For the Fed's June 5, 2008 press release, see http://www.federalreserve.gov/newsevents/press/orders/20080605a.htm .

For the PDF attachment to the press release, see  http://www.federalreserve.gov/newsevents/press/orders/orders20080605a1.pdf .  We advise that you read footnote 13 which recites how Bank of America gained approval to exceed 10% of the deposits of the United States.   Here is the operative sentence: “Therefore, the provisions of the Riegle-Neal Act prohibiting the Board from approving an application to acquire a bank if consummation of the acquisition would result in the applicant exceeding the national deposit cap do not apply to the present notice to acquire Countrywide Bank and the other nonblank subsidiaries of Countrywide.”  Please recall that this order opened the Pandora’s Box of “Too Big to Fail.”

Happy weekend reading.


David R. Kotok, Chairman and Chief Investment Officer

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