Why Is the Fed’s Stanley Fischer Tilting at Windmills?

Courtesy of Pam Martens.

Stanley Fischer, Vice Chairman of the Federal Reserve

Stanley Fischer, Vice Chairman of the Federal Reserve

Last Friday and again yesterday, the Vice Chairman of the Federal Reserve, Stanley Fischer, delivered speeches that attempted to refocus his audience away from the systemic global risk posed by behemoth Wall Street banks and redirect their gaze to dangers lurking in the nonbank sector: things like mutual funds and hedge funds.

Reading the speeches, we had an epiphany here at Wall Street On Parade: if something does blow up in the nonbank sector it is highly likely to be caused by an interaction with a Wall Street bank. The insurance company, AIG, would not have failed during the last financial crisis had it not agreed to engage in Credit Default Swaps (CDS) with Wall Street mega banks. Fannie Mae and Freddie Mac would not have failed had they not been seduced into buying dodgy mortgages,  mortgage-backed securities, and derivatives from Wall Street banks. The Reserve Primary Fund, a money market fund that infamously broke the buck (its shares fell below the sacrosanct $1 per share) in September 2008, did so because of its holdings of Lehman Brothers’ debt – a large Wall Street investment bank which failed in September 2008 while owning two FDIC-insured banks — Lehman Brothers Bank, FSB and Lehman Brothers Commercial Bank.

Fischer’s efforts to redirect the debate away from the largest Wall Street banks comes on the heels of a February report from the Office of Financial Research, a unit of the U.S. Treasury, showing systemic problems bubbling again at the mega banks.

The study was authored by Meraj Allahrakha, Paul Glasserman, and H. Peyton Young, and found that five U.S. banks had high contagion risk values — Citigroup, JPMorgan, Morgan Stanley, Bank of America, and Goldman Sachs.

The authors write:

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