The Federal Reserve’s effort to recover taxpayer money used in bailouts while also ensuring the stability of the financial system puts it in a “difficult spot,” said Charles Plosser, president of the Philadelphia Fed.
The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., has joined a bondholder group that aims to force Bank of America Corp. to buy back some bad home loans packaged into $47 billion of securities.
On the one hand, the Fed has “a duty to the taxpayer to try to collect on behalf of the taxpayer on these mortgages,” Plosser said today at an event in Philadelphia.
“At the same time, as a regulator, and as someone who’s trying to preserve financial stability and manage the oversight of banks and financial institutions, we’ve got another hat that we wear that says, ‘Should we be in the business of suing the financial institutions that we are in fact responsible for supervising?’”
The Federal Reserve System, made up of 12 regional banks plus the Washington-based Board of Governors, works with other regulators to ensure the safety and soundness of the financial system.
“It’s a very difficult spot for the Fed to be in,” Plosser said. “It’s a little bit of a Catch-22, but it reinforces my notion of what the challenges and difficulties are for the Fed entering into the markets in this way.”
Concern that Bank of America may be forced to buy back soured mortgages helped send its stock down 7.3 percent since Oct. 18, the day before the New York Fed’s role was reported.
Wall Street Banks
The New York Fed oversees many of the biggest Wall Street bank holding companies, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. Bank of America, the largest U.S. bank by assets, is based in Charlotte, North Carolina, and overseen by the Richmond Fed.
The Fed owns assets from the Bear Stearns and AIG bailouts in three holding companies. The New York Fed, which has policies to manage conflicts of interest between its multiple units, created its Special Investments Management Group in January to oversee the assets.
Maiden Lane LLC, named for the street bordering the New York Fed’s Manhattan headquarters, bought about $30 billion of Bear Stearns assets that JPMorgan didn’t want when it acquired the company. Maiden Lane II and III were created to hold the assets from AIG’s rescue. BlackRock Inc., the world’s biggest money manager, was hired to manage the assets and is also part of the bondholder group.
“In terms of monetary policy, we should stick to buying government securities and Treasuries and not venture outside that for exactly these sorts of reasons,” said Plosser, a former professor and business-school dean at the University of Rochester in New York who joined the Philadelphia Fed as its chief in 2006.
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