LIBOR, The Fed And The TED

“Insanity: doing the same thing over and over again and expecting different results.” Albert Einstein

Somehow, the insanity of the present unsupervised system involving the Federal Reserve’s primary dealers continues. The Fed had “surveillance” in place during the Drexel Burnham failure and the Salomon Brothers affair. There were no market meltdowns attributed to either event.

Then, in the early 1990s, under the Corrigan initiative and with the approval of the FOMC and Chairman Greenspan, the Fed ceded the surveillance issue to the other regulators. Since this policy change, the toll of primary dealer casualties has grown to include Lehman Brothers, Bear Stearns, Merrill Lynch, MF Global, Countrywide, and now Barclays.

How many more market shocks will we have to endure before the Fed reverses one of the worst decisions it ever made? Until the Fed ceases shirking its supervisory responsibility and restores a more formal surveillance and oversight role, there is no reason to expect things to be any different; and Einstein’s remark applies.

Below is a direct quote from the website of the Federal Reserve Bank of New York. Readers please note that the NY Fed sets the rules for primary dealers. It does not take Congress to change this. The Fed could make this change tomorrow if it chooses to do so.

“The Federal Reserve Bank of New York trades U.S. government and select other securities with designated primary dealers, which include banks and securities broker-dealers. Weekly transaction, market share data and primary dealer lists are updated periodically. Much of the information is submitted voluntarily. The Bank expects primary dealers to submit accurate data, but the Bank itself does not audit the data.”

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