Fed offers explanation for $5 billion surge but fails to provide documentation

May 28, 2007 – Vincent R. Reinhart is the Director of the Federal Reserve’s Division of Monetary Affairs[1].  He is one of Chairman Ben S. Bernanke’s top advisors on interest rates[2].  Despite his high ranking position with the Fed, the American Enterprise Institute announced on January 17, 2007 that Reinhart would be leaving the Federal Reserve to take a position with AEI[3].  I spoke with AEI spokeswoman Veronique Rodman earlier this week.  She indicated that Reinhart is scheduled to join AEI in September 2007. 

AEI is a neoconservative think tank that has played a major role in shaping the failed social, foreign, and military policies of the Bush Administration.  It supports U.S. intervention in the Middle East.  AEI was one of the prominent driving forces behind the invasion of Iraq, and is currently pushing for regime change in Iran. 

President Bush considers AEI to have “some of the finest minds in our nation”.  At a January 2003 AEI dinner Bush said, “You do such good work that my administration has borrowed 20 such minds.”[4] 

But before Reinhart is allowed to run off to the American Enterprise Institute he has some unfinished business at the Federal Reserve.  He owes the public a well-documented, verifiable, and substantiated explanation regarding a phenomenal surge in the M1 currency component that occurred in July / August 2001. 

In a April 19, 2006 letter to Adam Miles and Thomas Devine of the Government Accountability Project, Vincent Reinhart attempted to explain the July / August 2001 surge ($5 billion above average) in the M1 currency component.  His explanation is woefully inadequate – so much so that it suggests the blatant arrogance of an elitist or the evasiveness of a perjurer. 

The Government Accountability Project is a nonprofit public interest group that promotes government and corporate accountability by advancing occupational free speech, defending whistleblowers, and empowering citizen activists.  It became interested in gaining further information from the Federal Reserve regarding the July / August 2001 surge in the M1 currency component ($5 billion denominated in $100 bills) once it discovered the circumstances surrounding the termination of former Federal Reserve analyst William Bergman.  Bergman raised questions about the July / August 2001 M1 currency component while working at the Federal Reserve in Chicago.  Shortly thereafter, Bergman’s employment with the Federal Reserve ended. 

On March 22, 2007 the Muckraker Report published an in depth article titled Former Fed analyst questions M1 currency component spike prior to 9/11[5] that detailed the work of William Bergman in his pursuit to obtain answers that adequately explained one of the largest money stock increases since 1947 for the months June through August. 

What follows is a summary of the William Bergman story. 

William Bergman worked at the Federal Reserve Bank of Chicago from July 1990 until early 2004.  In late 2003, he was asked to consider an assignment in the money laundering area.  Bergman accepted the assignment, underwent a background check, received credentials affording access to confidential banking information, and began working in the area.  Bergman had noted that the Board of Governors of the Federal Reserve had issued supervisory letters to the 12 Reserve Banks in the weeks after September 11, 2001 urging scrutiny of suspicious activity reports in tracking terrorism activity and financing.  However, Bergman also noticed that the Board of Governors had issued a similar letter on August 2, 2001[6] - prior to September 11, 2001.  Given the fact that a supervisor directed Bergman to discover what prompted the August 2, 2001 supervisory letter, Bergman decided that the best approach was to contact the staff of the Board of Governors of the Federal Reserve directly.  In December 2003 he called the Board and inquired about the meaning and motivation behind the August 2, 2001 letter.  Within two weeks his assignment was abruptly terminated and his credentials canceled. 

Bergman explains:

At the time I was also looking into and asking questions about currency flows. I thought these questions were worth pursuing, and was planning to raise them when I made the above-noted phone call to the Board of Governors.  The currency component of M1 (Federal Reserve Notes circulating outside of banks) rose especially rapidly in July and August 2001. In fact, up to and including August 2001, that month (August 2001) was one of the three fastest growing months for the currency component of M1 since 1947, on a seasonally adjusted basis, even on the heels of significantly above-average growth in July 2001.  Much of the July-August surge (over $5 billion above-average) seems to have been in the $100 denomination. Among other explanations, persons aware of any imminent terrorist attacks and concerned about possible asset seizures such as those that arose after the 1979 Iranian hostage crisis and the 1998 embassy bombings could have been trying to liquidate their bank accounts in July and August 2001. The money trail could provide important clues about people aware of, if not responsible for, the attacks.  I looked at some internal data bearing on this issue that was available to anyone within the Federal Reserve’s internal computer network; after going back to look at this important data again a week or two later, it was no longer freely available, but password protected.

Approximately one month after his money laundering work was terminated for what was described at the time as an egregious breach of protocol attributed to his contacting the staff of the Board of Governors, Bergman’s department was absorbed into another department, and his 14-year employment with the Federal Reserve ended.  Bergman was told that the elimination of his position at the Federal Reserve had nothing to do with him personally – that it was an organizational matter.  He was offered and accepted a severance package, and left the Chicago Federal Reserve Bank in March 2004.

In response to the Government Accountability Project’s inquiry into this matter, Reinhart wrote:

As you noted, the change between June and August 2001 of the currency component of the money stock was the largest recorded since 1947.  This change, however, is largely explained by a surge in net shipments of U.S. currency to Argentina in response to a major financial crisis affecting that country.  Absent the shipments to Argentina, the increase in currency over these months would have been within its typical range. 

Reinhart needs to explain what he means by largely.  What we are considering here are traceable currency shipments that could potentially identify individuals that had prior knowledge of the September 11, 2001 events.  Whether it was a foreign government trying to hedge against frozen assets, or a corporation, group, or even an individual aware of, if not responsible for, the attacks - largely explained - is not sufficient.  Eighty percent could fall under the largely explained category, which would still leave $1 billion in $100 bills unaccounted for which is unacceptable.  Many have killed for much less. I suggest full, public disclosure including shipping tickets and transaction slips that clearly support his assertion that in July / August 2001 - $5 billion in $100 bills was shipped to Argentina.  Until Reinhart produces such documentation, I will remain convinced he is participating in the perpetuation of a fraud upon the American people. 

Reinhart’s Argentina explanation is also insufficient when considering the history of Argentina banking.  In his letter to the Government Accountability Project, Reinhart attempts to substantiate his claim that $5 billion in $100 bills was shipped to Argentina in July / August 2001 because of a financial crisis affecting that country.  He writes:

At times of financial stress abroad, the U.S. dollar becomes the currency of choice for transactions and as a store of value, and the demand for U.S. dollars rises. 

The Argentina economy had been in periodical crisis for 20-30 years prior to the July / August 2001 surge.  During those decades of financial turmoil Argentina enacted eight major stabilization plans and countless other reforms aimed at stabilizing its hyperinflation or the devaluation of its currency.  Hyperinflation, inflation, and the devaluation of currency are all one in the same.  By the late 1980s, as a result of its failed stabilization efforts, Argentina witnessed the persistent “dollarization” of its economy.  Even in the 1970s, dollars were beginning to be used increasingly to settle transactions in Argentina because the people were losing faith in their county’s currency – a looming reality that awaits the American people and the worth-less U.S. dollar. 

The point here is that Argentina had a long history of banking crisis with eight major stabilization events prior to the July / August 2001 surge, and as early as the 1970s, the dollarization of its economy was already occurring.  Consequently, the M1 currency component record should reflect all the banking meltdowns in Argentina since the 1970s and not just one.  Remember, the surge that Bergman questioned was one of the largest recorded for the months June through August since 1947.

In fact, the so-called crisis that Reinhart refers to in July / August 2001 was no more significant than any other Argentina had encountered since the 1970s.  Additionally, in 1991 Argentina pegged its currency to the U.S. dollar using a currency board structure.  Basically, its currency became “backed” by U.S. dollars held in its central bank.  It established a 1-to-1 peg.  With the creation of the dollar peg and the currency board, inflation became virtually nonexistent in Argentina for over a decade.  Pegging its currency to the U.S. dollar at a 1-to-1 ratio should have produced a significant demand for U.S. dollars in 1991 and a corresponding surge in the M1 currency component that greatly surpassed the surge of July / August 2001 – yet the money stock measure does not reflect this cause and effect.

By 2000, signs that the dollar peg would collapse began to emerge as the result of Argentina’s failure to maintain its fiscal discipline. 

By July 2001, it became clear to the world that an Argentina default was fast approaching.  At that time, Argentina held $130 billion in foreign debt.  Its economy was in recession. Civil unrest was increasing with a proposal to cut wages by 13 percent for public employees.  The reduction in wages would have saved Argentina approximately $1 billion that year.  International bankers were demanding that Argentina cut its annual budget by $2 billion to $3 billion to comfort investors.  Clearly, Argentina was having yet another banking crisis.  The question is not whether the crisis existed.  The question is whether $5 billion in $100 bills was shipped to Argentina as a result of the crisis as Reinhart claims.  Given the magnitude of the economic turmoil, to extend further credit to Argentina at that time would have been ludicrous.  Argentina was absolutely on a collision course with default. 

As reported in The Militant, on July 13, 2001 U.S. National Security Advisor Condoleezza Rice announced that the Bush administration was carefully monitoring the economic turmoil in Argentina but indicated that Washington had no plans to offer its own “assistance” to help Argentina meet its foreign debt payments.  “The best course of action right now is for Argentina to be able to take the steps it needs to take at home,” Rice asserted.[7] 

I searched the congressional record and found no action by Congress authorizing a bailout either.  Clearly, in July 2001 the Bush administration and the U.S. Congress were in agreement that there would be no additional U.S. loans made to Argentina to save it from defaulting on its foreign debt.  Yet Reinhart contends that $5 billion in $100 bills was shipped to Argentina in July / August 2001 in response to Argentina’s financial crisis. 

What we now know is that the Bush administration did not authorize a bailout and neither did the U.S. Congress.  So what was the mechanism used to ship $5 billion in $100 bills to Argentina in July / August 2001?  Is it possible that Argentina had $5 billion in reserves held at a Federal Reserve Bank and simply made a withdrawal? 

It seems unlikely that Argentina would have waited until July / August 2001 to make such a withdrawal.  Why would it have waited until it was on the brink of meltdown – assuming that Federal Reserve Banks even maintain these types of reserve accounts for foreign governments.

For the sake of argument, let’s assume that such an account exists.  If it does, then Reinhart should have no difficulty whatsoever producing the withdrawal request records and shipping documentation.  He should be required to do so now and make the documents available to the public promptly. 

And let us not forget about the August 2, 2001 supervisory letter to the 12 Reserve Banks urging scrutiny of suspicious activity reports to include the tracking of terrorism activity and financing.  The American people have yet to be told the motivation behind this letter – 5 weeks prior to the 9/11 events.  Reinhart has been asked to explain this letter in addition to the July / August 2001 surge.  To date, he has offered no public explanation about the supervisory letter. 

Harvey Witherspoon is the Senior Program Manager for Investigative Services at the Federal Reserve’s Office of Inspector General.[8]  I spoke with Adam Miles from the Government Accountability Project earlier this week to learn if he had any follow-up information regarding this story.  He told me that he had sent similar questions via e-mail to Witherspoon on February 9, 2006.  To date, Witherspoon has not responded to Miles. 

On Sunday, May 21, 2006 William Bergman sent a list of valid questions to Harvey Witherspoon.  I spoke with Bergman earlier this week also.  He indicated that he has never received a response from Witherspoon. 

On May 23, 2007 I sent e-mail to Witherspoon asking why he has not responded to the Government Accountability Project or William Bergman.  I also called his office and left a message in voicemail asking the same questions.  He has not responded to my e-mail or returned my phone call.

On May 24, 2007 I call Vincent Reinhart.  His assistant told me that Reinhart was traveling until June 1, 2007.  She would not put me through to his voicemail nor would she provide me with his cellular phone number.  I left a message with her that explained that I seek proof / documentation that supports his claim that the July / August 2001 surge of $5 billion in $100 bills was indeed shipped to Argentina.  She suggested that I sent Reinhart an e-mail asking these questions.  I did. 

To date, I have received no response from Vincent Reinhart. 

On Friday, December 21, 2001 BBC News ran an article titled The events that triggered Argentina’s crisis[9] that provided a timeline of events leading to the 2001 crisis.

March 2, 2001 – Mr. Machinea resigns on March 2^nd and is replaced by Richard Lopez Murphy.

March 16, 2001 – Mr. Lopez Murphy unveils a tough $4.45 billion two-year austerity program with deep cuts in education.

March 19, 2001 – Mr. Lopez Murphy resigns after six government officials quit in protest over his policies.

March 20, 2001 – Domingo Cavallo, a former economy minister under President Menem, is appointed and given special powers to restructure the economy.

June 3, 2001 – Argentina says it swapped $29.5 billion of debt, deferring $7.8 billion in interest payments to 2002. 

July 3, 2001 – Stock Market falls to 28 month low on rumors that President Fernando de la Rua will resign.

July 11 – 26, 2001 – Three rating agencies slash Argentina’s credit ratings.

July 30, 2001 – The government’s key austerity bills are passed, forcing an end to budget deficits, slashing state salaries and some pensions by up to 13 percent.

August 21, 2001 – The International Monetary Fund (IMF) recommends an $8 billion increase in Argentina’s $14 billion stand-by loan agreement.

Please note that the BBC does not report on Argentina withdrawing or receiving $5 billion in $100 bills from the Federal Reserve.  It must also be recognized that the IMF is identified as the lender of last resort for Argentina and not the Federal Reserve Bank. 

November 30, 2001 – Argentines withdraw about $1.3 billion from their bank accounts. 

If the BBC decided to include the $1.3 billion bank run in its timeline, why wouldn’t it include $5 billion surging into Argentina in July / August 2001 as Reinhart contends?