September 11 Commission Report - Gnostic Liberation Front

In addition to suspending rules which controlled substitution, reporting, disclosure and
control in the matching process, the Federal Reserve immediately injected $120Billion
into the system, and kept injecting until it reached $300 Billion in incremental money
supply.
“Banking system balances went from $13 billion on September 10 to over $120 billion on the
13th….Federal Reserve credit extension following September 11 was unsterilized, in the sense that it
resulted in a net increase in the monetary base.” [Payment System Disruptions and the Federal Reserve
Following September 11, 2001, Jeffrey M. Lacker, Federal Reserve Bank of Richmond, Richmond,
Virginia, 23219, USA, Federal Reserve Bank of Richmond Working Paper 03-16, December 23, 2003]
The lifting of these rules, and the immediate infusion of over $120 billion in Reserve
funds was inadequate to resolve what was identified as the “fail” problem: the inability
to match the buyer’s funds and seller’s certificates. Hence, on the 19 th of September,
after lifting the constraint, the Government Securities Clearing Corporation (GSCC) sent
a memo to banks encouraging them to make substitutions on “immediately maturing
collateral”, which is what the Brady Bonds were. In other words, the Fed enabled
participants to replace any older, allegedly illegal 10 year notes with new notes.
“…collateral substitutions can and should be made with regard to immediately maturing collateral.”
[Reminder of Bond Market Association Recommendations, GSCC073.01, September 19, 2001]
Then, it treated the ‘fails’ as two separate groups, suggesting there was a large group of
trades that required ‘special treatment’ for “other” problems.
“GSCC has listed, on two new, separately re-created databases, those deliveries from members that
were bought into our account last week without our ability to view those transactions. This will allow
us to identify with confidence those "fails" that are in fact incorrect, as well as other problems such as
erroneous deliveries made to GSCC.” [GSCC075.01, September 20, 2001]
Subsequent to that ruling, the GSCC issued another memo allowing blind broker
settlements. A “blind broker” is a mechanism for inter-dealer transactions that maintains
the anonymity of both parties to the trade. The broker serves as the agent to the
principals' transactions.
“The only repo transactions entered into by blind brokers should be those done in direct furtherance of
clean-up and reconciliation efforts. No new blind brokered business should be executed.”
[GSCC080.01, September 25, 2001]
At this point in time, the Federal Reserve and its GSCC had created a settlement
environment totally void of controls and reporting – where it could substitute valid, new
government securities for the mature, illegal securities, and not have to record where the
bad securities came from, or where the new securities went – all because the primary
broker for US securities had been eliminated. These clearing operations were being run in
one of three ‘temporary’ facilities set up by the Bank of New York. (A more technical
explanation of how this process was deployed is described in Appendix D,)
This act alone, however was inadequate to resolve the problem, because the Federal
Reserve did not have enough “takers” of the new 10 year notes which this report suspects
THE SEPTEMBER 11 COMMISSION REPORT Page 197