The Curious Case of the Fed Analyst Fired After Asking Too Many Questions
Ed. note: the following might a bit long and F-bomb lite for regular JDA readers. I ask you to overlook that, grab a beer, get comfy and read anyway.
Before we get into the story of William Bergman, an analyst with the Chicago Fed for 14 years of his life, we need to get the background on the story he was sniffing out.
Some of his work at the Chicago Fed includes The New Midwest in Recession and Recovery, The Revival of the Rust Belt: Fleeting Fancy or Durable Good? and 1995 Economic Outlook: 1994 Will Be a Tough Act to Follow. Without calling him bland (we'd never be so rude), let's just say he was good at his job, which as a Fed analyst is to pump out quality droll nonsense that appeals only to central bankers and economy nerds. It's a tough job but someone's got to do it.
On August 2, 2001, a non-routine letter went out from the Fed Board of Governors to the 12 regional banks. The letter reminded them that "among other things, the review of SARs assists in the identification of potential supervisory issues at banking organizations, provides information for determining compliance with relevant laws and regulations, and provides useful information on suspicious activity being identified by the reporting institutions."
Suspicious Activity Reports (here's what one looks like), while not specific to terrorism, can be useful for tracking terrorism activity and financing based on reports the regional Fed banks receive from banks they supervise. The August 2011 letter went deeper:
Reserve Banks must continue to conduct a thorough and timely review of all material SARs filed by supervised financial institutions in their districts. This review is an integral component of the supervisory function. A periodic, comprehensive review of SARs will assist Reserve Banks in identifying suspicious or suspected criminal activity occurring at or through supervised financial institutions; provide the information necessary to assess the procedures and controls used by the reporting institutions to identify, monitor, and report violations and suspicious illicit activities; and assist in the assessment of the adequacy of anti-money laundering programs.
So when, in his official capacity as an analyst at the Chicago Fed, Bergman was asked to consider a money laundering assignment (investigating, not doing), a long winding road of dot connecting led him to the August 2, 2001 letter issued by the Board. In the course of his research, he found it appropriate to contact the Board and ask about the non-routine and completely sketchy but seemingly innocuous letter.
His research also brought him to the third largest increase in the currency component of M1 (that's "money" as most of us define it, though this "money" in particular - about $5 billion above the average monthly increase - happened to be made up of a lot of $100 bills) since 1947. When did that event occur? July and August of 2001. I don't need to remind any of you what happened just one month later.
Bergman writes via Sanders Research Associates (remember, research and analysis is and was his job):
The Federal Reserve-reported data on currency in circulation dates to 1947. If you compute the growth rate for each month, you can find (in the ‘seasonally adjusted’ data) the three fastest-growing months. The fastest growing month for the currency in the 700 months since 1947 was in
– December 1999 — right before Y2K. This makes some sense, as many people were concerned about the quality of their electronic bank deposits. In addition, however, note that there were significant “millennium” terrorist threats arising at that time.
– The second fastest-growing month for currency in circulation was January 1991 — the onset of U.S. affirmative military action in Gulf War I and, perhaps very importantly, an important enforcement month in the Bank of Credit and Commerce International money laundering scandal.
– The third fastest-growing month for currency in circulation since 1947 was August 2001. It’s not like July 2001 was weak, either — there was a significantly above-average increase in July 2001 as well. In the ‘non-seasonally-adjusted’ numbers (data that are not statistically adjusted for within-year seasonal trends), the increase in currency in circulation from June to August 2001 is the largest single June-August increase since 1947.
Much of the July-August 2001 surge in currency (over $5 billion above-average) seems to have been in the $100 denomination. Did ‘wartime hoarding’ play a role in the surge in currency in July and August 2001?
The official line regarding the currency increase has something to do with a currency crisis in Argentina but Bergman doesn't necessarily buy that excuse:
“Just because there was a crisis in Argentina doesn’t foreclose other possibilities. The letter said the crisis is ‘largely’ explained by Argentina. Assume the above increase in public data was $5 billion and if 80 percent is largely explained that still leaves $1 billion perhaps unexplained. That seems to be material,” Bergman said. “It is possible the people (terrorists) suspected their assets were going to get frozen and they rushed to liquidate them. . . One very wealthy person could have contributed to that spike.”
When the Government Accountability Project asked the same question, they received a fairly straight-forward answer from then-Director of the Federal Reserve's Division of Monetary Affairs, Vincent R. Reinhart. Reinhart retired from the Fed just a few months after issuing the following in a April 19, 2006 letter to Adam Miles and Thomas Devine of the Government Accountability Project:
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.
What did asking the Board about the August 2, 2001 letter get Bergman? Fired.
The official story is that Bergman's position was eliminated in a reshuffling at the Chicago Fed, though that excuse feels just as fishy as the Argentina one.
Though the Muckraker Report is no longer more than an archive, a copy of the Bergman material it covered may be found here and is recommended for additional reading on the subject. You can also check out this piece by Jim Hogue via the Baltimore Chronicle.
The August 2, 2001 supervisory letter and the surge in currency growth in July and August 2001 go unmentioned in the final report of the 9/11 Commission. To date, Bergman is still seeking a satisfactory answer to his very reasonable question. If anyone can provide any insight, they are welcome to get in touch.
We will continue digging into this and let you know if we find anything new. And if you don't hear anything from me, you know for sure they came to pick up poor little JDA in the chauffeured black helicopter.