Vern McKinley


Vern McKinley is an attorney, financial analyst, policy analyst and author specializing in central bank and deposit insurance operations and policy. He has worked the past twelve years in advising a variety of government clients, principally applying his expertise to improving central bank and deposit insurance operations, and banking supervision and regulatory systems for central banks and financial agencies. McKinley has worked on a full range of financial stability issues, including management of central banks; stress testing and failure prediction models; strategies for addressing banking crises, including resolution of problem financial institutions; deposit insurance and bank supervision design; and coordination of interagency actions among multiple financial sector agencies. Prior to his time as an advisor, McKinley worked for 15 years at a number of the US financial agencies, including the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve, Resolution Trust Corporation and Treasury's Office of Thrift Supervision.

Currently McKinley is finalizing the editing of a book to be published by the Independent Institute that traces the past century of financial institution bailouts in the US, focusing in particular on the most recent financial crisis. In researching the book, he has brought four lawsuits under the Freedom of Information Act against the Board of Governors of the Federal Reserve, FDIC and Federal Housing Finance Agency to secure details on the bailouts. He has also completed work on Central Bank Modernisation, a book on change management in central banks. McKinley co-authored one of the book’s lead chapters and has applied the methodology from the chapter to a number of operations assessments of central banks. In an earlier policy analysis for Cato Institute over a decade before their demise ("The Mounting Case for Privatizing Fannie Mae andFreddie Mac"), McKinley labeled Fannie Mae and Freddie Mac "financial time bombs" and warned that they "expose the federal taxpayer to an ever-increasing potential contingent liability that could ultimately cost tens of billions of dollars to rectify."

Mr. McKinley holds dual bachelors degrees (with honors) in finance and economics from the University of Illinois at Champaign-Urbana and a J.D. (with honors) from George Washington University.


Addressing Mortgage Malinvestment (Part III)

by Vern McKinley November 20th, 2012 9:25 am

Fannie Mae and Freddie Mac continue to distort the mortgage markets and are nowhere near a proper wind down after four years in government conservatorship. I reviewed the SEC reporting for each of them over the past few years and found that they still have total assets in the range of $5 trillion, which has stayed steady for the past three years. I summarize my findings in an editorial in the Wall Street Journal today……

“At the height of the presidential election campaign, the Treasury Department issued a press release called "Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac” highlighted a new policy to scale back the pair's mortgage-investment portfolio at a rate of 15% per year, as opposed to their stated 10% rate. Reports from the Securities and Exchange Commission, however, suggest that these two government-sponsored enterprises—currently under federal conservatorship—may not be shrinking much at all. The Treasury announcement, coming near the fourth anniversary of the September 2008 government takeover of the mortgage behemoths, was made during an election campaign with a heavy focus on the health of the economy. The impression it left was that the most expensive of the 2008 bailouts was not much of an issue, as the transition back to stability in the mortgage market is well under way.”

For the full article.

I have also been busy with Freedom of Information Act requests to see if the government is considering placing Fannie and Freddie in receivership. There has been some movement on this front, but only some work being done by PricewaterhouseCoopers to lay out some options as reported by Bloomberg which included reference to a contract I dug up from the Federal Housing Finance Agency, the pair’s conservator.


Bernanke's Fairy Tale

by Vern McKinley April 12th, 2012 8:44 am

Taking a cue from Dr. Selgin who made a convincing case on this blog regarding the entertainment value of the first installment of Chairman Bernanke’s GW lectures; and after spending an hour and a half of my free time while recently working in the Caribbean listening to Peter Schiff’s critique of the same lectures in an event on Reason TV, I felt the need to watch one of them in its entirety. What a maddening experience indeed. These two gentlemen picked apart the Chairman’s indoctrination with their usual skill and grace, especially with regard to creation of bubbles and discretionary monetary policy. As I am wont to do, my focus was on the Fed’s bailout policy and I happened to catch the third installment of the Bernanke series which involved a discourse on the AIG bailout (about the 45:50 mark):

It's an oldie but a goodie for our Federal Reserve chairman. In one of his recent lectures at George Washington University (GWU), Ben S. Bernanke made the self-congratulatory assertion that the "forceful policy response" led by the Federal Reserve in 2008 helped avoid a more serious economic downturn.

This rhetoric is nothing new. Mr. Bernanke has made similar remarks in the past. As he confided in one interview, "I was not going to be the Federal Reserve chairman who presided over the second Great Depression." It is clear that like Treasury Secretary Timothy F. Geithner, who recently trumpeted the fourth anniversary of his role in the Bear Stearns bailout, Mr. Bernanke is aggressively using the GWU lectures to shape his legacy before he steps down.

During the chairman's one-hour-plus lecture, he dedicated five full minutes (and four PowerPoint slides) to a case study on AIG. In the classic dour assessments reminiscent of 2008, Mr. Bernanke used Chicken Little hyperbole, noting that the "failure of AIG, in our estimation, would have been basically the end." The chairman did not elaborate for the benefit of the students in attendance what he meant by "the end" or the precise connection between the failure of AIG and the end of financial life as we know it, but it certainly made for a dramatic moment during the lecture.

Interestingly enough, one of the GWU students pressed the chairman for more details on the decision-making process underlying interventions like what occurred with AIG. The student, identified by Mr. Bernanke as "Max," boldly questioned the chairman's methods: "Where do you draw the line between bailing out a bank and allowing it to fail? Is it arbitrary or is there some sort of methodology?" Mr. Bernanke meandered a bit in responding to Max and eventually admitted that the process was somewhere in between arbitrary and a set methodology, noting that it was a "case-by-case process" and "somewhat ad hoc."

For the full article, please see today’s Washington Times.


Name Your Favorite Geithner Nickname: "Turbotax Tim" "Chicken Little"

by Vern McKinley March 16th, 2012 9:40 am

By all indications by year end we will be granted a reprieve from listening to Secretary Geithner’s outrageous claims about how the bailouts, largely engineered from his perch as the President of the New York Fed, saved the world from absolute financial Armageddon. To Geithner anyone who disagrees with him has amnesia as this recent WSJ editorial from earlier this month details. In today’s Investor’s Business Daily I give the countervailing narrative (click the link for the full editorial):

“Timothy Geithner is in full "swan song" mode. Word is he will give up his job as secretary of the treasury at the end of 2012, regardless of whether President Obama wins or loses in November.

To influence history's judgment of his tenure as president of the New York Fed and as treasury secretary, he is now aggressively shaping a glowing narrative. This explains his current victory lap in the media highlighting the fourth anniversary of the bailout of Bear Stearns.

He recounts how the CEO of Bear, with his firm on the brink of bankruptcy, came to him looking for a shoulder to cry on. From his then leadership perch as president of the New York Fed, the bank ultimately extended nearly $30 billion for a bailout, the first in a series of such interventions.

Although this effort to shape a narrative has begun, the countervailing narrative is also clear. This narrative couches the bailout of Bear Stearns as the "original sin," the first in a series of short-sighted interventions with negative consequences and highlights that our system is just as vulnerable, if not more vulnerable, to similar crashes in the coming years.”


Addressing Mortgage Malinvestment (Part II)

by Vern McKinley February 21st, 2012 2:11 pm

David Skeel of Penn Law School has a good piece in today’s Wall Street Journal and Todd Zywicki of George Mason Law School in this week’s Forbes as both have good reviews of the recent well-publicized mortgage settlement. David points out that (picky-picky) there does not seem to be much of a connection between the settlement and any underlying analysis of the facts and that the government-led extractors “treated the case as an opportunity for photo-ops and high-level negotiations.” Todd focuses his analysis on the likelihood that this is merely an initial installment of such extortive agreements which will lead to continued uncertainty in the mortgage market. All of this leads to the conclusion that we are far away from any type of free banking world where the mortgage market is allowed to fall back into balance, a point I made on the Dylan Ratigan Show a few weeks ago with particular emphasis on winding down Fannie Mae and Freddie Mac.


Addressing Mortgage Malinvestment in the Financial Sector

by Vern McKinley February 4th, 2012 4:34 pm

Notwithstanding a great deal of tough language in September 2008 from our government about how Fannie and Freddie were a disastrous case study in government failure, not much has been done to get rid of the mortgage twins.  Here is part of a piece I had in the Hill blog this week about how to move them away from their status as wards of the state and towards a freer mortgage market, a wind down process that can begin immediately:

“The Romney-Gingrich political grudge match over Freddie Mac presents an opportunity to ask a basic question: Why are Fannie Mae and Freddie Mac still operating? Michael Williams’ recent resignation as CEO of Fannie Mae has set up a struggle over the direction of the two mortgage behemoths. It comes just a few months after Freddie Mac’s chief executive Ed Haldeman announced his departure. Will the two mortgage giants continue to muddle along in conservatorship as they have since September 2008, or will these resignations act as a catalyst to put them in receivership and wind down their operations? The latter scenario would enable taxpayers to put the fiscal disaster of these two government-sponsored enterprises behind them.”

For the full article follow the link.


Financial Stability: FSOC, Continued Secrecy, Fannie and Freddie

by Vern McKinley January 22nd, 2012 8:01 pm

I address this range of issues in an editorial this week published in the Washington Times.


Hyperinflation, alive and well

by Vern McKinley January 1st, 2012 11:19 pm

In my initial post last May I mentioned I would discuss some of the economic environments that I have worked in as part of my consulting work. I have some very clear memories about inflation in the US from the late 1970s and early 1980s. I worked in a grocery store from 1979 to 1980 in suburban Chicago and one of my duties was to change prices on the full range of grocery products. This was before the time of electronic bar codes that allowed price changes to happen essentially automatically. Back then you had to either scrape the price tags off cans and put the new price tag on, or for products in boxes the old price tags had to be covered up with the new, higher price tag. Also as a business student in the early 1980s I remember that we took up quite a bit of time on inflation accounting, learning how to detail financial statement footnotes regarding the underlying cost basis. I don’t recall ever using that concept in practice once I started working full-time in the mid-1980s.

In one of my trips late last year, I spent some time working in Belarus in November.  One interesting characteristic that I found about the Belarusian economy is that inflation is currently hovering around 100 percent. The currency experienced two major devaluations during 2011. Last spring the USD/BYR exchange rate stood at about 3,000:1. One devaluation occurred in May that sent the rate to about 5,000:1 and another devaluation in September and October sent the rate to just under 9,000:1 which is about where it stood when I was there. It has recently drifted back to about 8,300:1. Usually when I travel to a country I immediately exchange a few hundred dollars into the local currency. I didn’t do that in Belarus. I exchanged about $40 of spending money every two or three days and I got a few thousand BYR more each time I went to exchange currency. Some cite loose credit in the form of “issuing cheap loans to cover state firms' budget gaps and propping up the ruble at what eventually became more than double its actual worth” as the cause of the problems with the economy. Most of the lending in Belarus is undertaken by large state-owned banks.

One final anecdote will close out my post. I have been to three countries where I have seen Lenin statues previously—Tajikistan, Ukraine and now Belarus. In Tajikistan and Ukraine, the statues were tucked away in parks. In Belarus, the statue is in front of the Government.



Dexia: Nothing New Under the Sun and Financing Failure

by Vern McKinley October 9th, 2011 6:41 am

Took some time away from blogging recently distracted by a number of issues, including moving back to the US from Kyiv where I had been living for 18 months, transitioning to different clients work-wise and also finalizing a book I have been working on the past two plus years.

It is interesting to see that not much has changed world-wide as far as how central banks and governments around the world continue to panic at the least sign of a potential large bank failure. This week governments were aflutter about Dexia Bank of Belgium as its central bank, as well as the French central bank, are coming to the rescue (

Dexia Bank is an interesting case for a number of reasons.  First of all, it just received a bailout package three years ago from its government and I guess that went so well that another bailout may be in order. This parallels the well-publicized troubles of Bank of America in recent weeks which had a relapse with its stock back down near 2009 lows. This is after it was bailed out in early 2009 when the Merrill Lynch purchase threatened its long-term viability. I also recall during the 1980s that two of the largest banks in Texas during that period were bailed out and then they ultimately failed a few years later when the bank groups did not bounce back as expected: BancTexas and First City. So the history of bailouts reveals that many times the cure just does not take.  The way the bailout crowd explains it though is that bailouts are an elixir that cures all ills for a bank under stress.

Another interesting issue about Dexia is that just this past summer it went through the so-called “stress tests” by the European Banking Authority. Dexia passed with flying colors with an 11% capital ratio intact, well above the 10% ratio that its regulators had hoped for. This was the procedure that 91 of Europe’s largest banks went through to see how they could withstand the stress of a downturn. Seems the stress test was not so stressful, as it just assumed that sovereign debt would not cause any problems for Dexia. So the post-crisis panacea for addressing future stress of having banking agencies worldwide demand higher capital ratios and then intervene early to avoid bailouts seems to be coming apart before it was even fully implemented.

To loop back to a few of the issues I started with at the beginning of the post, have a look at a recent interview I had with the Wall Street Journal about my forthcoming book Financing Failure: A Century of Bailouts and the Independent Institute’s promotional page that provides a summary and some initial comments on the book itself.


The Fed Wants Secrecy and the US Court of Appeals for the DC Circuit Gives It To Them

by Vern McKinley June 6th, 2011 9:36 am

“I personally have always been a big believer in providing as much information as you can to help the public understand what you’re doing, to help the markets understand what you’re doing, and to be accountable to the public for what you’re doing.” Federal Reserve Chairman Ben Bernanke, Press Conference, April 27, 2011.


One of the most attractive features of a free banking environment would be in reducing the power of a secretive government agency. There is a good reason that one of the most well-known books on the Federal Reserve was given the name Secrets of the Temple.

I have some personal experience with this issue and that all came to a head this past week in my Freedom of Information Act (FOIA) case as reported by Dow Jones Newswire (3 June 2011):

A federal appeals court ruled Friday that the Board of Governors of the Federal Reserve System doesn't have to release records stemming from the 2008 rescue of Bear Stearns.

The U.S. Court of Appeals for the District of Columbia Circuit rejected a Freedom of Information Act lawsuit that sought details of the Fed's March 2008 decision to authorize an emergency funding arrangement for Bear Stearns through J.P. Morgan Chase & Co. (JPM).

Plaintiff Vern McKinley, a former FDIC official, was seeking details on the Fed's conclusion that emergency funding for Bear Stearns was necessary because the firm's collapse would be a contagion on fragile financial markets.

The appeals court said the public release of the information would undermine the ability of the Federal Reserve Board to perform its functions.

"Disclosure of the type of information withheld here, therefore, would impair the Board's ability to obtain necessary information in the future and could chill the free flow of information between the supervised institutions and the Board and Reserve Banks," the court said.

See the court’s full opinion.

For the past two years, with the help of the legal team at Judicial Watch I have been trying to get some basic information on the March 2008 Bear Stearns bailout: essentially what severe consequences would have flowed from allowing Bear Stearns to fail. Although we have found some interesting details, the Fed and the Justice Department have fought us every step of the way regarding full disclosure. The extent of resources the government is willing to put into such a fight is clear from the first page of Judge Henderson’s opinion. You have the two attorneys from Judicial Watch on my side followed by the details of the SEVEN attorneys from the Fed and Justice Department:

Michael Bekesha argued the cause for the appellant. Paul J. Orfanedes was on brief.

Samantha L. Chaifetz, Attorney, United States Department of Justice, argued the cause for the appellee. Tony West, Assistant Attorney General, Beth S. Brinkmann, Deputy Assistant Attorney General, Mark B. Stern, Attorney, Katherine H. Wheatley, Associate General Counsel, Board of Governors of the Federal Reserve System, and Yvonne F. Mizusawa, Senior Counsel, were on the brief. R. Craig Lawrence, Assistant United States Attorney, entered an appearance.

My intent here is not to go into great detail on the case, but to highlight the predominant issue as I saw it. As background, in the early briefings for the case we discovered what we thought was a big hole in the Fed’s case. The Federal Reserve Bank of New York is not a government agency and they are thus not subject to FOIA so they cannot be compelled to disclose the details of their operations through FOIA law. But we noticed that the Board of Governors in Washington was invoking various intra-agency and inter-agency exemptions to avoid disclosing communications between Washington and the New York Fed. We thought the Fed in Washington was trying to have it both ways, as in this case they seemed to be treating the New York Fed like a government agency so they could invoke inter-agency exemptions.  Obviously, if the New York Fed is not a government agency, then it seemed that these were not inter-agency communications. The Fed did not address this issue in their original brief.

When we made this point, in what might be called a ‘hail mary’ the Fed in Washington responded that the New York Fed was their….’consultant.’ There is under FOIA law what is called the ‘consultant corollary’ which allows for keeping secret ‘intra-agency’ communications between a government agency (the Fed in Washington) and their consultant (the New York Fed in this scenario). Although the idea that the New York Fed, a creature of federal legislation, is anything resembling a consultant (like McKinsey & Co.; Deloitte; Booz Allen Hamilton; or Accenture) is a preposterous notion, the Court of Appeals, seemingly in an effort to defer to the Fed’s wishes on secrecy, bought into the argument.

So the Fed in Washington, enabled by the Obama Justice Department, with all manner of public resources at their disposal and with the agreement of at least one panel of judges on a court of appeals in DC is perpetuating the historical pattern of secrecy at the Fed. I recall that when I began my lawsuit two years ago a former government lawyer colleague of mine, who now works at the Fed in Washington, had an interesting comment upon hearing the story of my lawsuit: “Secretive bastards!” Indeed. 



Were the Pre-Federal Reserve Days So Bad?

by Vern McKinley June 2nd, 2011 10:48 pm

"In the next few days the situation would grow much worse, and the interconnected nature of the relationships among the nation's financial institutions would only enable the contagion to spread."

The question I pose is which set of circumstances is the author of this passage describing? Was it in March 2008 immediately after the problems were discovered at Bear Stearns and the Federal Reserve rushed to the rescue? Was it during September 2008 that month that saw the meltdown of Fannie Mae and Freddie Mac followed by Lehman Brothers, followed by AIG and Wachovia? Was it in November 2008 as Citigroup approached failure? Or was it during an earlier financial crisis, maybe during the 1980s when Continental Illinois was bailed out by the Federal Reserve and then the FDIC.

The passage is actually from a book by Robert F. Bruner and Sean D. Carr of the University of Virginia: The Panic of 1907: Lessons Learned from the Market’s Perfect Storm. Having listened to Timothy “Chicken Little” Geithner and Hank “I’m prepared to do anything” Paulson tell us how the troubles they faced during 2008 were absolutely unprecedented in nature, this may be surprising. But this passage actually describes the financial crisis that preceded the creation of the Federal Reserve and led to its creation.

During the Panic of 1907 there were discussions of bailouts. However, these were bailouts by private parties that were contemplated, not governments. JP Morgan (the man, not the financial institution) and the private, voluntary clearinghouses were the ‘lenders of last resort’ back then. They considered giving a bailout to a large troubled financial institution: Knickerbocker Trust Company. The clearinghouse committee denied a loan through an intermediary bank on behalf of Knickerbocker. JP Morgan commissioned an assessment of the trust companies to determine which should be supported and which should be allowed to fail. He had two bankers, one of whom was Benjamin Strong who later would become the first President of the New York Fed, examine Knickerbocker. If they determined Knickerbocker was sound, Morgan committed to finding money for it. Ultimately they determined that it was not solvent and that there were other more sound institutions that were better candidates for funding. Knickerbocker was allowed to fail (see Bruner and Carr pages 72 to 76, 84, 87).

It is useful to think about what happened in this pre-Federal Reserve crisis. The impetus was on these private financial players to assess the soundness of Knickerbocker, as well as any collateral that might have been available and determine if they wanted to put up their own money to save it. They knew about the possible adverse consequences of letting Knickerbocker fail and they had an interest in assuring that the financial system did not collapse. Yet they decided to not provide any funding to Knickerbocker.

Contrast the situation in 1907 with the most recent crisis and the alignment of interests. The three bailout agencies (the Federal Reserve, Treasury Department and the FDIC) were all dealing with public funds involving handing out other people’s money, so of course it is easier to make the decision to hand out public funds than one’s own funds. They felt they had to do “something” and could not just let these financial institutions that were on the brink of failure simply collapse. They had what former FDIC Chairman Bill Seidman called the “not on my watch” mentality.  They wanted to avoid a large failure on their watch at all costs, with Lehman Brothers being the singular exception. These policymakers probably recognized the possibility that there were moral hazard costs to such bailouts, but those costs would come home to roost in the future, on someone else’s watch. They acted in their own self-interest rather than the public’s interest in effectively using public funds.

This description of the reality of the response of public officials contrasts with what was anticipated when the Federal Reserve was under development. From the comments of Senator Claude Swanson, Democrat of Virginia, who was President Wilson’s point person in securing passage of the Federal Reserve Act (51 Cong Rec 428, 430 – 432— December 8, 1913):

“The benefits which will accrue from these regional, or, as named in this bill, Federal reserve banks are great and many. The reserves of this Nation, which are needed in times of financial distress and stringency, will be held by those who have a public responsibility for their just and proper use, and not as now, by those who have such responsibility and no purpose of public benefit in their use…I am satisfied that the Federal reserve board when constituted will wisely, faithfully, fearlessly, and patriotically discharge the duties conferred upon them to the benefit of the whole of the country and without favoritism to any…I believe the present President of the United States, animated by only lofty and noble principles in all of his work, will select as members of this Federal reserve board men fully equipped, men with noble purposes and whose administration of their office will redound to the great betterment of this Nation.”

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