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Federal Reserve’s ‘astounding’ report: We loaned banks trillions

The Federal Reserve has lifted its veil of secrecy regarding special lending programs during the financial crisis, responding to a mandate from Congress by revealing the specifics of transactions with firms like Goldman Sachs and Citigroup.

Critics of the Federal Reserve are poring over the data, seeking red flags regarding potential improprieties. And Congress has asked its Government Accountability Office to sift through the numbers and offer its own analysis.

At the same time, it’s possible that the release of details will end up largely vindicating the Fed for the massive financial support that it gave the economy at a time of severe stress. The emergency loans, in the view of many finance experts, helped to avert a much deeper economic slump. And those loans have now been largely paid back without losses to the central bank.

The numbers are staggering, encompassing more than a dozen emergency programs set up starting in 2007 or 2008. In one program alone the Fed doled out nearly $9 trillion in funds to borrowers such as Morgan Stanley and Merrill Lynch, largely at interest rates below 1 percent. (This program involved overnight loans, so the amount of Fed credit outstanding at any single point in time was much smaller.)

Other programs, with longer-term loans also measured in the trillions of dollars.

The Fed actions were just part of a larger array of government bailouts for the financial industry, which were deeply unpopular with most Americans. Rescue programs run outside the Fed included insurance-style backstops for bank debts and the investments from the Treasury’s $700 billion TARP (Troubled Asset Relief Program).

Despite the public outrage stirred by the actions to prop up firms like Citigroup and AIG, the Fed’s biggest mistakes may have come before the recession rather than in response to it.

“My view is that the Fed has done an excellent job since the crisis started, but they didn’t do a very good job before the crisis started,” says Pete Kyle, a finance expert at the University of Maryland. He says the central bank, as a key financial regulator, should have ensured that U.S. banks had plenty of capital on hand to weather a storm.

Some other economists echo that view, arguing that the Fed and other bank regulators should have done much more to safeguard against a surge in high-risk mortgage lending during the years leading up to the crisis, at a time when U.S. home prices were soaring.

Once a crisis is under way, however, the standard view among economists is that a central bank should act as a “lender of last resort,” providing credit as freely as possible to prevent widespread bank failures at a time when ordinary investors are in a panic.

Even if the Fed’s general approach was the correct one, Wednesday’s data release is sure to prompt close analysis of the money lent, and who got it.

Sen. Bernie Sanders, a Vermont independent who led the charge for Fed transparency, characterized the new details as “astounding” and called for an investigation to determine whether banks borrowed at near-zero interest and then loaned money back to the government at higher rates.

He said the bailouts may have helped to line the pockets not only of banks in general, but also of their top executives.

“How many big banks [that] repaid Treasury Department bailouts in order to avoid limits on executive compensation received no-strings attached loans from the Federal Reserve?” Sanders asked in a statement released Wednesday.

The transaction details may also call into question whether the Fed was too loose in the quality of collateral that it accepted in making loans to banks and in some cases to industrial firms. (McDonald’s and Verizon got Fed help.)

Scores of banks, from large to small, came to the Fed’s lending windows. But in some cases the rescue programs ended up targeting aid at a few prominent firms.

For example, at the height of the crisis, just four large securities firms were the main recipients of loans from the Fed’s Primary Dealer Credit Facility, an overnight loan program for securities firms. Of $3.6 trillion doled out in the six weeks after Sept. 15, 2008 (when Lehman Brothers failed), nearly $3.1 trillion went to Morgan Stanley, Citigroup, Goldman Sachs or Merrill Lynch.

The Fed argued against disclosing the names of firms that recieved loans from this and other programs, saying that in a crisis firms should not be worried about a possible stigma attached to getting emergency funds.

Since the loans have largely been repaid in full, the crisis response appears on one level to impose little direct cost on the public. The biggest cost of the rescues may be indirect. Propping up financial firms can encourage risky behavior, and thus sow the seeds of future crises, by making financial firms believe they are too important to be allowed to fail.

Congress recently passed financial reforms designed to address this problem, but Kyle and other finance experts say the measure has not fully resolved that problem.

Comments (4)

  1. Submitted by Glenn Mesaros on 12/02/2010 - 11:35 am.

    “Since the loans have largely been repaid in full, the crisis response appears on one level to impose little direct cost on the public.”

    Here is the BIG LIE designed to “fool most of the people most of the time”. If you “loan”, i.e. print money at zero percent to Wall STreet banks, and they buy government debt that yields 3 – 6 per cent, of course, they are “going to pay back the debt” – it’s all a computerized paper fantasy world. But no real businesses that can employ people are getting any zero per cent loans.

    New books come out all the time, such as “Barbarians of Wealth” : which document this Wall Street thievery.

    What WAS the solution: FDIC should have taken over these banks back in 2008, and put them through bankruptcy proceedings.

    What is the solution: Glass Steagall restoration of banking principles created under FDR in 1933, that prevented banking crises until late 90’s when this legislation was repealed.

    The FINAL BIG LIE: the bailouts prevented another depression. What do you think we have NOW? 30 million people are out of work.

  2. Submitted by Patrick Wells on 12/03/2010 - 06:45 am.

    I agree with Glen Mesaros.

    In addition to the problems with Fed actions over the past two years, the most alarming event,now, is the Fed Policy of quantitative easing, a policy which Ben Bernanke said he would not use.

    For an average person, quantitatve easing is resulting in higher gasoline prices and a devaluation of cash savings. Quantitative easing produces a loss of value of the dollar as a currency.

    In addition to threatening the value of the dollar, Fed policies have rewarded outrageously bad financial behavior. Bankers who have violated the law have not been held to account while many ordinary citizens have lost their jobs and homes. With governmental budget shortfalls, next year will be worse in terms of job losses. Ordinary citizens did not cause the financial crisis.

    Finally, the most disappointing element of this financial crisis is the lack of interest by citizens or lawmakers. I agree that none of this would have happened with Glass Steagal and with the kind of regulatory environment which had served us well for many years.

  3. Submitted by donald maxwell on 12/03/2010 - 11:42 am.

    If big banks got essentially free loans from the fed, why should not the people paying on mortgages to those banks get a holiday free of interest for the period over which their banks paid no interest to the fed?

    Many of those people are facing foreclosure because of the accumulating interest they are facing. Just how unfair can this system of banking get?

  4. Submitted by george farland on 03/30/2011 - 04:20 am.

    The Top Court has ordered the Federal Reserve to give up more information about the Wall Street bailout. The proof is here: Supreme Court forces Fed to fess up about discout window data to press A Top Court decision on Monday sided with a news organization seeking information about banks using the Fed’s “discount window” and the amount of money involved. The information about discount window loans was the only aspect of the bailout program that remained secret after Congress required the Fed to disclose information to the public about the Wall Street bailout in December.

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