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The Spectacle Blog
Yesterday, Bloomberg published a massive investigation into newly released documents showing the number and size of emergency loans made by the Federal Reserve to specific banks during the financial crisis. In total, banks such as Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs, along with dozens of others, received about $1.2 trillion in loans from an alphabet soup of Fed supplementary lending programs.
It hasn’t been a secret that the Fed committed such a huge amount of money to Wall Street. The Fed announced each program as it began, and by looking at the size and composition of the Fed’s balance sheet it’s always been clear that its actions constituted a massive bailout:
What’s new is that the Fed recently released the data on each loan and its counterparties. It did this in order to comply with a provision of the Dodd-Frank financial regulation bill (one of the bill’s few bright spots). Although the Fed and banks would argue otherwise, the public has a right to know which companies received help from the Fed.
The Bloomberg article mentions that the 10 largest banks received far more in loans from the Fed ($669 billion) than they did through TARP ($160 billion). In other words, “the bailouts” were much more about the Fed than they were about TARP. For that reason, the public’s anger at TARP has been a little misdirected, as has the administration’s defense of TARP because it hasn’t lost as much money as predicted.
Yet this new data on the Fed’s loans still doesn’t fully capture the extent of government assistance to the banking sector. The most important aid to the banks has been the Fed’s almost three-year-long policy of zero percent short term interest rates. Investment banks with access to short-term loans have been able to earn risk-free profits by simply funding purchases of longer-term Treasury bills with short-term, zero-percent interest loans.
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More Blog Posts by Joseph Lawler
http://spectator.org/blog/2011/08/23/the-12-trillion-fed-bailout-of
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Ken (Old Texican)| 8.23.11 @ 11:19AM
I'm not so sure I am as frustrated with the FED actions...as I am with the "Wall Street WIzards" being paid millions of dollars in salaries during the midst of their horrible screw-ups.
Why haven't they been fired, fined, and thrown in jail?
Kenny| 8.23.11 @ 11:29AM
It is my understanding that to get this data, Bloomberg had to go to the U.S. Supreme Court.
This could be yet another indication that our system is too complicate, too dishonest, too filled with special-interests not to literally crack up sooner rather than later.
And it is probably the case that the drips we elect to congress, on average, didn't even know this at the time. Amazing
Teflon93| 8.23.11 @ 11:48AM
You're missing the WHY here.
Why all the secretive largesse from Uncle Sam, given the pols are flaying banks left and right?
The same result could have been achieved, by the way, through rather simple reforms:
1. Lower capital reserve requirements to make markets more liquid. Much of the $1.6 T sitting in bankk coffers is required by the government; it doesn't really do anything if they're going to bail them out anyway, does it?
2. Repeal "mark-to-market" accounting rules for the mortgage portfolio. What sense does it make to force write-downs of a 30 year mortgage because one payment was missed? This Enron-era accounting rule needs to be replaced with real risk. It too will free up reserves and reduce incentives to find novel ways to securitize risk.
3. Stop requiring banks to make loans to people who cannot pay them back. This is the big one----it is the root cause of the whole crisis.
4. If you're really worried about bank health and solvency, exempt banks from corporate taxes for two years.
The reason why the Federal government engaged in this backdoor bailout is that it caused these losses in the first place. It wants to reinflate the housing bubble, not repair the conditions leading to it. Barack Obama and the Democrats will NEVER stop seeking government subsidized mortgage lending for its constituents and will prop up banks reeling under the load of bad debt. They will demagogue the issue relentlessly and pound on banks but when push comes to shove will hold their noses and eat the losses.
The financial industry on the other hand needs to wake up and stop viewing Uncle Sugar as an ally when all he wants is Zombie Banks to pass money to Democrat cronies and constituents.
John Allison of BB&T is a real hero for seeing this coming and staying well away.
JP| 8.23.11 @ 1:02PM
Mark-to-Market was quietly repealed in March 2009. The mortgage securities crisis abated the same month. A number of banks begged Congress to repeal it way back in May of 2008; Congress flatly refused, and 4 months later the crisis unfolded. Obama was handily elected.
The massive fed liquidity injection was to cover cash short-falls of our largest investment banks. As Mr Lawler stated, TARP really did very little to keep Citi, Goldman, and other banks from going under. What worries me is what else did the Fed do behind the scenes. We all know about QE1 and 2. But this is disturbing. Apparently, Congress wasn't aware of the Feds actions. And from what I gather, Congress just yawned when the news hit the wire yesterday.
Since the Fed's inception in 1913, the dollar has lost 93% of its purchasing power. And since 1997, there have been 2 major booms/busts triggered mainly by the Fed's manipulation of interest rates and money supplies. The Federal Reserve Act was one of the most destructive laws ever put to the books.
Teflon93| 8.23.11 @ 2:50PM
Hmm, are you sure it was repealed? Bank reserves are ridiculously high....perhaps they merely replaced it with stress tess reserve requirements?
You're right that part of this is because the banks hold a lot of bonds and Bernanke's been using QE to inflate the debt away while avoiding the immediate impact of inflation with these reserve requirements. Banks are so frightened they're actually reserving more than mandated.
Biff| 8.23.11 @ 12:03PM
Although the jury is still out; for me; on Gov Perry. His shot across the bow on the Fed in general; and Ben B in particular; we well placed indeed. No one has had the stones to call him out. I don't think the average American; has any idea on what a problem the Fed truly is.
Bill Hussein O'Stalin| 8.24.11 @ 6:47AM
We are in a sinking ship where the rats are not abandoning the ship, they are running it.
Charles R. Williams| 8.24.11 @ 9:31AM
The Fed is SUPPOSED to function as a lender of last resort in a financial panic. So the real question is why was TARP necessary and why were TARP funds used for unlawful purposes like funding bankrupt auto companies.
Bailout City| 8.31.11 @ 2:48PM
Does this mean maybe another bailout is soon coming? Another bank/lender? I now see a similar situation that could be brewing in Thailand. I've recently noticed a number of major development projects throughout the country. New houses seem to be springing up everywhere in the suburban areas of Bangkok and other cities. I don't know what is going on behind the scenes of it all, but I've seen a lot of people with questionable qualifications given loans for houses or condos. Their salaries often do not seem to justify the size of the loans which they're receiving. Some Thailand lawyers have referenced the Thai banks as a key contributor to the onset of the 1997 Asian Economic Crisis. That doesn't mean we can assume that lenders or other banking institutions are totally responsible for financial meltdowns, in either the Asia or US cases. It’ll be interesting to see if history repeats itself.