On Sunday evening, Bloomberg News published a story that confirmed the worst suspicions of bailout critics. The article revealed that trillions of dollars of emergency loans the Federal Reserve disbursed during financial crisis went to the biggest banks, ultimately providing firms then on the edge of collapse with a $13 billion profit. According to Bloomberg, the Federal Reserve’s total emergency commitments to big banks like Goldman Sachs and Morgan Stanley number $7.7 trillion when the previously unknown loans are taken into account.
Bloomberg’s expose makes it clear, three years afterward, that the infamous Troubled Asset Relief Program (TARP), which divided the country and ignited at least one mass protest movement (if not two), was never more than a sideshow when compared to the bailouts authorized by the Fed. TARP only allocated $700 billion for bailouts, and a significant portion of those funds were never used.
The Bloomberg story, reported by Bob Ivry, Bradley Keoun, and Phil Kuntz, needs no editorializing, because the facts alone are damning. The article notes that banks like Citigroup and Bank of America would have had less success lobbying against regulations limiting their rent-seeking activities had the public and Congress known that only trillions of dollars in Fed loans kept them afloat. There is little doubt that, as the authors conclude, “taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.”
The Fed’s various emergency lending programs, TARP, and the other bailouts undertaken by the government, together, saved the banking system but shortchanged the broader public. That was apparent well before Bloomberg uncovered this latest information, which only reveals the full scope of the swindle.
Perhaps the most amazing aspect of the story is that the emergency loan data ever saw the light of day. It wasn’t an easy process. Bloomberg originally tried to obtain information pertaining to bailouts through a Freedom of Information Act request. When the Federal Reserve and banks fought against fulfilling the request, Bloomberg took the matter all the way to the Supreme Court, which finally denied a financial industry appeal to keep the relevant documents out of the public eye earlier this year. Bloomberg then quietly began sifting through the paperwork.
Bloomberg’s struggle to publish the data is merely the latest in a longstanding debate over central bank transparency. Although the Fed’s secrecy invites all sorts of conspiracy theorizing about the motivations of its chairman and members, there is a simple, boring reason the Fed doesn’t want its emergency lending made public. The idea is that the Fed is supposed to serve as the “lender of last resort” for firms that are solvent but are having liquidity trouble. If word gets out that a bank is borrowing from the Fed’s discount window, that could lead to further runs on the bank, exacerbating the liquidity problem the Fed was trying to solve.
The stigma that could accompany discount window lending is a legitimate reason for Fed opaqueness, and one that the chairman and board take seriously. Against it, though, must be weighed the costs of secrecy. Concerns about the power of certain banks relative to other institutions and rewarding failed executives don’t enter into the Fed’s calculations, even though they are of increasing importance to taxpayers and the public. There is a mismatch between the priorities of taxpayers trying to guard against bailouts and those of the Fed, which is obligated by law to focus on the stability of the financial sector.
In light of all that we’ve learned since the financial crisis, though, it seems obvious that the public was poorly served by legislators knowing none of the information available to the bank CEOs lobbying them when the regulation of the financial sector was under review. The lesson contained in the Bloomberg story is that the sooner and more fully the activities of the Fed are disclosed to the public, the better.
In other words, the news that the Fed kept significant, economy-altering bailouts secret largely vindicates the much-derided outsider efforts to audit the Fed.
Auditing the Fed has been a hobbyhorse of, among others, Rep. Ron Paul, who would like to see the Fed abolished outright. Over the course of the past few years, the idea of auditing the Fed has progressed from being perceived as wild-eyed crazy talk to becoming a bipartisan platform plank, with respectable legislators from both parties favoring a full accounting of the Fed’s lending. Eventually a weak version of Ron Paul’s bill to audit the Fed was passed as part of the Dodd-Frank financial regulation bill.
The General Accountability Office performed and wrote up the audit mandated by Dodd-Frank in due course, and the report kicked up significant media attention and provoked outrage over some of the Fed’s more ethically dubious loans. Yet the GAO report only covered certain of the Fed’s emergency lending programs, and not all the lending authorized through the discount window, which is the oldest and largest program of all.
In the meantime, Paul, who had ultimately criticized the audit included in Dodd-Frank as ineffective, reintroduced his original “audit the Fed” measure in the House, where it now has 183 cosponsors, and his son Rand Paul did the same in the Senate. Had the original “audit the Fed” bill been in place prior to Dodd-Frank, voters would have known about all of the loans banks got from the Fed, and the outcome of that legislative battle would have been far different.
As much as we hesitate to second-guess the warnings of experts and veterans, this is an instance in which the outsider critique, previously criticized as unrealistic, reactionary, and mob-like, was in fact underappreciated. With the news that the full extent of the government’s aid to troubled banks far exceeded what the public understood it to be at a critical juncture, it’s worth reflecting on the prescience of the outsiders’ warnings.
Update: Apologies for originally posting this with some editing marks still included.