How the Fed Lied about Loans to Big Banks
Yesterday the market rallied when the Fed and other central banks intervened on behalf of the world’s banks, which are still larded with junk loans (which now include the loans of certain European countries). The magic didn’t last, however, as bank stocks fell back today.
In propping up banks, though, the Fed only resumed a practice of favoring the undeserving (and insolvent) that started way back in 2008, and only recently came to light. It wasn't a permanent fix then, either.
In 2008 the Fed loaned U.S. and foreign financial institutions $1.2 trillion and told no one about it. At the same time, those institutions were asking the Fed for the money, they were proclaiming in press releases and earnings calls that they had plenty of cash. Getting all this money at below market rates meant $13 billion in income for the banks.
That would be the same banks who have all-but-refused to make small business loans. What does it say when what used to be fringe-conspiracy-nut ideas are now proven and accepted as facts?
Bloomberg, which deserves an award for breaking this story, goes on to explain perfectly some of the impact of keeping all this secret:
Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.
Bloomberg only got this information after a two-year court battle that went all the way to the Supreme Court. They had to sue in order to find out what was done with your money! Next time you want to say something nasty (and probably deserved) about the press, remember this.
In case you are having trouble picturing $1,200,000,000,000, it is:
- Almost three times the size of the U.S. federal budget deficit that year
- More than the total earnings of all federally insured banks in the U.S. from 2000 to 2010
- More than 25 times the Fed’s previous lending record of $46 billion on Sept. 12, 2001
- Enough to fill 539 Olympic-sized pools in $1 dollar bills
Fed Chair Ben Bernanke later said the agency provided emergency loans only to “sound institutions,” even though internal Fed documents described at least one of the biggest borrowers, Citigroup, as “marginal.”
Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre- crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.
One of the many great things about the Fed’s program is that it meant all those sound institutions could repay their TARP loans (you know, the ones that limited executive compensation) quickly and cheaply.
Some banks maintain they only took the money to set a good example for others. JPMorgan CEO Jamie Dimon said in a letter to shareholders this year that the bank took the government’s money “but this was done at the request of the Federal Reserve to help motivate others to use the system.”
Very altruistic man, our Jamie is. Always doing what’s best for others.
This behavior is so bad it’s even upsetting those who profited from it. As one Wall Streeter recently told the New York Times: “The fact that they were bailed out and can borrow for free — it’s pretty sickening.”
Finally, on July 21 of 2008, then-Secretary Treasury Henry Paulson indicated <> to a bunch of hedge fund managers that the government was going to take over Fannie Mae and Freddie Mac. In the six days before that Paulson had said – in interviews with the press and testimony before Congress – that no such thing was going to happen. It’s a good thing Paulson wasn’t a baseball player lying to Congress about steroids – because you can go to jail for that.
CONSTANTINE VON HOFFMAN | Columnist
Constantine von Hoffman is a writer and sometime standup comedian. His work has appeared in Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, and Boston Magazine.