I missed this story when Bloomberg reported it almost a week ago, and it seems to me that a lot of other people did too. But it’s remarkable. You know those TARP bailouts – the Treasury department’s loans to big banks and AIG that got everyone so riled up? Those amounts are chicken feed compared to what the Fed did in secret.
The information wasn’t easy to get. Bloomberg apparently had to file numerous FOIA requests, engage in months of litigation including a case that was appealed to (but was refused by) the Supreme Court, and rely on the recently-enacted Dodd-Frank law to get the information it was after.
The results were remarkable.
Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.
By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.
Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.
“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”
You should read the whole Bloomberg story. You should also check out the helpful interactive graphic that Bloomberg has set up, and also read today’s NY Times column, which is a useful summary that also adds some perspective. From the NYT column:
If the Fed reprises some of its emergency lending programs, we will at least know what they will involve and who will be on the receiving end, thanks to Bloomberg.
For instance, its report detailed the surprisingly sketchy collateral — stocks and junk bonds — accepted by the Fed to back its loans. And who will be surprised if foreign institutions, which our central bank has no duty to help, receive bushels of money from the Fed in the coming months? In 2008, the Royal Bank of Scotland received $84.5 billion, and Dexia, a Belgian lender, borrowed $58.5 billion from the Fed at its peak….
If these rescues were intended to benefit everyday Americans, as Mr. Paulson contended, they have failed. Main Street is in a world of hurt, facing high unemployment, rampant foreclosures and ravaged retirement accounts.
The Fed’s defense of all this is that the loans have all been repaid with (very low) interest, so the taxpayers didn’t lose any money on the deal. According to the NYT column that’s sort of true, and sort of not.
Evaluating bailout programs like the Troubled Asset Relief Program and the facilities extended by the Fed against “the senseless standard of doing nothing at all,” [BC finance professor Edward] Kane testified [before a Senate banking committee hearing earlier this month], government officials tell taxpayers that these actions were “necessary to save us from worldwide depression and made money for the taxpayer.” Both contentions are false, he said.
“Bailing out firms indiscriminately hampered rather than promoted economic recovery,” Mr. Kane continued. “It evoked reckless gambles for resurrection among rescued firms and created uncertainty about who would finally bear the extravagant costs of these programs. Both effects continue to disrupt the flow of credit and real investment necessary to trigger and sustain economic recovery.”
As for making money on the deals? Only half-true, Mr. Kane said. “Thanks to the vastly subsidized terms these programs offered, most institutions were eventually able to repay the formal obligations they incurred.” But taxpayers were inadequately compensated for the help they provided, he said. We should have received returns of 15 percent to 20 percent on our money, given the nature of these rescues.
Government officials rewarded imprudent institutions with stupefying amounts of free money. Even so, we are still in economically stormy seas. Doesn’t that indicate that it’s time to try a different tack?
Maybe so. It certainly indicates that the oversight provisions included in Dodd-Frank are a necessary first step, and probably do not go nearly far enough. I found very interesting the accounts of why the loans were kept secret, and the lengths to which the banks went to try to prevent Bloomberg from getting the information it was after. From the Bloomberg story linked about:
Fed officials argued for more than two years that releasing the identities of borrowers and the terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs. A group of the biggest commercial banks last year asked the U.S. Supreme Court to keep at least some Fed borrowings secret. In March, the high court declined to hear that appeal, and the central bank made an unprecedented release of records.
Data gleaned from 29,346 pages of documents obtained under the Freedom of Information Act and from other Fed databases of more than 21,000 transactions make clear for the first time how deeply the world’s largest banks depended on the U.S. central bank to stave off cash shortfalls. Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.
And the extent of the puffery from the big banks about how great their balance sheets looked, even as they were taking these ginormous secret loans is, frankly, breathtaking.
Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.
That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show….
JPMorgan Chase & Co. (JPM), the New York-based lender that touted its “fortress balance sheet” at least 16 times in press releases and conference calls from October 2007 through February 2010, took as much as $48 billion in February 2009 from [the Fed].
Amazing, really. Maybe Ron Paul’s calls to audit the Fed aren’t so crazy after all.
David says
is the fact that, though banks are by far the biggest borrowers, it’s not just financial institutions who showed up on the Fed’s list of secret debtors. Caterpillar ($316M), Verizon ($1.5B), and even Harley-Davidson ($1.3B) were all in for staggering amounts of money that they surely would not have been able to get elsewhere. And check out the interesting story of local hero State Street Bank:
stomv says
is why the Feds didn’t save the banks through mortgages. They could have shored up the banks finances while simultaneously resolving mortgage problems — help change bad debt to good debt, thereby benefiting the banks and the citizenry. We didn’t do that.
It would have been harder. It would have been one mortgage at a time. But look, figure 75 million privately owned homes in tUSA. Let’s say 10% are struggling — it’s not clear if the owner will be able to keep up with payments over the next six months. Some subset of them have exotic mortgages, perhaps including balloons and interest only. Some are traditional, but the home owner is stuck with medical bills, unemployment, etc.
The banks could have easily helped the Feds identify a large subset of troubled mortgages. Then, the Feds hire folks to literally go door-to-door, finding folks willing to re-work their mortgage. Convert the ARMs and balloons to fixed rate mortgages. Make the 30 year with 27 years left into a 35 with 32 left to help lower the payments a smidge [with the lower interest rate too]. Work extra hard in neighborhoods which are in extra trouble. In extreme cases, perhaps the lenders eat a few $10k worth of buy down.
It would have taken lots of boots on the ground, but at the end of the day we’d have had more secure neighborhoods, homes would have held on to more value, homeowners would have been a bit better off, the banks would have had fewer toxic mortgages on their books and more profitable ones on their books, and there’d even have been a temporary jobs program akin to the census folks. People who rent or who have always been able to pay their mortgage wouldn’t directly benefit, but they would benefit from more stable communities and they didn’t directly benefit from the Fed’s bailout anyway, so they’d be no worse off.
Hell, it’s not clear why the Fed (and POTUS, Congress, etc) aren’t turning the screws on the banks now to refinance troubled loans — working directly with the borrowers to come up with more stable, lower monthly payments to help folks stay in their homes.
farnkoff says
If this TARP program was supposed to be somehow progressive and responsible, and something identified with Obama and the democrats, so much the worse for us in 2012. It was completely worthless as far as I can tell- just another way to protect the rich from losses while eroding middle class wealth. The whole “it could have been worse” thing- not much of a rallying cry. I think we (Democrats) have been on the wrong side of this issue from very early on.
What in God’s name was the justification for keeping this stuff secret, anyway?
SomervilleTom says
This is more evidence that our government is owned by and serves the purposes of corporate interests, which are in turn owned by the same tiny handful of wealthy men (yes, they are almost all male) that has sucked the wealth out of America’s consumer economy and destroyed it in the process.
They overreached, the system collapsed, and they exercised their leverage over federal authorities to protect their interests.
This is the real story of our economy that the relentless of focus on “austerity” misses — from both sides of the aisle.
kbusch says
Even if run properly TARP was never going to popular. The optics are terrible: Ugh, giving money to banks. Banks! When there are so many more deserving people.
However, the collapse of the banking system would have hurt even more people, been orders of magnitude more unpopular, and had horrendous consequences. If the Fed did a good but unpopular deed — and did so legally, then I’m not going to get too upset.
In a similar circumstance, Sweden was able to nationalize the failing banks and then restore them to the private sector. It’s unfortunate that something like that did not happen here. There would have been a number of advantages for doing so:
1. No unseemly bonuses.
2. The financial sector would not be lobbying Congress to weaken regulation still further. We’d have come out of this with a sounder financial system.
3. The politics would have been better. It would be clear that we weren’t rewarding banks for bad behavior. Less moral hazard.
I understand that our banks are bigger than Sweden’s. In Sweden, government work is more honorable, and so they actually could have more people who could run a nationalized bank. So maybe nothing like that was ever going to happen here.
Christopher says
…also doesn’t shy away from being (gasp!) SOCIALIST when it has to be. Imagine the uproar here if we did anything remotely like that!
kbusch says
That’s another reason we couldn’t have just transplanted Sweden’s response to here.
Instead, we seem to have treated keeping the banks afloat as synonymous with being nice to their executives.
Christopher says
The Constitution clearly states that no money shall be withdrawn from the Treasury without Congressional authorization. I’m pretty sure it does not distinguish between appropriations and loans.
David says
That’s exactly why this could happen. It’s (essentially) a bank, though it obviously does more than conduct banking business, and although its structure and governance are subject to acts of Congress, its day-to-day operations, which apparently include lending a trillion bucks to favored institutions, are not.
Wikipedia’s article is a good starting point.