For over two years, the Federal Reserve and banking giants concealed what is now known to be the largest rescue package in US history. According to Bloomberg Markets Magazine, while bankers were painting a rosy picture of financial health to their investors, they were borrowing tens of billions in emergency loans. On December 5, 2008, the Federal Reserve bailed out the banks to the tune of a staggering $1.2 trillion. These loans came at a time when the banks could enjoy the Fed’s below-market rates and, as Bloomberg reported in its January 2011 issue, this resulted in estimated income for those banks of $13 billion.
As Congress—unaware of the bailout—thrashed out legislation to avoid another collapse, the rescued banks, unnamed by the Fed at the time, continued to lobby against government legislation. Bloomberg reports that 29,000 pages of Federal Reserve documents and over 21,000 central bank transactions acquired under the Freedom of Information Act (FOIA) give a new account of the economic crisis of 2007 to 2009. Taxpayer dollars helped maintain a structure for even greater growth for the biggest banks, their anonymity giving Congress a false picture of their health and reducing the probability the flawed regulatory system would be addressed.
Senator Sherrod Brown (D-Ohio) put forward an unsuccessful bill in 2010 to cap the size of banks. He told Bloomberg, “When you see the dollars the banks got, it’s hard to make the case these were successful institutions. This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”
Details of the lending emerged when Bloomberg LP, parent of Bloomberg News, took court action which forced the Federal Reserve and the Clearing House Association LLC (a group composed of the biggest US banks) to make a summary of the bailout public. The Federal Reserve protested that exposing borrower details would dissuade other distressed financial organizations from seeking assistance should a further financial crisis arise, and that investors and other parties would avoid companies that had borrowed from the central bank as a lender of last resort. In March 2011, the Supreme Court refused an appeal from Clearing House Association.
Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, said he was “unaware of the magnitude” when speaking of the bailout. But taking into account guarantees and lending limits, the Fed, as of March 2009 had pledged $7.77 trillion to saving the financial system. That figure, over 50 percent of the United States’s overall production that year, dwarfed the Treasury Department’s Troubled Assets Relief Program, which totalled some $700 billion. The creation of TARP in 2008 was a response to the problems financial institutions had getting loans following the collapse of Lehman Brothers Holdings Inc. Rep. Brad Miller (D-N.C.), who serves on the House Financial Services Committee, said, “TARP at least had some strings attached,” in regards to the program’s executive pay ceiling. “With the Fed programs, there was nothing.”
Kenneth D. Lewis, then Bank of America’s CEO, told shareholders on November 26, 2008 that he headed “one of the strongest and most stable major banks in the world.” At that point his North Carolina-based firm owed the central bank $86 billion. Shareholders of JPMorgan Chase were told by CEO Jamie Dimon on March 26, 2010 that his bank had accepted funds “at the request of the Federal Reserve to help motivate others to use the system.” His bank had used the Federal Reserve’s Term Auction Facility, neglecting to inform shareholders that the bank’s TAF borrowing was nearing double its cash holdings. JP Morgan Chase & Co’s borrowing peaked at $48 billion on February 26, 2009, more than a year after the program was created. Both Howard Opinsky, a spokesman for JPMorgan and Jerry Dubrowski a spokesman for Bank of America, declined to comment to Bloomberg.
Since its beginnings in 1913, The Federal Reserve has lent to banks through its “Discount Window.” In August 2007, as a response to dwindling faith in banks, The Fed found ways to support the system by way of cash and tradable securities. Little over a year later, the central bank had founded or expanded some eleven lending facilities for banks and other financial institutions that were unable to secure short term lending elsewhere. The Fed’s director of the Division of Monetary Affairs, William B. English, explained that “Supporting financial-market stability in times of extreme market stress is a core function of central banks. Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”
The Federal Reserve claims that there have been no losses and that the bulk of the loans have been repaid. According to Phillip Swagel, former assistant Treasury Secretary under Henry M Paulson and now a professor of international economic policy at the University of Maryland, the Fed’s action should “lead to praise of the Fed, that they took this extraordinary step and they got it right.”
Figures on borrowing, were not disclosed to the public, nor were the identities of the banks involved or the rates of interest. Even the Bush administration officials who handled TARP were kept in the dark. According to two senior treasury officials, quoted by Bloomberg but who wished to remain anonymous, details of lending were also kept secret from Paulson’s senior aides.
According to officials, the Treasury relied on the Federal Reserve to decide which banks were robust enough to receive TARP cash. Using central bank data, Bloomberg calculated that the six biggest banks, recipients of $160 billion in TARP funds, were loaned up to $460 billion from the Fed. Bloomberg requested comment from Paulson but received no response.
Data shows that loans to JPMorgan, Bank of America, Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, made up 63 percent of the average daily debt to the Fed by all publicly traded US banks, money managers and investment services firms. Federal Reserve loans of $107 billion to Morgan Stanley in September 2008 peaked at the same time Congress dismissed the TARP bill proposal, resulting in a record drop in the Dow Jones Industrial Average. Morgan Stanley would eventually receive $10 billion through TARP despite its instability.
Joshua Rosner, a banking analyst with Graham Fisher & Co, believes that the Fed should have displayed more vigilance and not allowed conditions to go so far, stating, “Supervision of the banks prior to the crisis was far worse than we had imagined.”
In a document released at the beginning of 2011 by the Financial Crisis Inquiry Commission, Citigroup’s financial strength was described as “Superficial,” supported in main by $45 billion in Treasury funds. These were the findings of the New York Fed. Both New York Fed and Citigroup declined Bloomberg’s request for comment.
A call for transparency came from Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee. Judd Gregg, a Republican negotiator on TARP says he was kept in the dark; likewise, Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee. Frank said, “We were aware emergency efforts were going on. We didn’t know the specifics.” Frank co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, legislation aimed at correcting the industry’s excesses.
Ted Kaufman, former Delaware Democratic Senator, said that collapse of the largest banks could have had a domino effect on the rest of the industry. Lenders believe that the government will provide a safety net for the bigger banks and this is reflected in a lower cost of borrowing. Had Congress been aware of the situation, Kaufman believes he would have received more backing to break up the biggest banks. Consequently, the covert lending allowed the big banks to grow even bigger and propped up the banker’s huge salaries. In 2010, employees of the six biggest banks were paid twice that of the average US worker. Anil Kashyap, a former Fed economist stated “The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out. They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous.”
On September 15, 2008, following the purchase of Countrywide Financial Corp, at the request of then-Treasury Secretary Paulson, Bank of America took over Merrill Lynch. At that time, Bank of America had received $14.4 billion in Fed loans. Merrill Lynch had garnered $8.1 billion. At the end of September, the loans, which supported the transaction, had increased to some $25 billion for Bank of America and $60 billion for Merrill Lynch.
When depositors began removing funds from Wachovia Corp., the United States’s fourth largest bank was sustained by $50 billion in secret Federal Reserve loans before they were bought out by Wells Fargo. Ancel Martinez, a spokesman for Wells Fargo, said, “These programs proved to be very successful at providing financial markets the additional liquidity and confidence they needed at a time of unprecedented uncertainty,” JPMorgan also received Federal Reserve assistance of $29 billion in their takeover of Washington Mutual Inc. and investment bank Bear Stearns, who had received $30 billion in undisclosed loans to keep them afloat before the acquisition.
Lobbyists pushed for the preservation of the biggest banks, claiming that they offered stability and the ability to compete on an international level. They insisted that any breakup would have a negative impact on the US economy and that jobs would be lost. Figures from the research group that operates the OpenSecrets.org website show an increase in banks’ lobbying spending of 33 percent in 2006.
At the time of JPMorgan’s takeover of Bear Stearns, Timothy F. Geithner headed the New York Fed. During his time there, Geithner was involved in the design and running of the central bank’s lending systems. He was also privy to Wall Street’s financial reports, according to sample emails released by the Financial Crisis Inquiry Commission. Now Treasury Secretary, Geithner met with then Senator Kaufman on May 4, 2010. Geithner reasoned that Congress would not understand the implications of a limit on bank size and that this would be best left in the hands of market experts, telling Kaufman that he would prefer international bankers meeting in Basel, Switzerland to set the amount of money that banks were required to hold in reserve and that passing laws in the US would undermine this.
The lobbyists prevented the breakup of the big banks before the amount they were borrowing from the Fed was revealed. Dodd-Frank does allow for big banks to be broken up and the Financial Stability Oversight Council (FSOC) could see that the business of severely troubled banks be concluded in a systematic fashion. Geithner is now head of the FSOC.
In December 2008, in the midst of the financial crisis, data collected by Bloomberg shows that the Fed was offering loans for as little as 0.1 percent. These loans were some of the cheapest available, even though the Fed states that emergency loans are usually kept high to dissuade banks from capitalizing on their benefits. The loans allowed firms to keep hold of assets when depositors and investors withdrew their funds, allowing the banks to maintain interest. Net interest margin gives an insight into the difference between loan earnings, investments, and the profit realized from Fed loans. Bloomberg multiplied the banks tax-adjusted net margins by their average Fed debt in the periods they took out emergency loans. This yielded the amount each bank would profit.
Provided the loans were invested at the margins reported, the data collected from 190 firms showed an income of $13 billion. An estimated subsidy of $4.8 billion was shared by the six biggest US banks, some 23 percent of their combined income during their Fed borrowing period.
The 190 firms for which data was available would have produced an income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data shows. The six biggest US banks’ share of the estimated subsidy was $4.8 billion or 23 percent of their combined net income during the time they were borrowing from the Fed. Citigroup would have taken in the most, with $1.8 billion. “The net interest margin is an effective way of getting at the benefits that these large banks received from the Fed,” says Gerald A. Hanweck, a former Fed economist. As the numbers are not available for scrutiny, the true figure is impossible calculate. Opinsky, A spokesman for JPMorgan claims that the figure isn’t a fair reflection as “in all likelihood, such funds were likely invested in very short-term investments.”
In a meeting in September, 2008, Paulson and Bernanke told lawmakers that TARP was essential. Writing in his book On the Brink (2010) Paulson quoted Bernanke as saying “unemployment would rise to 8 or 9 percent from the prevailing 6.1 percent.”
Since March 2009, US unemployment hasn’t fallen below 8.6 percent. Moreover, some 3.6 million homes have been repossessed since August 2007, according to figures from RealtyTrac Inc. There have been clashes between police and Occupy Wall Street protestors who say that policy favors the wealthy. Neil M. Barofsky, former TARP special inspector general and Bloomberg Television contributing editor says “The lack of transparency is not just frustrating; it really blocked accountability,” Barofsky adds, “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”
Ultimately, the Brown-Kaufman proposal to limit bank size was unsuccessful, with bank supervisors meeting in Switzerland instructing minimum reserves to be held by institutions and greater ones for the world’s biggest banks. The rules will come into force in 2019 and can be changed by individual countries. Kaufman says “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”
Jude Freeman writes from London for The Cutting Edge News.