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Fed Denies Release of Underlying Collateral Data on Emergency Lending

I think I’ve mentioned Zach Carter’s piece, “The Fed Lied About Wall Street,” at least a couple times here, but it’s important. Carter explains that what we learned from the disclosure of $3.3 trillion in emergency lending is that the Fed created a liquidity event for an insolvency crisis, and is now pretending like they saved the economy when the destructive real-world effects are as plain as day.

The truth has been far worse than Krugman predicted. Not only are today’s major banks unable to support the economy, they are actively sabotaging the middle class with fraudulent foreclosures. This is a direct result of policymakers’ failure to address the fundamental solvency problem in 2008 and 2009. And what’s worse, it appears that the Federal Reserve was aware of the solvency problem, even as its top officials publicly insisted that the bailed out banks were fine […]

The Fed knew it was facing a solvency crisis, even as it publicly insisted that Wall Street was merely dealing with a liquidity issue. If the Fed had truly believed Wall Street only faced liquidity troubles, it would not have allowed major banks to pledge junk bonds as collateral for loans. And indeed, for months, the Fed did not allow banks to put up junk bonds as loans. But things changed when Lehman Brothers went under.

The Fed and the Treasury had to do something in the fall of 2008. But to fix liquidity without fixing solvency was a grave error. By denying the solvency crisis, major bank executives who had run their companies into the ground were allowed to keep their jobs, and shareholders who had placed bad bets on their firms were allowed to collect government largesse, as bloated bonuses began paying out soon after.

But the banks themselves still faced a capital shortage, and were only kept above those critical capital thresholds because federal regulators were willing to look the other way, letting banks account for obvious losses as if they were profitable assets.

In fact, the Fed is still lying. For they withheld data in this report, data they were mandated to provide. Specifically, they withheld the data on $885 billion in junk loans that the banks used as collateral, information that would expose the nature of the banks’ worthless assets.

The central bank yesterday released data on 21,000 transactions from $3.3 trillion in emergency lending to stem the financial crisis. July’s Dodd-Frank law required the Fed to disclose the names of borrowers, the size and interest rates of loans, and “information identifying the types and amounts of collateral pledged or assets transferred.”

For three of the Fed’s six emergency facilities, the central bank released information on groups of collateral it accepted by asset type and rating, without specifying individual securities. Among them was the Primary Dealer Credit Facility, created in March 2008 to provide loans to brokers as Bear Stearns Cos. collapsed.

“This is a half-step,” said former Atlanta Fed research director Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Sarasota, Florida. “If you were going to audit the facilities, then would this enable you to do an audit? The answer is ‘No,’ you would have to go in and look at the individual amounts of collateral and how it was broken down to do that. And that is the spirit of what the requirements were in Dodd-Frank.”

They want to talk about this in terms of denying the level of risk taxpayers were bearing with this junk collateral. Wrong. This denies the level of crap on the bank balance sheets. It’s the same problem that Carter describes – the banks are insolvent, or at least so brittle that nobody can properly regulate them or force them to take losses. We’re still dealing with Too Big To Fail, and the collateral information would expose that.

As Bernie Sanders notes, there will be a GAO audit of this emergency lending in July, so this is just the beginning. But the Fed is violating the law by not releasing the collateral data. I hope Sanders will seize on that. He’s right to point out that the disclosure tells us “that despite this huge taxpayer bailout, the Fed did not make the appropriate demands on these institutions necessary to rebuild our economy and protect the needs of ordinary Americans.”

I intend to investigate whether these secret Fed loans, in some cases, turned out to be direct corporate welfare to big banks that used these loans not to reinvest in the economy but rather to lend back to the federal government at a higher rate of interest by purchasing Treasury Securities. Instead of using this money to reinvest in the productive economy, I suspect a large portion of these near-zero interest loans were used to buy Treasury Securities at a higher interest rate providing free money to some of the largest financial institutions in this country. That is something that we have got to closely examine.

Pro Publica has some great charts based on the information the Fed actually released. They should be pressed to release this information as well.

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David Dayen

David Dayen