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Explosive Bloomberg Report Details Fed’s Monster Bank Bailouts: $7.77 Trillion

In a monster report for its January issue, Bloomberg Magazine compiled previously secret Fed data on the size and scope of the bank bailouts during 2008-2009.   Among other things, we learn that the Federal Reserve under Ben Bernanke and Tim Geithner (previously head of the New York Fed) secretly loaned over seven trillions dollars to arguably insolvent banks and financial institutions to keep them afloat, while concealing the scope of the lending from Congress and even member of the Treasury Department charged with allocating TARP bailouts.

Much of this information on the Fed’s lending programs was already known in summary form as a result of the successful “audit the fed” legislation pushed by a coalition that included Firedoglake.  That effort led Bloomberg to further successful Freedom of Information Act requests that retrieved another 29,000 pages of more detailed documents.

The Bloomberg report compiles and analyzes this information to reveal the staggering effort undertaken by the Federal Reserve in 2008-2009, both to keep the financial system, including the nation’s largest banks, from collapsing and to keep the details secret from Congress as it was considering the TARP legislation in 2008 and the financial reform legislation and regulations in 2009-11.

Among the most dramatic findings:

— While the the Fed and Treasury frequently boast that virtually all the TARP money was paid back, the major banks also received a “gift” of an estimated $13 billion in profits resulting from the difference between near zero interest rate loans and market rates.

— The publicly debated TARP funding request was for $700 billion to be administered by the Treasury, but the Federal Reserve Bank had committed 11 times that much — $7.77 trillion — to its secret guarantees and lending facilities by March 2009. (Eventual totals may have been over twice that much.)

— The heads of the major banks routinely misled investors, without corrections from federal officials, about their utter dependence on the Fed’s loan facilities. For example,

“On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day. . . .”

— There were virtually no strings attached to the institutions that received the loans.

— The Fed essentially decided which banks would receive TARP funds from Treasury, but the amounts were dwarfed by Fed loans.  “The six biggest U.S. Banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed . . .”

— The big six — JP Morgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — “accounted for 63 percent of the average daily debt to the Fed” for all publicly traded financial firms, far more than their total market share.

— Ben Bernanke and Hank Paulson insisted the loans were made only to “sound institutions,” even though the largest firms were essentially supported by Fed loans and TARP.

— Congress members working on the financial reform law claim to have been kept in the dark about the extent of the Fed lending programs and the degree of reliance by the largest financial institutions.  The concealment played a major role at a time when Senators Kaufman and Brown were fighting unsuccessfully to break up the TBTF banks.  The Administration opposed any breakup, arguing that larger sizes were essential for efficiency and international competition, the same position taken by bank lobbyists.

— While there was much publicity about Bush Treasury Secretary Hank Paulson “forcing” the largest banks to accept TARP funds, all of them were already relying heavily on low-interest Fed loans, which were not disclosed to Congress:

“Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion. . . .

Lawmakers knew none of this.

They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages.”

— Democratic Senators Kaufman, Brown and Dorgan argue that Congress would have been much tougher on the banks in the financial reform legislation if the extent of the lending had been revealed.  Instead, the largest banks grew even larger, increased compensation to executives, and increased spending on Congressional lobbying to limit the scope of financial reforms and subsequent regulation.

“Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data.”

The entire Bloomberg report is worth reading.  It does not argue that the lending programs were unnecessary or too large; it includes quotes from those who believe they were necessary.  Instead, the thrust of the story is that information about the massive size and scope of these efforts was deliberately concealed from Congress and the American people during a critical period.

That concealment shielded the financial industry from more drastic reform efforts and accountability, leaving the industry even larger and too big to regulate.  I’d add that the concealment also shielded federal regulators on how massive a rescue effort they believed was required to make up for their regulatory failure.

More from Yves Smith, Quelle Surprise! Everyone lied.

David Dayen’s take:

The banks were able to access emergency lending facilities, or change themselves into bank holding companies overnight, to borrow at next to nothing, and if they chose, lend back to the government at a tidy profit. You didn’t have to think at all to make money. And you didn’t have to worry about that toxic balance sheet, because the government was going to help you grow your way out of it. They will also facilitate mergers to help decimate your competition. The money that the banks borrowed for nothing could have just as easily gone to underwater homeowners.


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John has been writing for Firedoglake since 2006 or so, on whatever interests him. He has a law degree, worked as legal counsel and energy policy adviser for a state energy agency for 20 years and then as a consultant on electricity systems and markets. He's now retired, living in Massachusetts.

You can follow John on twitter: @JohnChandley