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Bloomberg Reveals Massive Fed Emergency Lending During Financial Crisis

One insidious claim I’ve been trying to fight for the past couple years is this notion that TARP worked, and that the bailouts were unpalatable but necessary. The problem here is that people conflate “TARP” and “the bailouts” in unhelpful ways. If TARP worked at anything, it worked to put Congress on the hook for the idea of a bailout, so they had no space to criticize the actual bailout that was going on.

But TARP represented something like 2% of all emergency support given to the banks during the financial crisis. It was a sideshow. The real bailout came directly out of the Treasury Department, through their emergency vehicles, and especially the Federal Reserve. And the Fed has been incredibly touchy about explaining just what they did during the fall of 2008.

Bloomberg News has been relentless in getting out the facts of what happened during that time, filing multiple lawsuits and FOIA request to pull the truth out of the Fed. They won all their cases, and finally, they can reveal in a blockbuster story all of the secret loans that the Fed gave to the banks in that troublesome stage to prevent a liquidity crisis.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

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.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

That’s precisely the way to look at this. I will grant Felix Salmon in his explanation of this business that this is what a lender of last resort looks like. The crisis was at its apex, and these firms needed a lender to survive. And that is a lesson for Europe. But they actually got far more than a lender, they got a nursemaid. At least in Europe there’s a pass-through of sovereign governments to save from a crushing round of austerity; here there wasn’t even that fiction.

The lending suites that were set up for months and years, beyond the initial crisis point, were focused on how to keep banks profitable, not just how to keep them alive. 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. There’s nothing special about the banks except that they know the Fed policymakers personally.

The roots of our malaise can be traced back to this decision. Banks are back to profitability while millions are out of work. The 1% was protected in ways that defy belief; the 99% was given a hope and a prayer (and they’re trying to take away the prayer). Banks lied about their fragility even while they took taxpayer money and spun it into gold. And the same bloated finance system was around to prey on homeowners and do more to preserve their balance sheet than aid a broken economy.

Now you have the ammunition to laugh in the face of the next person who tells you that TARP worked. And thanks to Bloomberg News for their persistence in getting out information that the public has a right to know. We need better understanding of how the Fed works in this country.

UPDATE: Forgot to add this tidbit:

On May 4, 2010, Geithner visited (former Sen. Ted) Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission.

At the meeting with Kaufman, Geithner argued that the issue of limiting bank size (Kaufman and Brown were working on a simple bill to cap bank size) was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman.

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David Dayen

David Dayen