After more than two years, details of the largest bailout in U.S. history have finally been exposed. The Federal Reserve fought to keep secret the details of its bailout for the banking industry, telling no one which banks were in trouble while bankers taking billions of dollars in emergency loans continued to assure investors that their firms were healthy. Now the truth comes out.
From 29,000 pages of Federal Reserve documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions, Bloomberg News has ascertained that not only were big banks saved by the Fed, but they actually reaped an estimated $13 billion of income by taking advantage of the central bank’s below-market rates.
Fed officials claim that almost all of the loans have been repaid and that the government has incurred no losses as a result of the bailout, but details suggest taxpayers are paying for the bailout in other ways, namely perpetuating a broken status quo while enabling the biggest banks to grow even bigger.
Saved by the bailout, big banks turned around and lobbied against new government regulations meant to prevent another collapse, a job made easier by the fact that the Fed never disclosed the details of the rescue to lawmakers. The sheer size of the bailout has only now come to light after Bloomberg LP won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.
In total, the central bank had committed $7.77 trillion to banks as of March 2009, dwarfing the Treasury Department’s better-known and highly controversial $700 billion Troubled Asset Relief Program, or TARP. Brad Miller, a North Carolina Democrat on the House Financial Services Committee, notes that at least TARP “had some strings attached,” referring to the program’s executive-pay ceiling, while the Fed program had nothing.
The new information shows that some of the nation’s biggest banks were assuring investors of their stability while secretly borrowing billions from the central bank to stay afloat. Bank of America (NYSE:BAC) CEO Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world,” on November 26, 2008. The firm owed the central bank $86 billion that day.
While JPMorgan (NYSE:JPM) told shareholders on March 26, 2010 that it had used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system,” the bank did not mention that it had borrowed almost twice its cash holdings from TAF, or that its peak borrowing of $48 billion on February 26, 2009 came more than a year after the program’s creation.
By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms, and corporations that couldn’t get short-term loans from traditional sources.
“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.” The Fed claims all loans were backed by appropriate collateral and that the central bank didn’t lose any money.
The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed. The six — JPMorgan, Bank of America, Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS) — accounted for 63% of the average daily debt to the Fed by all publicly traded U.S. banks, money managers, and investment-services firms. Before the bailout, they held roughly half of the industry’s assets.
While the central bank maintains that the bailout was necessary, it has been criticized for keeping the details of the bailout secret, allowing big banks to grow on false impressions of their financial soundness. Chairman Ben Bernanke said in an April 2009 speech that the Fed provided emergency loans only to “sound institutions,” but its internal assessments described at least one of the biggest borrowers — Citigroup — as “marginal.”
Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee and co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, says that he was kept in the dark as to the Fed’s monetary policy. “We were aware emergency efforts were going on,” Frank said. “We didn’t know the specifics.” Congress debated the Dodd-Frank legislation in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival.
Ted Kaufman, a former Democratic Senator from Delaware, says that, had Congress been aware of the extent of the Fed rescue, he would have been able to line up more support for breaking up the biggest banks. According to Kaufman, the cost of borrowing is less for too-big-to-fail banks than for smaller firms because lenders believe the government won’t let them go under. They then take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.
Byron L. Dorgan, a former Democratic senator from North Dakota, says the information might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking.
Instead, the Fed helped America’s biggest financial firms grow even bigger. Total assets held by the six biggest banks grew 39% to $9.5 trillion as of September 30, from $6.8 trillion on the same day in 2006, before the crisis began. Now many of the nation’s biggest banks remain too big to fail. Kaufman fears another crisis if big banks continue to take big risks, landing themselves in a situation that would again require taxpayers to bail them out because their failure would wreak havoc on the economy.