Morgan Stanley Biggest Welfare Recipient as Federal Reserve Lent Banks $1.2 Trillion During Financial Crisis

The nation’s 10 largest banks (NYSE:KBE) borrowed $669 billion in emergency loans from the Federal Reserve in 2008, dwarfing the $160 billion in public bailout money the Treasury provided them as part of the Troubled Assets and Relief Program (TARP). Until now, the full amount of the Fed’s loans remained secret.

All in all, the Fed lent banks and other companies nearly $1.2 trillion of public money, nearly three times the federal budget deficit in 2008. Morgan Stanley (NYSE:MS), the largest borrower, received $107.3 billion, Citigroup (NYSE:C) received $99.5 billion, and Bank of America (NYSE:BAC) received $91.4 billion, according to information compile by Bloomberg News.

Investing Insights: Is Another Gold Boom Waiting to Happen?

American banks weren’t the only banks saved from collapse by the U.S. Fed. Nearly half of the 30 banks borrowing from the Fed were European firms, including the Royal Bank of Scotland Plc (NYSE:RBS), which borrowed $84.5 billion, Switzerland’s UBS AG (NYSE:UBS), which borrowed $77.2 billion, and Germany’s Hypo Real Estate Holding AG, which borrowed $28.7 billion.

According to James Clouse, deputy director of the Fed’s division of monetary affairs in Washington, nearly all of the loans have been repaid, and the Fed incurred no losses and expects none. In fact, a report by the Federal Reserve Bank of New York said the central bank earned $13 billion in interest and fee programs from its loans between August 2007 and December 2009.

The size of the loans makes a case for new minimum liquidity requirements to be imposed by global regulators beginning in 2015. But some don’t think regulators are doing enough. According to the U.S. Financial Stability Oversight Council, created by the Dodd-Frank Act and led by U.S. Treasury Secretary Timothy Geithner, the reforms undertaken since the crisis may not be enough to insulate banks (NYSE:XLF) from sovereign budget and debt crises.

In the future, the U.S. central bank will be required by law to publicly disclose its borrowers after two years, according to new transparency laws adopted in 2010. While Fed officials argued that releasing the identities of its borrowers might stigmatize the banks, in turn damaging investor confidence and stock prices, their appeal was denied by the Supreme Court. Thousands of pages of documents were released by the Fed in March under the Freedom of Information Act, showing just how dependent upon government funding many banks were while publicly asserting their stability and denying any weakness in news releases and earnings calls.

The Fed did require collateral for its loans in the form of Treasuries or corporate bonds and mortgage bonds that could be seized should the banks be unable to repay their loans. Of course, should the banks collapse, that collateral would likely be worth less than the amount owed. And as the crisis got worse, the Fed’s standards for acceptable collateral became looser, accepting “junk” bonds and even stocks.

While the Fed’s lending program usually charged above-market interest rates to make them the last stop for banks, at times that practice reversed, with the interest on 28-day loans through its Term Auction Facility falling as low as 1.1% on October 20, 2008, less than a third of the 3.8% banks were charging each other for one-month loans at the time. On that day alone, the central bank doled out $113.3 billion in low-interest loans.

Here’s a breakdown of the biggest borrowers under the Fed’s various loan programs between August 2007 and April 2010:

  • Morgan Stanley (NYSE:MS) borrowed $107.3 billion.
  • Citigroup (NYSE:C) borrowed $99.5 billion.
  • Bank of America (NYSE:BAC) borrowed $91.4 billion.
  • Royal Bank of Scotland Plc (NYSE:RBS) borrowed $84.5
  • UBS AG (NYSE:UBS) borrowed $77.2 billion.
  • Goldman Sachs (NYSE:GS) borrowed $69 billion.
  • Deutsche Bank AG (NYSE:DB) borrowed $66 billion.
  • Barclays Plc (NYSE:BCS) borrowed $64.9 billion
  • JPMorgan Chase (NYSE:JPM) borrowed $48 billion.
  • Hypo Real Estate Holding AG borrowed $28.7 billion.
  • Societe Generale borrowed $17.4 billion.

Don’t Miss: Gov. Perry Battles Bernanke on Currency Devaluation and Economic Policy.