The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.
The Fed didn’t tell anyone which banks were in trouble so deep they required emergency loans of 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 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 interest rates, Bloomberg Markets magazine reports in its January issue.
Saved by the 2007-2010 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.
While Fed officials say that almost all the loans were repaid without losses, details that emerge from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions 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.
“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” said Ohio Democratic Senator Sherrod Brown. “This is an issue that can unite the Tea Party and Occupy Wall Street.”
The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court battle against the Fed and a group of the biggest banks called Clearing House Association LLC. The amount of money the central bank parceled out dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP.
Few people were aware of this, partly because bankers didn’t disclose the extent of their borrowing. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told shareholders in March 2010 that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion came more than a year after the program’s creation.
On Nov. 26, 2008, Bank of America Corp.’s then-CEO Kenneth Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that Bank of America owed the Fed $86 billion that day. Bank of America’s borrowing peaked at $91.4 billion in February 2009.
Howard Opinsky, a JPMorgan spokesman, declined to comment, as did Bank of America’s Jerry Dubrowski.
The Fed, headed by Chairman Ben S. Bernanke, has been lending money to banks since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to financial firms that couldn’t get short-term loans from their usual sources.
“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” said William 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 central bank initially released lending data in aggregate form only. Who borrowed and how much were kept from public view. The secrecy extended even to top aides of then- Treasury Secretary Henry Paulson who managed TARP, say two former senior Treasury officials who requested anonymity.
The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt. Morgan Stanley was the top borrower with a peak of $107 billion on Sept. 29, 2009.
That was eight days after then-CEO John Mack said the firm was “in the strongest possible position.” Mark Lake, a spokesman for the bank, declined to comment.
With the help of the Fed’s secret loans, America’s largest financial firms got bigger during the crisis. Part of the boost came from a hidden subsidy -- the Fed’s below-market interest rates. The subsidy can be estimated using a figure banks call “net interest margin.” It’s the difference between what they earn on loans and investments and their borrowing cost. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during the time they took emergency loans.
The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show. Citigroup Inc. would have taken in the most, with $1.8 billion.
Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on September 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data.
Six banks holding so many assets is “un-American,” said Richard W. Fisher, president of the Federal Reserve Bank of Dallas. “All of these gargantuan institutions are too big to regulate. I’m in favor of breaking them up and slimming them down.”
That wasn’t the policy advocated by the Obama administration. Treasury Secretary Timothy F. Geithner opposed an April 2010 proposal by Brown, the Ohio senator, and Ted Kaufman, the former Delaware Senator, both Democrats, which would have forced the six banks to shrink.
The big six -- JPMorgan, Bank of America, Citigroup, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley -- took 63 percent of the Fed’s emergency-loan money as measured by peak daily borrowing, the data show.
Combined, the six spent $29.4 million on lobbying in 2010, a 33 percent increase from 2006, according to OpenSecrets.org. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate, OpenSecrets.org reported.
Lobbyists argued that bigger banks are more stable, better able to serve large companies and more competitive internationally, and breaking them up would cause “long-term damage to the U.S. economy,” according to a November 2009 letter to Congress from the Financial Services Forum, an advocacy group made up of the CEOs of 20 of the largest financial firms.
Kaufman countered that some banks are so big that their failure could trigger a chain reaction in the financial system. So-called too-big-to-fail banks have an advantage over smaller firms: Their borrowing costs are lower because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard -- the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.
According to Kaufman, Geithner visited his Capitol Hill office to argue that the issue of limiting bank size was too complex for Congress. The Treasury secretary preferred that international bank supervisors, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve, Kaufman said. Anthony Coley, a spokesman for Geithner, declined to comment.
Geithner knew which banks received Fed assistance and how much they got. Lawmakers didn’t. Senator Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, and Barney Frank, a Massachusetts Democrat who co-sponsored the financial reform law that bears his name, Dodd-Frank, among others, said they were kept in the dark.
The Senate defeated the Brown-Kaufman proposal, 60 to 31. Bank supervisors meeting in Switzerland did mandate minimum reserves that institutions will have to hold. Those rules can be changed by individual countries. They take full effect in 2019.
Meanwhile, Kaufman said, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”
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