Fed’s Secret Deals and Foreign Bank Bailouts

A couple of days ago Bloomberg broke one of the biggest stories of the year, yet it is getting almost no attention:

Wall Street Aristocracy Got $1.2 Trillion in Fed’s Secret Loans

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

We knew about TARP, in which Congress authorized $700 billion but, according to CNN, only $411 billion was loaned out. And to date only $309 billion has been returned.

But what we didn’t know about is another $1.2 trillion dollars in secret loans made to a variety of institutions. Further, the only way we did find out about it was the tenacious efforts of Bloomberg reporters that included going to court and an act of Congress.

This, from “the most transparent administration in history.”

The Huffington Post is one of the few places I saw an appropriate sense of outrage:

If you’ve not yet read the recent piece by Bradley Keoun and Phil Kuntz of Bloomberg News, "Wall Street Aristocracy Got $1.2 Trillion in Fed’s Secret Loans," please go read the whole thing. The report hits many of my favorite sweet-spots. By far the most important is the fact that, for all the reporting on the Troubled Asset Relief Program and the way every picayune repayment is worthy of an excited press release from the Department of the Treasury, the underreported story of the bailout remains the trillions of taxpayer dollars that the Federal Reserve has disbursed to major financial institutions in an attempt to make them whole, making the TARP just an overhyped sliver of the entire bailout.

Of secondary interest is that Bloomberg takes home this story thanks to the efforts of the late, great Mark Pittman. This week’s disclosures are the fruits of a lengthy legal battle that Bloomberg has waged with the Federal Reserve, which began with Pittman’s 2008 FOIA requests. Pittman, who passed away in November of 2009, produced some of the bailout era’s most important pieces of reporting — including this one, in which he described in detail the terrible deal that American taxpayers got in the whole process.

Again, “the most transparent administration in history.” What a laugh.

Now be prepared to be even more outraged: foreign banks were bailed out as well. Barry Ritholtz rightfully rants:

… Imagine if the government and the Federal Reserve were run not by knaves and fools and Wall Street sycophants, but instead, were run honestly for the benefit of the taxpaying voter. Imagine the goal was saving the banking system (not the banks), and the financial rescue was for the benefit of the taxpayers, not the bondholders. Naive thoughts, I totally understand, but hear me out.

Hat tip to Krut Brouwer at Seeking Alpha, who capably expands on Ritholtz’s post:

The first problem I see is simply the absolutely massive size of the loans that were made. $1.2 trillion! I don’t remember hearing the Fed discuss its trillion dollar line of credit for banks. In fairness to the Fed, the loans appear to have been paid back, but I am not confident that the curtain of secrecy has fully arisen. If the Fed tried to hide this program initially, is there any reason to think it is being forthright now?

Even more critical to me is that this program does not seem to have been an actual solution, but rather a stopgap measure to preserve and protect the banks and their shareholders. The Fed’s chosen solution did not solve the problem and, at best, it postponed the reckoning we face because big banks screwed up.

Exactly. These bailouts had the same effect as rewarding unruly children with hugs and toys. What’s the 2-year stock price chart for the top 3 beneficiaries of our government’s largesse at tax payer expense?

Morgan Stanley:


Bank of America:

How bad is the financial market? According to one of my favorite (and usually spot on) analysts, Bank of America will enter bankruptcy this fall, perhaps as early as September.

While Wall Street is rewarded for being really bad at their jobs, the real unemployment in the rest of the nation nears 23%. TWENTY THREE PERCENT!

Anybody else feeling a little cheated?

Posted August 24th, 2011 Filed in Economics and the Economy