New revelations about the extent of the Federal Reserve’s bailout of Wall Street have caused many to question the role of government lending programs as many fear another recession. The Fed’s $1.2 trillion loans of public money to Wall Street and foreign banks dwarf the Treasury Department’s heavily criticized $700 billion Troubled Asset Relief Program, nearly all of which has been paid back to the government. According to Bloomberg:
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.
Even more shocking, almost half of the Fed’s top 30 borrowers were European firms, such as the Royal Bank of Scotland Group Plc. ($84.5 billion), the Swiss bank UBS AG ($77.2 billion), and Germany’s Hypo Real Estate Holding AG ($28.7 billion).
Even so, the Fed insists that it has not had any credit losses on any of the emergency programs, even claiming it netted $13 billion in interest and fee income from the programs between August 2007 and December 2009.
The Fed had been fighting to keep the extent and recipients of this borrowing program secret for years, until Congress and the courts required more disclosure in March 2011. Part of the justification for the lack of transparency was that the information would stigmatize the banks involved and damage stock prices.
Data gleaned from 29,346 pages of documents obtained under the Freedom of Information Act and from other Fed databases of more than 21,000 transactions make clear for the first time how deeply the world’s largest banks depended on the U.S. central bank to stave off cash shortfalls. Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.
The Fed usually demanded collateral for its loans, such as treasuries, corporate bonds, and mortgage bonds, but the deepening financial crisis led it to relax its standards for acceptable assets, thereby increasing the associated risks. At times during the crisis, the Fed’s lending programs were even charging below-average interest rates, which encouraged more borrowing.
As University of Pennsylvania finance Professor Richard Herring told Bloomberg, some banks might have tried to maximize their profits through the program by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”
But now that the information is public, the public is left to wonder why the Federal Reserve lent such a staggering amount of money to these banks, placing public money at risk without the knowledge or consent of more than a handful of people.