Secret Federal Reserve Loans Of $7.8 Trillion Yield $13 Billion To Banks

It’s been slightly more than three years since President George W. Bush signed the Troubled Asset Relief Program (TARP) into law (October 2008). TARP authorized $700 billion to bail out the financial sector, a Congressional effort to forestall another Great Depression.

Most American think TARP was too large and that the money was wasted. Unfortunately for President Obama, 1-in-2 Americans think TARP came about during his administration (Pew, July 2010). In March, the Congressional Oversight Panel report was a less than robust endorsement of the program: TARP Provided Critical Support but Distorted Markets and Created Public Stigma.

Amid public discontent and institutional ennui comes a new bombshell from Bloomberg, courtesy of a legal staff willing to both fight the Fed for documentation and then analyze the resulting 29,000 Federal Reserve documents coughed up by the FOI request; the documents reveal 21,000 non-disclosed (until now) transactions. According to the Bloomberg analysis (emphasis added):

The Federal Reserve Bank loaned funds to major Wall Street banks at rates of between 0.10 percent and 0.25 percent and at the same time banks were encouraged to purchase U.S. Treasury bills. Two-year Treasury bills the federal government was selling were fetching more than one percent interest. The deal — borrowing at a discounted rate from one agency of the federal government and taking loans earning interest at a higher rate from another agency of government — amounted to a cash transfer from the federal government to the big banks that Bloomberg estimated netted the banks some $13 billion in profit.

Bloomberg released its report last week, noting the scale of the secret bailout: the Federal Reserve Bank “committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year (emphasis added).”

More from the expose (emphasis added):

The Fed didn’t tell anyone which banks were in trouble so deep they required 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 in emergency loans 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 rates, Bloomberg Markets magazine reports in its January issue.

Saved by the 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.

Update: On December 18 — 10 days later — the Wall Street Journal reported that Treasury Secretary Henry Paulson “acknowledged that banks aren’t lending enough money despite the government infusion, but said the U.S. didn’t want to nationalize the industry and dictate the loans banks make.” Understand that Paulson was talking about TARP money — not the trillions that Bernanke was slipping under the table, so to speak. Paulson had taken “$250 billion of equity stakes in banks, arguing that was a quicker and more effective way to encourage banks to lend money to consumers, businesses and each other.”

One of the criticisms of the bailout was the moral hazard implicit in a “too big to fail” argument. Ironically, the big six — JPMorgan, Bank of America, Citigroup, Wells Fargo & Co., Goldman Sachs Group Inc., and Morgan Stanley — have gotten bigger, not smaller, since secret shoring up:

Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data. (emphasis added)

Moreover, management acts like nothing happened. Nothing bad, that is:

Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker, according to data compiled by Bloomberg. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.

In July, the GAO found (pdf) that “the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913″ to provide financial assistance to the banks; “[l]oans outstanding for the emergency programs peaked at more than $1 trillion in late 2008.”

As a reminder, the banks themselves triggered the crisis through insane leverage ratios and the now fully discredited CDO (gild crap to make it shine like gold) program that helped create the housing bubble.

When you hear GOP Presidential candidates lambasting TARP and the Fed actions, watch to see if reporters remind them of these little details (don’t hold your breath):

  • President Bush appointed Ben Bernanke to the Board of Governors of the Federal Reserve.
  • President Bush picked Bernanke to serve as chair of his Council of Economic Advisers.
  • President Bush appointed Bernanke to be Chairman of the U.S. Federal Reserve.
  • President Bush signed TARP

There is, however, room to criticize President Obama as well, as he nominated Bernanke for a second term as chairman. The resulting Senate confirmation vote (70-30) was “the narrowest margin in the history of the position.”

What do you think about TARP? About this latest report documenting a transfer of wealth from the taxpayer to the banks?

Update 8.06 pm Pacific:: In response to the allegation that Obama shaped the 2008 TARP language (comments):

On October 3, 2008, the Senate passed the $700 billion bank bailout bill. The guts of the bill was the same as the three page document submitted on September 21, 2008, by Treasury Secretary Henry Paulson. Paulson had asked Congress to approve a $700 billion bailout to buy mortgage-backed securities that were in danger of defaulting. By doing so, Paulson wanted to take these debts off the books of the banks, hedge funds and pension funds that held them. The bill established the Troubled Assets Recovery Program (TARP).

Update 2: 9:16 pm Pacific:

If ever there was an event to justify the darkest, most conspiratorial view held by many that the alliance of big money on Wall Street and big government produces nothing but secret deals that profit insiders—this is it.

[...]

Demand that politicians return all contributions made by the institutions that got hidden loans. Pressure the politicians who continue to feed from the trough of Wall Street, even as they know all too well how the banks and others have gamed the system and the public.

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  • EEllis

    While it’s standard for partisans to pass the buck on any policy that might get them in trouble trying to put the Tarp issue in Bush’s lap ignores what was going on at the time. When Tarp was being discussed Bush had basically said that he wasn’t going to be around so he was stepping back, tho he was in favor of some sort of bailout. Obama had started to lead McCain in the polls, and in fact, Obama taking the lead on the issue was pushing the polls a bit. While Obama hadn’t been elected he was the presumed future president and “leader” of the Dems at the time and fully involved with the issue and had as much say in the details than Bush ever did. So sure Tarp was signed on Bush’s term but don’t try and pretend Obama was uninvolved because it is rewriting history

  • http://wideeyedandreal.blogspot.com ProfElwood

    @EEllis
    Bush was strong-arming legislators with threats of Marshall law, while both Obama and McCain were practically falling over each other to get back to DC to help him. It was another disappointing moment to realize how little difference there was between those clowns.

    But the point of the article was not the relatively small amount in TARP, but the even bigger amounts that the Fed was able to dump completely outside of any public authorization, or even notice to the public. In fact, one major reason that politicians were able to brag about was that TARP was repaid, when in reality, it was simply paid from the secret Fed funds rather than the higher-interest, and public, TARP funds.

  • http://wiredpen.com KATHY GILL, Technology Policy Analyst

    @EEllis – What ProfE said. I included info on the GOP candidates and TARP in a sidebar.

    I think it is Criminal that the Fed secretly created money out of thin air at basically 0 percent and that banks could use that money to buy Treasury bonds at 1 percent.

    Look at the scale of this : HALF of GDP! Secretly!! This doesn’t piss you off? If not, why not?

  • JSpencer

    This is just another incident showing how democracy is dying in this country. What power do the citizens have to effect stuff like this? The elites (of both parties) are sufficiently insulated against the consequences of their actions (and against the realities most of us face) they are able to dispense with conscience and do as they like. Meanwhile the taxpayers are taken for a ride and run over roughshod. Expect more of this – including legislation (think social security) that will drive the middle class, the poor, the jobless, and other disenfranchised AMERICAN CITIZENS even further out of the loop, out of their homes, and into the streets. Apologies for being non-specific, but this is all part of a larger pattern of rule from the top by people who have already stopped believing in democracy and who seem to have nothing but disdain for the bulk of the citizenry.

  • merkin

    You have to be a little bit careful here. The 7 trillion dollars wasn’t part of TARP. It was an attempt to boost the economy’s money supply.

    While all of the textbooks will tell you that money is produced by the Fed using the banks through the fractional reserve process, we are finding out that unfortunately that is not true. Money is created by the banks through their credit creation model which is independent of the Fed. The only influence the Fed has is by setting the interest rates.

    This private money creation process was backed by the same credit default swap derivatives that backed the mortgage derivatives. The private money creation completely failed in a blink of an eye because no one would extend credit after the CDS’s proved to be not reliable. The money supply dropped alarmingly, producing a classic credit crunch.

    The Fed, controlled by neo-classical economists like Ben Bernanke reacted exactly like Milton Friedman told them to, by boosting the money supply through the fractional reserve system. But the credit model of money creation still wouldn’t work because the banks were unwilling to loan the money. The Fed had to give the banks the 1% spread to induce them to even take the money.

    As long as we have to rely on the private banks to produce the money needed in the economy we will have the dual problems of too much money produced in good times and too little produced in recessions.

    The only way to avoid these problems is to have a true national bank in competition with the private banks. A bank that can step in and loan money directly in recessions or can boost savings rates in good times to soak up money, and not loan the money out, of course. In other words use competition, not regulation.

  • EEllis

    This doesn’t piss you off?

    Are you kidding? I’ve been complaining for years. And lets not forget the Quanitive Easing. My issue is that Obama got off way to light in your post.

  • http://wiredpen.com KATHY GILL, Technology Policy Analyst

    @Merkin – The reason I included TARP was because (a) this dwarfs TARP [ie, context], (b) the big banks are BIGGER now than they were then, and (c) if voters didn’t like TARP, they sure as hell should be up in arms about this.

    @ProfE – Yes, I know that Obama got off lightly here although I did point out that he re-appointed Bernanke.

    I didn’t have time to re-acquaint myself with the events of 2008. I have a vague memory that I wrote something about Obama and McCain and TARP back in the moment …

  • slamfu

    So where is the money now? The banks seem to be solvent now, but is it just a huge bandaid ready to burst again or has the money been integrated into the economy or paid back? I don’t mind that they made $13Bn off it, at 7+Trillion that is a rounding error or profit on a figure like that. Frankly I’m not sure what it means for the Fed to loan that much out. Can someone explain it a bit more?

  • http://wiredpen.com KATHY GILL, Technology Policy Analyst

    @Slamfu — the banks borrowed money from one government agency at basically zero interest and then bought Treasury bonds at 1+% … how can this be “OK”?

    Much of the money went into bonuses to management and employees.

    The Fed secretly expanded the money supply by 50% of GDP. Does that make it more clear?

  • http://wideeyedandreal.blogspot.com ProfElwood

    This is weird. I don’t know how much has been in circulation on average, but if it’s only half (3900 billion), over two years, that yields .33% interest. To get to even a 1% average, you’d have to assume that only 1/6th of that money is in circulation at any time.

    At near 0% interest, that’s pitiful. They can’t be that bad at money management, can they?

  • ShannonLeee

    I hate to say it but… I need an extremely long explanation of why this happened. Right now, all I see is 8 trillion given to banks that then turned around and bought bonds at higher interest rates. If 13 billion isn’t that much, well, may I have the same deal? I promise to do exactly what the banks did with it…nothing, but make a profit off of the American tax payer.

    I hope this doesn’t die. I hope we get explanations. This is frightening.

    Stupid question…
    Doesn’t this sort of behavior lead to massive inflation? I mean, creating 8 trillion out of thin air should normally devalue a currency.

  • http://wideeyedandreal.blogspot.com ProfElwood

    @ShannonLeee
    Inflation is a delayed reaction. The banks still have balance sheet problems which discourages them from making loans. While they’re holding the money or putting it into things like stock, the inflation is minimal, since it’s not being used to buy goods.

    When the banks start lending, then we’ll see if the Fed can pull back the money in time to stop rampant inflation.

    I doubt it.

  • SteveinCH

    Kathy,

    There’s a lot of hyperbole in your post and some misunderstanding.

    First the hyperbole. You are using the total value of the loans made over the course of time, not the loans outstanding at any given moment in time. As an example, let’s say Bank A borrows $50 million at the beginning of every week and pays it back at the end of each week. The counting used by Bloomberg would put Bank A’s borrowings at $2.6 billion ($50 millionX52) rather than $50 million. Because banks tended to borrow short, this is a material issue in the calculations. As I remember the Bloomberg piece, they acknowledge this but you have ignored it.

    The reason this has to be true is in the very numbers you cited. If the Fed had loaned banks $7.8 trillion at a net rate of 175bp (2 percent – .25 percent), the banks would have made more than $100 billion per year. They didn’t, hence the hyperbole.

    Now as to the second point. What exactly did you want the banks to do with the money loaned to them by the Fed? Should they just leave it in cash or would they be better off buying t-bills? The latter is obviously better.

    Two more points. First, why would the Fed do this? The Fed felt the banks were subject to potential runs and had insufficient capital to back them. Maybe they were right and maybe they were wrong but that was the policy, arguing it was better to loan the money to the banks than risk a run.

    Second, the rates you cite are simply the Fed discount rate. In your text, you imply this was a new (Bush inspired) sweetheart deal. It wasn’t. It was simply the Fed lending at the rate it always lends to banks at. And furthermore, there is always a spread between the discount rate and the bond rate…almost always that spread is positive (the bond rate is higher than the discount rate).

    There is a positive debate to be had about the role of the Fed in the banking system. This probably isn’t that debate.

    And, for some additional context, the bailout of GM looks like it’s going to drain about $70 billion out of the treasury before all is said and done to say nothing of AIG, Fannie, of Freddie.

  • ShannonLeee

    thanks for the info everyone

    is .01% interest the Feds normal rate? I didn’t think that was the case.

  • roro80

    Of the sizable number of disappointments I hold against our current president, the number one most unbelievably disappointing thing he has (not) done is the utter failure for *any* of hundreds (thousands?) of known criminals at the heads of the financial industry, and their counterparts in our government, to be held legally accountable for their known criminal acts.

    If the TARP needed to be bigger to keep the banks solvent, I’m all for it — fix the system, don’t let it take down the whole country/world with it. I hope it’s at least well-understood that insomuch as we have recovered, such a recovery would not have been possible without the bailouts. I’m ok with that.

    However, you do not then let the same criminal liars who lied to make themselves personal billionaires continue to head up these industries and continue to do the really extraordinarily short-sighted and greedy things they did to enrich themselves and bankrupt the rest of the damn world. You send them to jail. Over a thousand people were sent to jail during the investigations of the Savings and Loan crisis a few decades ago, and the scale and granduer of the criminal misconduct was NOWHERE near what it is for our current crisis.

    Please, President Obama: investigate both the financial industries and your own and previous administrations. Do it thoroughly, even if it includes those you now rely on, and whose money you rely on. Then send the MFers to jail.

  • roro80

    **Note: my argument is that these loans were kind of an under-the-table way to further recapitalize the banks to keep them solvent. Sweetheart deal, but so is the whole bailout concept. Shouldn’t have done it under-the-table, but I would consider this ok if the rules of play were strictly enforced for everyone.

  • davidpsummers

    There has been a lot of loose numbers in the debate. Steve in CH pointed out some of these. More generally there needs to be an understanding what is “spent” when a government gives out “loans”. Looking at TARP.

    Many have justified spending on the basis of the $700 million TARP as if this money was all “spent” (leaving aside the issue of “good money after bad”). However, when the government loans money, the only money that is “spent” is a) money that was not refunded and b)loss of income, if the loan didn’t provide a return the government might otherwise have. Wikipedia state “By March 3, 2011, the Congressional Budget Office (CBO) stated that total disbursements would be $432 billion and estimated the total cost would be $19 billion” I don’t know where this number comes from, but that fact is that this is one of the central issues, yet seems to be mostly ignored.

    Turning to the program mentioned here. All the money seems to be have been repaid (?). That means the “cost” is the spread in interest rates. So this is at most 13 billion (assuming the government could have been as efficient at investing it as the banks), or less than the TARP.

    Now I don’t know is that was justified. Clearly the government was trying to manipulate the money supply. SteveinCH thinks this was the usual cost for doing that, I don’t know enough about that to agree or disagree.

  • EEllis

    What is funny that those, posting here, that usually want more govt involvement in finace suddenly are concerned and are finding this interference bad. Heck one doesn’t care about the involvement it’s just that they want some bankers to end up in jail, seemingly with little regard to the fact that no laws were broken.

  • EEllis

    Sorry I should say with no regard to if laws were broken.

  • http://wiredpen.com KATHY GILL, Technology Policy Analyst

    @SteveInCH : are you taking issue with the quoted material? Beause that’s where the numbers come from and that’s Bloomberg. *I’m* not doing any of the things you say — Bloomberg is. I’m quoting them. My trust may be misplaced, but I trust them to know what they are writing about.

    My heartburn lies in the secrecy — the lies (“everyone is doing just fine”) — and the fleecing of public money re T-bill purchases with almost-free money.

    What should they have done with the money? LOAN IT OUT. The problem, as I remember it being broadcast wide and near, was that the banks were afraid to lend money to one another and had stopped lending to businesses.

    What should they have done with the money? RESTRUCTURE MORTGAGES. You know, the instrument of death thanks to their turning-turds-in-gilded-turds derivatives.

    AND EVERYONE AT THE TOP SHOULD HAVE BEEN FIRED. For crissakes — these people almost brought the world’s economy to its knees because of their cavalier approach to leverage and yet they (a) argued that they didn’t need restructuring or more regulation and (b) are running businesses that more concentrated in power (market share) today than they were then!

  • http://wiredpen.com KATHY GILL, Technology Policy Analyst

    @ShannonLee – no that is far below normal market rate.

  • http://wiredpen.com KATHY GILL, Technology Policy Analyst

    @roro80 — Look, back then I was one of the people who said, holding her nose, that we had to do something to keep the banks from going under.

    But I expected that $ to come with strings. And I expected ALL OF IT TO BE PUBLIC KNOWLEDGE.

    I wrote a history of bailouts back then — http://uspolitics.about.com/od/economy/ig/Financial-Bailouts—A-History/ — take a look at it. You might notice that the only time the federal government did NOT get its money back was when it gave $$ to BANKS. Did we not learn anything from the S&L mess? (the answer appears to be a hearty “no”)

  • http://wiredpen.com KATHY GILL, Technology Policy Analyst

    Once again, let me explain that I included TARP as context and comparison. Public sentiment has shifted away from TARP as a good idea — lots of reasons for that, probably, but the fact that an even greater sum of public money was loaned to banks at almost no percent should be more unpalatable.

  • http://wiredpen.com KATHY GILL, Technology Policy Analyst

    @davidpsummers – I don’t think the numbers are “loose” — they are “hard” (ie, documented).

    The Federal Reserve secretly floated a butt-load of money to the banks to keep them afloat. Maybe if everyone had known what poor shape they were in …. that we would have all panicked and there would have been runs that would have brought the house of cards tumbling down.

    Congress not knowing that this was going on behind closed doors was wrong.

    Maybe Obama knew. I don’t know – if so, I didn’t see that in the Bloomberg report, and I haven’t read anything about it today.

    And we still have no meaningful financial reform. If we did, the big six would not be bigger today than they were in 2006.

  • ShannonLeee

    I didn’t think it was Kathy…seems like they were handed a large sum of money from one wing of the government in order to take more from another. A nice little kickback for doing what they wanted.

    And I think you are making the greater point here…this was all done under the table, without public knowledge. I’m not against government involvement in the market. I am totally against the American public not knowing about it.

  • davidpsummers

    KATHY GILL, says:
    December 5, 2011 at 11:32 pm

    @davidpsummers – I don’t think the numbers are “loose” — they are “hard” (ie, documented).

    Well, my point was that the discussion of this is, too often, loose. I’ve seen people advocating spending programs by citing TARP without noting that most of the TARP money comes back.

    Similarly, the government didn’t “spend” 7.7 trillion, but I guess that some are going to be saying that if the government can “give” the banks 7.7 trillion is should fund this program or that without question.

    The Federal Reserve secretly floated a butt-load of money to the banks to keep them afloat. Maybe if everyone had known what poor shape they were in …. that we would have all panicked and there would have been runs that would have brought the house of cards tumbling down.

    Congress not knowing that this was going on behind closed doors was wrong.

    Maybe Obama knew. I don’t know – if so, I didn’t see that in the Bloomberg report, and I haven’t read anything about it today.

    I think SteveinCH is right that the rate was simply the Federal discount rate and that this is a method the Fed normally uses to pump up the money supply. Maybe this was unusual, I don’t know, but at the moment I find myself having to take Bloomberg’s word for it.

    And we still have no meaningful financial reform. If we did, the big six would not be bigger today than they were in 2006.

    I am sympathetic that the size of banks the government is obligated to protect should be limited to reduce risk to the country.

    I’ve wondered if it wouldn’t work to have the banks create smaller subsidiaries, ones which engage in the business the government needs to protect, which are independent enough that they can be protected while the rest of the bank is allowed to fail if they get into trouble.

  • roro80

    “Sorry I should say with no regard to if laws were broken.” (EEllis)

    EEllis, of course laws were broken, or have you just not been paying attention? There are laws, stemming from the Enron scandal, in fact, that makes it a crime for CEOs to present false data on their worth and their liabilities. It’s also a crime to falsify loan documents (duh), which we know was done literally millions of times, by essentially all loaning institutions. That’s just what I can think of off the top of my head, and I certainly do not have the resources to conduct the investigation which should have started the moment Obama took office.

    Yes, I think this is where the government should get involved. This is their goddamn job.

  • EEllis

    “of course laws were broken”

    We have so many laws maybe there where one or two little ones here or there but the big problem was all this could and did happen with most people acting within the law. CEO’s didn’t need nor did they bother to falsify anything and as for Mortgage docs, I’m sure there was plenty of that so lets arrest 3000 mortgage brokers and lets not forget 50,000 former home owners who just got foreclosed on. Either way it doesn’t touch any CEO’s and pretending otherwise is fantasy.

  • roro80

    No, EEllis. “one or two little ones” is not the case. That’s actually kind of hilarious. Sorry to burst your bubble, but no. There are plenty of resources to tell about the humungous, widespread criminal activity surrounding the crash, so I’m not really interested in arguing about it. If you care, you’ll find the information that’s out there, and has been extensively reported on.

    I do say it is typical EEllis style to insist that nobody in charge did anything wrong when the entire world economy was literally put into free fall. But hey, let’s protect those CEOs…I’m sure they had no idea what was going on.

  • roro80

    “But I expected that $ to come with strings. And I expected ALL OF IT TO BE PUBLIC KNOWLEDGE.”

    Oh, of course, absolutely. I expected it to come with new laws to make sure this sort of thing isn’t built into the system, and the enforcement of existing laws so that the SOBs that caused this and those who let it happen would be deemed unable to have their sticky little fingers in the pie anymore. Neither of us had our very reasonable expectations met. It’s really disheartening.

  • http://wideeyedandreal.blogspot.com ProfElwood

    The Federal Reserve system is a group of private entities, owned by the banks, which is why they can operate without having to disclose information to the public. Their power comes from the fact that Federal Reserve notes have to be treated as legal tender, which is an exclusive monopoly granted by congress.

    They aren’t really part of the government, and the only reason that we even know about these loans now is because a one-time act of congress forced them to disclose that information. There’s no way for the public to find out what they’re doing now, or have done in the past.

  • EEllis

    I’m not really interested in arguing about it. If you care, you’ll find the information that’s out there, and has been extensively reported on.

    I do say it is typical EEllis style to insist that nobody in charge did anything wrong when the entire world economy was literally put into free fall. But hey, let’s protect those CEOs…I’m sure they had no idea what was going on.

    Bull. Again instead of talking facts or reasonable discussion you offer snide remarks and offhanded insults and innuendo. Were there crimes committed? Sure every day, and guess what there still are. That however is not what caused the banking crisis. The most damaging acts were not illegal. And by the way wrong does not = illegal. Plenty of “wrong” can be done without a crime occurring.

  • roro80

    Again, EEllis, a great deal of info is out there, and surely there’s a great deal more if the president would do his job and order an investigation. Either way, I’m deeply uninterested in rewriting a 400-page dissertation on the topic, which you will fail to read anyway. Many others have done so, and you’ve failed to read those, so really it’s just a waste of time for me to argue.