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.