The secret $1.2 trillion bank bailout

The prevailing wisdom in Washington and on Wall Street is that creating jobs, rebuilding the nation’s infrastructure and even maintaining basic government services is unaffordable.  Yet the Federal Reserve System was able to come up with $1.2 trillion to bail out failing banks and financial institutions.

This information was kept secret until Bloomberg Business News pried it loose a few days ago.  To get the information, Bloomberg needed the Freedom of Information Act, lawsuits that went to the Supreme Court and an act of Congress.

The size of the bailout boggles the mind.

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 $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

The balance was more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2001, the day after terrorists attacked the World Trade Center in New York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill 539 Olympic-size swimming pools.

via Bloomberg.

The Federal Reserve Board’s justification for the bailout, according to Bloomberg, is that the bailout was necessary to prevent the collapse of the financial system, that the loans were (mostly but not always) at above-market interest rates, that they were (mostly but not always) backed by adequate collateral, and that the loans were paid back.

I agree it was necessary for the Fed to act to prevent the banking and financial industry from collapsing.  There would have been a domino effect that would have spread through the whole economy, as in the bank failures of earlier eras.  But the rescue should have been like the rescue of General Motors and Chrysler.

In the auto industry rescue, government help was conditioned on getting rid of the incompetent managers who’d caused the problem, letting the stockholders and bondholders take a loss and restructuring the companies so they will be on a sounder footing in the future.

In contrast, the bank bailouts protected the jobs and bonuses of top management, shielded stockholders from loss and allowed a continuation of everything that led to the problem in the first place.

The secret bailouts dwarfed the public bailouts, Bloomberg reported; the top 10 banks got more than four times as much in the secret Federal Reserve loans than in the TARP and other public loans.

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… . … …

It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms.  They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG (UBSN), which got $77.2 billion.  Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.

The largest borrowers also included Dexia SA (DEXB), Belgium’s biggest bank by assets, and Societe Generale SA, based in Paris, whose bond-insurance prices have surged in the past month as investors speculated that the spreading sovereign debt crisis in Europe might increase their chances of default. … …

“Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic?” U.S. Representative Walter B. Jones, a Republican from North Carolina, said at a June 1 congressional hearing in Washington on Fed lending disclosure. “They get help when the average businessperson down in eastern North Carolina, and probably across America, they can’t even go to a bank they’ve been banking with for 15 or 20 years and get a loan.”

via Bloomberg.

The argument was that the big Wall Street banks and investment houses were too big to be allowed to fail.  But the way things are going, there will be another cycle of boom and bust, in which the banks and investment houses will be too big to save.  Then what?

Click on Wall Street Aristocracy Got $1.2 Trillion in Fed’s Secret Loans for the full Bloomberg article.

Click on Liquidity Lifelines: Tracking Fed Loans to Banks for an interactive graphic created by Bloomberg to give a breakdown on how much individual firms received in Federal Reserve loans.

The Federal Reserve’s bank bailout shows how little difference there is between the Bush and Obama administrations on economic and financial issues.  The architect of the bailout, Ben Bernanke, was appointed by President Bush and reappointed by President Obama.  The process began under Bush and continued under Obama without missing a beat.

Tags: Bank bailout, Federal Reserve Board, Federal Reserve Board bailout, Wall Street bailout