The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.
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.
A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.
Dec. 5th, 2008, was the day the Bush administration and Democrats in the House came to an agreement to give the automakers $14-17 billion to get them through until the Obama administration took over. Republicans in the Senate shot down that proposal the following week though, forcing the Bush administration to turn to $17 billion from TARP on Dec. 19th.
Remember that time? Remember how fun that was for all of us? $17 billion. Peanuts.
The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had 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.
And remember how they demanded that those middle-class union workers make concessions on wages and benefits? And how the wagging fingers pontificated on how those automakers better show some progress on shaping up their business practices, blah, blah, blah, or they would be cut-off at the knees and millions would lose their jobs anyway?
“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”
Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.
It's easy to believe that Congress didn't know about this, and, given the dog-and-pony show they put on over the automakers, in hindsight that might have been for the best, odd as that may sound. Think about that time, the change in power that was coming and the Republican egos that were threatened by that - all during this crisis that threatened to tip us right over the edge. Would you have trusted those guys to make things right?
Time for some bluster after the fact though.
(Former Democratic Senator Ted) Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard -- the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.
If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks.
Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking.
“Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse,” says Dorgan, who retired in January.
You know what, Byron? We should still do that now, because nothing has changed. The big banks have gotten even bigger - and we've got Europe teetering on the edge of a financial disaster that might put us in the position of having to bail out the banks again.
Meanwhile, Kaufman says, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”
Well, sure glad that in 2010 we finally elected some responsible people who wouldn't obstruct progress on the hopes that a bad economy would put their party back in power or anything silly like that.
Better pray that Europe holds, or we might find ourselves in some mighty deep water very soon.