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Secret Fed Loans Gave Banks the $1.2T Kid-Glove Treatment

Everyone knows that the big Wall Street banks got bailed out of the mess they put the world's economy into. But even the infamous TARP funds were small beans compared to the $1.2 trillion that the Federal Reserve lent to financial institutions, both domestic and foreign, during the financial collapse, according to recently available data that Bloomberg analyzed. That's almost twice what the $700 billion TARP program managed.

Can anyone say "moral hazard"? One big danger stemming from government bailouts during the long financial freight-train wreck -- a disaster that keeps on going -- was that the Captains of Paper Industry would learn exactly the wrong lesson. Instead of being chastened by the wreckage they wrought, they'd see that, no matter how shortsighted and greedy they were, governments would bail them out.

And that's exactly what happened. Only federal officials have been so embarrassed by how completely they've been used, they haven't wanted to admit it in public.

They're in the money -- our money
To get a sense of just how much banks sucked from the Fed, here's a snapshot from the more extensive Bloomberg chart (click to enlarge):


But the gross numbers alone don't put the extent of the Fed's bailout into perspective:

  • Given that half of the borrowers were from foreign-based banks, the Fed was rescuing the world, not the U.S.
  • At peak borrowing time, when the number hit $1.2 trillion, the amount was more than all the earnings of all federally-insured U.S. banks for the first decade of this century.
  • The Fed made some profit -- $13 billion over 2.3 years, which works out to less than 0.5 percent interest per year. At the time, inter-bank rates were 3.8 percent, or more than seven times higher.
  • Were it up to the Fed, and not Congress, no one would ever have learned that such institutions as Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), Royal Bank of Scotland, Societe Generale (GLE), and UBS (UBSN) were among those bellying up to the cash bar. The bank regulatory agency didn't want any of them stigmatized for having borrowed money to cover their inept management practices.
  • Banks doubled down on their borrowing by taking extra money through subsidiaries to bloat their low cost cash tills.
  • The fed kept easing standards for collateral until it was taking junk bonds against a promise of payment.
  • Some of the banks may have used the funds to bolster their profits because the cost of money was so cheap.
  • Even as the inexpensive money flowed in, banks refused to make loans that would have helped jumpstart the economy, starting with small companies that don't have billions in the bank to invest.
This is a case where an analogy can say a lot more than a recitation of fact.

Aesops' financial fables
Some wolves got into financial trouble because they speculated on the market and didn't have enough money to cover their positions when things got bad. Each wolf had a median household income of roughly $50,000 and its back to the wall.

So, the wolves went to the Farmers' Cooperative Bank, which was overseen by a small group of wolves that had recast their resumes to explain their previous employment as guard dog security consultants. Each borrowed $500,000 over two years at a monthly interest cost of $104 -- lower than the biggest sweetheart deal anyone could imagine. Many put up as collateral what otherwise would have sold at a yard sale.

Some of the wolves probably reinvested their borrowed amounts at significantly better return than the interest they paid. Some claimed that they didn't need to borrow but were encouraged to so that no one else felt embarrassed by taking the money. To top it all, the Farmers' Cooperative didn't want to mention to any credit bureau that the wolves had over extended themselves beyond belief because it might embarrass them and make their future speculation more difficult.

While all this was going on, the wolves decided to get tough about money they had lent out and to insist that only the most qualified borrowers (and often not even them) would get loans. After all, someone had to teach the rest of the barnyard to get their financial houses in shape.

Corporatization of government
Some more paranoid (and ill-informed) pontificators have jumped up and down, screaming that the country has become socialist because the government had nationalized the banks. How amusing when you consider that exactly the opposite happened. The Fed and the Obama administration didn't take over the banks. The banks partied hard and then took over the government.

The Latin phrase Quis custodiet ipsos custodes? popularly and roughly translates as "Who will watch the watchmen?" Here's the context from Roman satirist Juvenal, a commentary on marital infidelity, in translation:

I hear all this time the advice of my old friends -- "Put on a lock and keep your wife indoors." Yes, but who will ward the warders? The wife arranges accordingly and begins with them.
The cheating wife in this case plots with the very people the husband has charged with guarding her.

The banks have proven that they know how to twist regulators and legislators around their little fingers, whether through speaking to former colleagues, flashing political contributions, or just convincing them that the danger of allowing Wall Street to fail is too grave.

In doing so, they've seen that no matter what the financial sector does -- whether wrecking the economy, faking documentation when foreclosing on mortgages, or paying lavish bonuses to the insiders -- no one with power will stop them. If you think this was the last time a financial calamity could owe its existence to human greed and indifference to the suffering of others, think again.

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Image: morgueFile user kevinrosseel, site standard license.
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