That Federal Bank Bailout in 2008 Was Bigger Than We Knew. A Lot Bigger

Thanks to some hard digging and a willingness to engage in litigation by Bloomberg News, we now have the benefit of their truly astonishing analysis of the scope and dimensions of the federal government's fall, 2008 bailout of the American and European banking industries.

Remember the TARP, the U.S. Treasury Department's highly controversial, $ 500 billion Troubled Asset Relief Program? That was only the tip of the iceberg. Think: $ 1.2 trillion. That's right. One trillion, two hundred billion dollars as of December 5, 2008 - when Wall Street's  emergency borrowing for the federal government peaked.

Turns out America actually was facing a total economic collapse.

That $ 1.2 trillion total is how much cash liquidity Bloomberg estimates the Federal Reserve Board and Treasury injected into Wall Street in the form of low-interest, collateralized loans. It was all supposed to remain secret. And, when you read Bloomberg's analysis, you can see why.

Here's a sample:

  • There were actually six different federal programs to keep the private credit markets functioning with taxpayer money in the fall of 2008, after the private lending markets had shut down.

 

  • While we were being told the 10 largest financial institutions had borrowed about $160 billion from the Treasury Department, we weren't being told that the same firms were also borrowing $ 669 billion in emergency funds from the Fed. Those borrowers included Morgan Stanley ($ 107 billion), Citicorp. ($99.5 billion) and Bank of America ($ 91.4 billion).

 

  • Almost half of the Fed's top 30 borrowers were European firms, not Americans. This included Royal Bank of Scotland ($84.5 billion) and UBS AG ($77.2 billion).

 

  • Several big American financial institutions who were trumpeting their liquidity at the time of the crisis (we'll let you dig their names out yourself, rather than call them liars in print), were, in fact, relying on secret federal borrowings to keep afloat and avoid insolvency. At times, and in some instances, the Fed money provided all of an institution's available cash.

 

  • A few institutions required emergency federal loans to stay liquid well into 2010.

 

The total amount lent to the private banking sector by the federal government, Bloomberg notes, was  about the same as the current amount of 6.5 million delinquent or foreclosed mortgages. Those borrowers haven't gotten any meaningful government help.

The Bloomberg report is also chock full of useful factoids. Example: when the 18-month U.S. recession officially ended in June, 2009, GDP had contracted by 5.1 %. By contrast, between August, 1929 and March, 1933, GDP dropped 27%.

Some of the disclosures in Bloomberg's report were mandated by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act").  This data was released in December, 2010.  Another release occurred in March, 2011.  But most of the secret loans had to be sought via the Freedom of Information Act and then pursued in court.  Bloomberg says the big banks fought release of this data under FOIA all the way to the U.S. Supreme Court.  The High Court declined to intervene in March, 2011.

The big data dump took place in July. Bloomberg then compiled, combined and analyzed it to arrive at the conclusions, analysis and spread sheets contained in its report.

At least three conclusions are apparent.

First, what sustained the viability of America's financial system during the Crash of '08 was a total lack of transparency as to how the liquidity was being funded. Several of our ten largest financial institutions (as well as several in Europe) were illiquid for extended periods of time and would have failed, but for the secret, low interest government loans.

Second, the secret Fed lending (as well as the disclosed Treasury loans, like TARP) completely eliminated moral hazard (i.e, risk and the potential losses resulting from bad decisions) for the major players (except for Lehman Brothers and Bear Stearns) in the U.S. financial marketplace. In other words: our largest financial institutions really are too-big-to fail. By acting as lender-of-last-resort, the Fed allowed the big Wall Street firms to avoid the financial consequences of their actions.

U.S. taxpayers, it should be noted, lost nothing on the secret Fed loans. Instead, according to Bloomberg, the Fed made money.

Third -- and most importantly for the future, essentially nothing has been done to correct or eliminate the conditions which would allow a reoccurrence of the Crash of '08 -- despite the 2500 pages of the Dodd-Frank Act..

So who knew?

Treasury Secretary Henry Paulson, Fed chairman Ben Bernanke and New York Fed chairman Tim Geithner (and one President George W. Bush) really did the save the world.

Now we finally know it too.

Thanks to some hard digging and a willingness to engage in litigation by Bloomberg News, we now have the benefit of their truly astonishing analysis of the scope and dimensions of the federal government's fall, 2008 bailout of the American and European banking industries.

Remember the TARP, the U.S. Treasury Department's highly controversial, $ 500 billion Troubled Asset Relief Program? That was only the tip of the iceberg. Think: $ 1.2 trillion. That's right. One trillion, two hundred billion dollars as of December 5, 2008 - when Wall Street's  emergency borrowing for the federal government peaked.

Turns out America actually was facing a total economic collapse.

That $ 1.2 trillion total is how much cash liquidity Bloomberg estimates the Federal Reserve Board and Treasury injected into Wall Street in the form of low-interest, collateralized loans. It was all supposed to remain secret. And, when you read Bloomberg's analysis, you can see why.

Here's a sample:

  • There were actually six different federal programs to keep the private credit markets functioning with taxpayer money in the fall of 2008, after the private lending markets had shut down.

 

  • While we were being told the 10 largest financial institutions had borrowed about $160 billion from the Treasury Department, we weren't being told that the same firms were also borrowing $ 669 billion in emergency funds from the Fed. Those borrowers included Morgan Stanley ($ 107 billion), Citicorp. ($99.5 billion) and Bank of America ($ 91.4 billion).

 

  • Almost half of the Fed's top 30 borrowers were European firms, not Americans. This included Royal Bank of Scotland ($84.5 billion) and UBS AG ($77.2 billion).

 

  • Several big American financial institutions who were trumpeting their liquidity at the time of the crisis (we'll let you dig their names out yourself, rather than call them liars in print), were, in fact, relying on secret federal borrowings to keep afloat and avoid insolvency. At times, and in some instances, the Fed money provided all of an institution's available cash.

 

  • A few institutions required emergency federal loans to stay liquid well into 2010.

 

The total amount lent to the private banking sector by the federal government, Bloomberg notes, was  about the same as the current amount of 6.5 million delinquent or foreclosed mortgages. Those borrowers haven't gotten any meaningful government help.

The Bloomberg report is also chock full of useful factoids. Example: when the 18-month U.S. recession officially ended in June, 2009, GDP had contracted by 5.1 %. By contrast, between August, 1929 and March, 1933, GDP dropped 27%.

Some of the disclosures in Bloomberg's report were mandated by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act").  This data was released in December, 2010.  Another release occurred in March, 2011.  But most of the secret loans had to be sought via the Freedom of Information Act and then pursued in court.  Bloomberg says the big banks fought release of this data under FOIA all the way to the U.S. Supreme Court.  The High Court declined to intervene in March, 2011.

The big data dump took place in July. Bloomberg then compiled, combined and analyzed it to arrive at the conclusions, analysis and spread sheets contained in its report.

At least three conclusions are apparent.

First, what sustained the viability of America's financial system during the Crash of '08 was a total lack of transparency as to how the liquidity was being funded. Several of our ten largest financial institutions (as well as several in Europe) were illiquid for extended periods of time and would have failed, but for the secret, low interest government loans.

Second, the secret Fed lending (as well as the disclosed Treasury loans, like TARP) completely eliminated moral hazard (i.e, risk and the potential losses resulting from bad decisions) for the major players (except for Lehman Brothers and Bear Stearns) in the U.S. financial marketplace. In other words: our largest financial institutions really are too-big-to fail. By acting as lender-of-last-resort, the Fed allowed the big Wall Street firms to avoid the financial consequences of their actions.

U.S. taxpayers, it should be noted, lost nothing on the secret Fed loans. Instead, according to Bloomberg, the Fed made money.

Third -- and most importantly for the future, essentially nothing has been done to correct or eliminate the conditions which would allow a reoccurrence of the Crash of '08 -- despite the 2500 pages of the Dodd-Frank Act..

So who knew?

Treasury Secretary Henry Paulson, Fed chairman Ben Bernanke and New York Fed chairman Tim Geithner (and one President George W. Bush) really did the save the world.

Now we finally know it too.