Gretchen Morgenson Has Just a Few Questions for Ben Bernanke

Gretchen Morgenson of the New York Times has picked up on a Bloomberg News report which AT broke here last Tuesday.  The Bloomberg story reported that, from 2008 to 2010, the Federal Reserve Board secretly lent $ 1.2 trillion to banks and other financial institutions around the world to keep the global financial system from failing. The fact and amount of this lending had been previously undisclosed.

There was, as we noted, the strong implication in Bloomberg's reporting that the Fed and the U.S. Treasury Department had, at a minimum, tolerated and, at a maximum, encouraged lying by American financial institutions about their liquidity (not to mention sources and uses of funds) at the height of the Crash of '08.

In effect, America's largest financial institutions were given a license to lie to current and potential investors and business partners about their solvency in the name of preserving the system.

This is not entirely news. There had already been more than a little hint of, um, forbearance by and collusion with regulators in prior reporting around Bank of America's forced acquisition of Merrill Lynch.  As was widely reported two years ago, Henry Paulson's Treasury Department allegedly strong-armed BOA to go forward with the deal after its own due diligence suggested that the big bank should back out.  Then Treasury sat silently by while serious risks to BOA of the Merrill acquisition went undisclosed in BOA 's merger proxy statements to its shareholders.

A subsequent SEC investigation into all this stirred further controversy  -- including a rejection of the initial SEC settlement by a federal judge in New York back in 2009.  As a result, the nominal settlement of $ 33 million was upped to a still-nominal (to a bank the size of BOA) $100 million.

It's now clear, however, thanks to Bloomberg News, that BOA was not the only big U.S. financial institution which got a free pass.  At week's end, Bank of America was one of several big U.S. financial institutions whose stock price was under heavy pressure.  Billionaire investor Warren Buffett stepped in late Thursday with a $5 billion investment to shore up BOA's balance sheet.

Intriguingly, it was also Buffett who stepped forward to invest the same amount -- and for the same purpose -- in Goldman Sachs at the height of the panic in the fall of 2008.

Thus, besides the fact of previously undisclosed $ 1.2 trillion in loans, perhaps the biggest surprise contained in Bloomberg's report last week was the revelation that roughly half of the Fed's secret lending went to foreign financial institutions.

Morgenson is the co-author, with Joshua Rosner, of the best-selling Reckless Endangerment. Her  Sunday piece hits the nail on the head with its headline: "The Rescue That Missed Main Street."  Writing in the Business Section, Morgenson makes several important points based on her reporting.

Several of them could be responses to comments by AT readers to our earlier piece:

  • Institutions, not citizens, were helped most by the bail-outs. The federal government did essentially nothing by way of relief for mortgage holders or credit card debtors.


  • The Fed accepted "surprisingly sketchy collateral" as security for its loans. Walker F. Todd, formerly of the Cleveland Federal Reserve Bank, told Morganstern: "If you make a loan in an emergency situation secured by equities, how is that different in substance from the Fed walking into the New York Stock Exchange and buying across the board tomorrow? And yet this, the Fed has steadfastly denied ever doing,"


  • The interests of foreign and domestic financial institutions were better served by the Fed and Treasury bailouts than the interests of society as a whole. Equal treatment under the law did not occur.


  • The Fed's claim that it made money on the secret loans is, at best, half true. It's true that no losses were sustained on the loans. But it's also the case that the Fed's interest rates on the loans were so low, and the credit terms so lax, that they were, in effect, give-aways. A real-world, market rate of return, Edward I. Kane of Boston College told Congress earlier this year, would have been a 15 to 20% rate of interest.


  • A false standard has been urged to evaluate the advisability of TARP and the Fed's secret lending program. The real measure should be: what would punish recklessness, reward prudence and encourage triage for failing or fatally mismanaged financial institutions? Instead, the Dodd-Frank Act actually authorizes even wider, more profligate federal bailouts in the event of another crisis. Wall Street and the U.S. financial sector are actually more concentrated now than they were before the Crash -- all thanks to Uncle Sam and the Paulson-Bernanke-Geithner regime.

Morgenson has recently appeared on PBS' Charlie Rose to raise further questions about the lack of federal law enforcement investigations into the Crash of'08. She's right about that too. Until Bloomberg broke the story on the Fed's secret loan programs last week, the previous shoe to drop on the Crash was the report of the Financial Crisis Inquiry Commission back in May, 2010.

 Reckless Endangerment is just out in paperback. Together with Michael Lewis' The Big Short and Matt Taibbi's Griftopia, Morgenson and Rosner offer one of the best -- and most dispiriting -- short accounts of how we got here.

So long as the prevailing wisdom continues to prevail, they're as good as we're likely to get.

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