The Federal Reserve: Part 1, Secret Loans

Those who have been yelling "End The Fed" for years would call the Federal Reserve a scam. Several days ago, Bloomberg Markets magazine published data showing that the Federal Reserve provided cover for the dire straits of the nation's largest financial institutions during the 2008 financial crisis. And today's news headlines would lead a casual reader to believe that the Federal Reserve is the Central Bank of the United States. Perhaps it's fair to call it a little of each - scam, cover-up, and Central Bank.

Five days ago, bloomberg.com reported that back in 2008/2009, unbeknownst to Congress, the Federal Reserve committed the largest bailout in U.S. history. A bailout to the tune of $7.7 trillion. That dwarfs the Congressionally approved TARP bailout of $700 billion. Not only did they do this in secret, but the Federal Reserve kept this secret as Congress debated banking regulation in 2010. In 2010, there was an unsuccessful effort to curtail the size of banks, to eliminate the downside of having banks that are too big to fail. There was also a successful effort to improve accountability and transparency of the financial industry. Bankers lobbied heavily against these regulations. And they did not inform lawmakers of the $7.7 trillion needed in 2008 to assure that the nation's largest banks did not collapse. Only with documents obtained under the Freedom of Information Act and after a victory in court, did the Federal Reserve release the details of its secret funding to Bloomberg.

Remarkably, the Bloomberg estimates are lower than those reported back in July. In July of 2010, an amendment to the 2010 Wall Street reform law instucted the Government Accountability Office (GAO) to audit the Federal Reserve. One year later, Bernie Sanders summarized, "As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world." Whether it's $7.7 trillion or $16 trillion, both are equally distasteful, and for the same reasons.

According to the Bloomberg report, two top borrowers from the Federal Reserve were Citigroup with $99.5 billion by January 2009 and Bank of America borrowing $91.4 billion by February 2009. The Treasury Department relied on the recommendations of the Federal Reserve to decide which banks were healthy enough to get TARP money. The TARP bailout funds were only to be provided to healthy banks. Both Citgroup and Bank of America received $45 billion in TARP loans. Based on their federal loans, both banks made tidy profits. According to the Bloomberg report, Citigroup made $1.8 billion and Bank of America made $1.5 billion.

This is not just a case of a couple of big banks. The list of banks who received Federal Reserve loans is long. The amounts they borrowed are staggering. And it was all done behind the scenes, without the knowledge of Congressional lawmakers. To be clear, almost all the loans were repaid. But this does not compensate for the duplicity of banks who took billions in emergency loans, and at the same time told the world that they were financially healthy. It does not counteract the fact that those banks that were too big to fail back in 2008, and thus had to be bailed out at taxpayer expense, are now bigger than they were. And it does nothing to mitigate the (Bloomberg) estimated $13 billion of income they made by taking advantage of the below-market rates they received on these loans.

Champions of the Federal Reserve would argue they didn't lose any money, so no harm, no foul. But I think most people, economists and non-economists, would agree that we are totally unprepared for another banking crisis. And, this is due in part to the Federal Reserve's secret trillions in loans. Loans that came with no strings attached. Loans that provided a safety net for bankers who took greater and greater risks. If financial institutions believe that the Federal Reserve won't let them go under, they will continue taking oversize risks and paying themselves handsome bonuses to do so. This is what gets the Occupy Movement so riled up. The United States has a financial system where bank executives can take huge risks, adversely impact the economy, rely on Congress and the Federal Reserve for emergency loans, and walk away with billions in compensation. And evidently all of this is perfectly legal.

Unfortunately, the media has yet to really pick up and run with this story. This morning I typed "Federal Reserve" into Google News search and was somewhat startled by the number and order of automatically generated categories:

• 4,399 articles about the Fed and the Euro
• 2 articles concerning the Fed and the stimulus
• 618 articles about the The Fed and the stock market
• 2 articles about The Fed and the economy in the Southeast
• 360 articles about the Federal Reserve Beige Book
• a CNBC transcript
• 29 articles about the Fed and the deficit
• GETTING CLOSER ... 313 articles about new scrutiny of the Fed
• FINALLY ... 10 articles about secret Fed loans

It was hard to find news about the Federal Reserve secret loans, even when I was looking for it. Nonetheless, I am hopeful that regulators will pick up on it. Already, probably due to the diligence of the Bloomberg report, The Hill reports that Representative Elijah Cummings (D-Md), who is on the House Oversight and Government Reform Committee sent a letter requesting the Committe look into the Federal Reserve's secret role in the 2008 bailouts. Go get 'em!