Fed's massive fix sent trillions across the nation, globe

McClatchy NewspapersDecember 1, 2010 

WASHINGTON — Lifting the veil on its $3 trillion emergency rescue of the financial industry, the Federal Reserve Wednesday revealed the names of U.S. and foreign banks that benefited hugely from nearly a dozen programs to stem panic and keep money moving.

The 21,000 transactions show that the Fed not only stretched the limits of its authority by lending tens of billions of dollars to Goldman Sachs and other giants of Wall Street, but that it also aided British, German and French banks, other big businesses and smaller banks from Puerto Rico to North Carolina and Washington State.

In some instances, the Fed made fully secured loans to banks that were in shaky condition, even lending to investment firm Lehman Brothers on the brink of its 2008 bankruptcy.

Defending themselves against mounting Republican criticism over the Fed's contribution to the rising national debt, officials at the central bank said that the data prove they acted responsibly during the crisis. They said that most of the loans have been repaid, and taxpayers have suffered no credit losses.

The Fed's actions were taken at a time when large global investment banks were operating outside the direct reach of regulators. Economists have widely praised Bernanke for saving the global economy with bold, unprecedented actions that saved investment banks and thawed frozen credit markets.

But anger that the Fed helped Wall Street while Main Street struggled fueled a backlash against the Fed, and many newly elected members of Congress campaigned on platforms to rein in the central bank's freedom to act independently.

Some experts said the newly released data likely would give critics new fodder.

Disclosure of all the loans to big banks "could be interpreted as actions to protect the connected, and the Fed has to be nervous about that," said Vincent Reinhart, who directed the Fed's Division of Monetary Affairs from 2001 to 2007. "If you want to channel voter anger, there's got to be stuff in that document drop."

The data revealed that the Fed made massive loans to Charlotte-based Bank of America and the firms it acquired, including Wall Street investment bank Merrill Lynch. Investment bank Morgan Stanley, which sustained big losses in the subprime mortgage market, borrowed up to $47.6 billion in late September 2008 under a Fed overnight loan program for major securities dealers, the data showed.

Goldman Sachs, the goliath of Wall Street, faced months of controversy over its receipt of more than $43 billion in federal aid. Wednesday's data showed, however, that Goldman also borrowed up to $24 billion under the program for dealers in the fall of 2008 and got another $7.5 billion from the Fed for its unmarketable securities.

Goldman spokesman Michael DuVally said that, at a time when "many of the U.S. funding markets were clearly broken . . . the Federal Reserve took essential steps to fix these markets, and its actions were successful."

Citigroup, the beneficiary of a massive Treasury Department bailout, held up to $18.6 billion in loans under the Fed program for primary dealers, while Bank of America's securities division borrowed up to $11 billion. Merrill, acquired late that year by Bank of America, had loans totaling up to $27.5 billion in mid-October 2008.

Bank of America spokesman Robert Stickler called the Fed programs "an example of a successful government initiative at no taxpayer expense."

"The programs helped our customers such as borrowers, auto dealers, depositors and money market fund investors continue to do business as usual despite virtually unprecedented disruptions in the financial markets," Stickler said.

Peak lending under each of the programs combined to total $3.3 trillion, though the Fed said much less was extended at any one time. More than $1 trillion in securities backed by home mortgages remain on the Fed's books.

The data drop came at the last moment before a congressional deadline for disclosure, adopted as part of a revamp of financial regulation by Congress earlier this year called the Dodd-Frank Act. The Fed, an independent and autonomous agency, successfully skirted attempts to require that it be audited, and the information released did not answer all questions about the Fed's activities.

Sen. Bernie Sanders of Vermont, an independent who succeeded in inserting the transparency requirement in the massive bill, cited Fed Chairman Ben Bernanke Wednesday for refusing to open the books.

"Today . . . we finally learn the truth — and it is astounding," Sanders said in a statement. "We now know that Fed loaned trillions of dollars at zero or near-zero interest rates not only to the largest financial institutions in this country, but also to many of our largest corporations — including GE, McDonalds and Verizon. Most surprising, the Fed also lent huge sums of money to foreign private banks and corporations."

Reinhart, now a senior researcher with the free market-leaning American Enterprise Institute, said that the growing size of the Fed's balance sheet suggested as much.

However, he said, "when you see the number of loans being rolled over day after day (by big Wall Street investment banks), it's pretty striking."

He pointed to Bank of America, which borrowed up to $15 billion under the Term Auction Facility that provided short-term loans at rates lower than what was available in the panicked marketplace.

"Bank of America had lots of really lowly rated securities as its collateral," said Reinhart, who added that the amount of loans being rolled over suggests a subsidy involved to keep Wall Street from fracturing further.

The government also told Bank of America to take $45 billion to shore up its balance sheet, which the bank later repaid.

Small banks also were helped under the Term Auction Facility, which doled out $493 billion in one- to three-month loans.

For example, the Cascade Bank of Everett, Wash., borrowed up to $162 million from the program between Valentine's Day 2008 and last January. Lars Johnson, who worked at the bank and is now chief financial officer of the Washington Business Bank in Olympia, Wash., said the loans "helped the banking system in general."

"It took pressure off us, knowing it was there," he said. "You could use it in the shorter term or the longer term."

(Rick Rothacker of The Charlotte Observer in Charlotte, N.C., and C.R. Roberts of The News Tribune in Tacoma, Wash., contributed to this article.)

MORE FROM MCCLATCHY

McClatchy's probe into roots of financial crisis, a Pulitzer finalist

To ask a question about this story or any economic question, go to McClatchy's economy Q&A

For more McClatchy politics coverage visit Planet Washington

Does WikiLeaks have dirt on Bank of America, too?

Obama, GOP to seek quick deal on tax cuts

European interest rates soar; could it happen to us one day?

Meet Bruce Reed, Obama's point man on cutting deficit

McClatchy Newspapers 2010

McClatchy Washington Bureau is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service