Thursday, April 24, 2014
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How bailout bankers lied, and the Fed let them

The 2008 bank blow-up was even worse than we were told at the time, secret Fed documents show

How bailout bankers lied, and the Fed let them

When the US was bailing out giant banks in 2008, the Federal Reserve and the Treasury Department didn't want us to know just how much money was propping up the largest US banks in the middle of the crisis.

The secrecy (under Bush and the Bernanke Fed, and under NY Fed boss turned Obama Treasury Secretary Geithner) might have helped keep the financial system from collapsing at the worst of the crisis. That's how bank regulatory secrecy is justified.

But the government's and the banks' continued failure to disclose, once the worst was over, made it easier for big bank CEOs to claim they hadn't been in really serious trouble (when records show they were), and to fight off conservative Republicans (like Dallas Fed head Richard W. Fisher) and liberal Democrats (like then-US Sen. Ted Kaufman, D-Del.) who wanted to break up Citigroup, JPMorgan, Goldman and the other giants so this wouldn't happen again. Result: the big banks got bigger.

Bloomberg LP sued for more info, won, and now reporters Bob Ivry, Brad Keoun and Phil Kuntz tell us things got a lot worse than the public knew.Read the story here. Excerpts:

"The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy...

"Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

"A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger...

"Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year... The amount of money the central bank parceled out... dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP."

Why not admit this in 2009, after the crisis, when Congress was debating what banking laws needed changing? "The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma -- investors and counterparties would shun firms that used the central bank as lender of last resort -- and that needy institutions would be reluctant to borrow in the next crisis." Federal courts disagreed, the reporters won, and the Supreme Court declined to hear the banks' appeal.

Bloomberg (and the surprised lawmakers and central bankers it quotes) isn't saying there shouldn't have been a rescue. It's saying that coming clean about how bad things got would have enabled Congress and the public to better understand what happened, and take firmer action to keep it from happening again.

Bloomberg also estimates the banks made $13 billion in extra profits thanks to this secret government lending - money it suggests might better have been used to write down bad mortgages, instead of propping up executive and trader bonuses (and bank lobbying in Washington).

Also from Bloomberg: Wall Street, which backed Obama in '08, is turning to Romney.

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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