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
Joseph N. DiStefano
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.
And who came up with the bailout? Can someone refresh my memory? Oh right, it was G. Henry Paulson and George W. Bush.— taxmanndumbeth- This story needs to be on the front page of The Inquirer, not buried in the business section (assuming that it gets into print at all).— srappoport
- Of course not, we get how much money mayors across the country are willing to spend on suppression of political dissent, all the while begging for concessions from public servants because they claim they are broke. If Mayor Nutter and Mayor Bloomberg, and Mayor Quan are presiding over deficit ridden treasuries that shut down schools, shut down homeless shelters, then how come they have TENS OF MILLIONS FOR THE POLICE TO SUPPRESS DISSENT?
- Bank failures are always kept secret to avoid a run on the bank, which cost taxpayers even more. Preventing bank failures is key, and regulation is the answer. Bankers will always say that regulation increases costs and hurts innovation, but that is false. Regulation reduces bad lending practices and helps true innovators. Currently the large banks control the OCC (the national bank regulator).— damnels
- Day in and day out, this is the most informative and well written blog on philly.com. Keep up the great work Joe, an awful lot of us appreciate it.— jimmymack
- Taxman you're right Bush started it; we should probably be thankful for that as something needed to be done; Philly Fed chief Plosser is probably right that it should have been something a lot more systematic. Of course the current bunch was on board too; Geithner was an architect of the 'rescue', and as NY Fed head refused the big commercial bankers' begging request he get involved in curbing bad-mortgage trading excess before the blow-up. Damnels, you're very right. Of course bank regulation does include a measure of secrecy when banks are in trouble (to avoid 30s-style runs on the banks), which turns into dissumulation (lying) when publicly-traded banks use the cover to claim they're sounder than they really are. Which is one reason banks in particular and financial institutions generally trade at a discount P/E ratio. Jimmy Mack, God bless you and yours. Joe D.— Joe D
- Though most of the anti-Fed rhetoric on the left and right seems to be tied to anti-semitism, it is an example of the crises of late stage capitalism, and the fact that Keynes couldn't save capitalism from itself.— HandNik
- HandNik, how exactly does anti-Fed rhetoric tie to anit-semitism? I'm not seeing the link between the Federal Reserve and hatred for the Jewish.— MoneyMan1115
- Re HandNik and blame-the-Jews, yep it's there. Every year some online reader urges me to one or another closely-written Web site claiming the Fed, a US Government agency whose boss is nominated by the President and confirmed by the Senate and whose employees are members of the civil service, is actually a private entity owned by "the Rothschilds" and other European Jewish bankers not accountable to Americans. I don't know why this specter haunts some readers instead of, for example, as Damnels has suggested in this comment thread, the way US bank regulators, Fed included, have sometimes identified too closely with their subjects ("regulatory capture") to the public detriment. - Soon after 9/11 a Saudi student in Alberta asked me to comment on a classic Rothschild/Jewish/Fed conspiracy article he saw online. I reminded him the major owner of what was then the biggest bank in America, Citi, wth its outsized Fed clout, was Prince Alwaleed of the House of Saud, "guardian of the Islamic holy places." No need to focus blame at "the Jews." Plenty to go around.— Joe D
