Friday, May 18, 2012

Did the Fed’s Emergency Lending Prop Up “Too Big to Fail”?

he Obama administration arrived in Washington in early 2009 facing the worst financial crisis since the Great Depression — and an American public outraged by bailouts for the financial institutions that had gotten them there.

To build confidence in the banking system, Treasury Secretary Timothy Geithner, the man tasked with the economic turnaround, hinged his plan on what were called “stress tests” to determine the biggest banks’ fiscal health and, if necessary, provide “capital support” to those that were the most in trouble.

On May 7, the results were in: The nation’s 19 largest banks were fundamentally healthy, the administration announced, and would soon repay the loans they had taken.

For more than a year, many of these same banks had turned repeatedly to the Federal Reserve to tap a vast reservoir of cash in order to keep their daily operations from freezing up.

Late last year, Bloomberg News broke the story of the Fed’s unprecedented intervention in the financial markets — under which it made trillions of dollars in loans, commitments and guarantees to financial institutions around the world. After two years of legal wrangling, the news organization obtained thousands of pages of documents, which revealed critical details about the emergency lending, including how much money went to which banks, when and at what interest rates.

What Did the Documents Reveal?

“What we found out, really, was that Wall Street was in much deeper trouble than we ever imagined,” Bob Ivry, one of the Bloomberg reporters investigating the loans, told FRONTLINE. In a series of reports, Bloomberg laid out three main calculations:

$1.2 trillion: The amount the Fed loaned to banks on Dec. 5, 2008, the “peak lending day” or single neediest day for banks that year;
$7.77 trillion: The total amount the Fed either lent, spent or committed “to rescuing the financial system” as of March 2009;
$13 billion: The estimated net interest margin banks made “by taking advantage of the Fed’s below-market rates.”

Bloomberg says these amounts “dwarfed” the amounts lent to the same banks through TARP — the $700 billion the Bush administration had secured from Congress to help alleviate the crisis. Citigroup, for example, received $45 billion in TARP funds, as compared with $99.5 billion it had borrowed from the Fed on its peak lending day, according to Bloomberg.

“Congress had no idea that these banks were having such trouble,” Ivry told FRONTLINE, noting that the loans came while bank CEOs were assuring Congress — which was in the midst of a debate over whether to regulate and even break up the banks — that they were in good shape. The secrecy, Bloomberg asserts, “helped preserve a broken status quo and enabled the biggest banks to grow even bigger.”

Full article: … -up-too-big-to-fail/

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