Saturday, December 3, 2011

The "mother of all bailouts" unmasked!

A Bloomberg investigation has revealed the stunning magnitude of the post-Lehman financial market bailout. Hitherto information about only the $700 bn Troubled Assets Relief Program (TARP) was made public and the details of the liquidity injection facilities were withheld on grounds that it would stigmatize borrowers and thereby destabilize market confidence. However, it now emerges that the Fed's liquidity infusion support dwarfs the TARP and should rightly assume the moniker of the "mother of all bailouts"!

As the crisis deepened, the Fed had to expand its traditional discount window to provide liquidity support to the frozen credit markets. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources. Such credit support involved reduced credit standards and collateral requirements.

The report finds,

Add up guarantees and lending limits (to direct lending), 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 US that year... 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.

While TARP credit had some strings attached, the liquidity injections came without any conditions attached and was a virtual doleout. And these banks, including foreign ones, profited by atleast $13 bn from the Fed's below market lending rates. It is no wonder that the Fed and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. The report writes that the witholding of this information helped the banks ward off pressures for greater regulatory oversight,

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... 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.

The hypocrisy of concealing the fact of being under life-support while at the same time publicly claiming stability and strength is captured in the report,

"On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed 'one of the strongest and most stable major banks in the world'. He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day."

On Sept. 21, 2008, a week after Lehman went bankrupt, Goldman Sachs converted to a bank holding company, gaining access to the Federal Reserve's last-resort lending program for banks, the discount window. While it took only $50 million from the window, New York-based Goldman Sachs had been borrowing from the central bank for six months from two temporary programs for broker-dealers: the Term Securities Lending Facility and the single-tranche open market operations, or ST OMO. On Dec. 31, 2008, Goldman Sachs had $34.5 billion of loans from ST OMO, some of it at an interest rate of 0.01 percent. "We weren't relying on those mechanisms", Goldman CEO Lloyd Blankfein told the Financial Crisis Inquiry Commission in January 2010.

The exposures of the six biggest financial institutions were staggering. The six biggest US banks, received $160 billion of TARP funds and borrowed as much as $460 billion from the Fed (measured by peak daily debt), and accounted for 63% of the average daily debt to the Fed by all publicly traded US banks, money managers and investment-services firms.

See the interactive graphic here.

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