Uncovering Secret Fed Loans

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Bob Ivry

Bob Ivry was part of a team of Bloomberg reporters that fought all the way to the Supreme Court to uncover the details of an alphabet soup of obscure emergency loans the Federal Reserve provided to banks during the financial crisis beginning in 2007. Federal Reserve Chairman Ben Bernanke, without naming names but seemingly referring to the Bloomberg article, said that recent reports on the Fed’s emergency lending program contained “egregious errors;” Bloomberg issued a point-by-point rebuttal. We reached Ivry via phone to learn more about his story.

So we all remember the $700 billion bailout, which was eventually reduced to a $475 billion bailout. But you investigated another bailout that, unlike TARP, wasn’t subjected to Congress’ approval or the media’s scrutiny. Can you tell us what you found?

There are three numbers — that are big.

The biggest number is $7.77 trillion. In March of 2009, that was the absolute limit that the federal reserve committed to rescuing the banking system from a really bad financial crisis. That is not money out the door, but that is money that the FED was willing to either guarantee or spend to get the banking system back on track.

The second number is $1.2 trillion, and that is the actual number of loans that went out the door on Dec. 5th 2008, which is the peak of one-day lending.

The other number that we discovered — which is just an estimate — is $13 billion. $13 billion is the amount we calculated banks stood to profit from the Fed loans, which were below market interest rates. So theoretically, the banks could have taken a loan from the Federal Reserve at a certain interest rate, turned around and bought treasuries that paid a higher rate, and gotten paid that higher interest rate just by basically borrowing from the Federal Reserve and lending to the US government.

Help us understand the magnitude of this — how do you explain to people what $7.77 TRILLION means? $1.2 trillion?

$7.77 trillion is about half of the value of everything produced in the country in 2010. The GDP is about $14 trillion.

If you wanted to pay off all the delinquent mortgages in the country and you had $1.2 trillion, you’d pretty much nail it. Also, if you remember, the super committee not too long ago had the job of shaving some money off the federal budget. How much were they asked to shave? $1.2 trillion, same number, just coincidentally.

How much of the secret bailout money has been paid back, and how much interest was paid on it?

The Fed says that all the loans have been paid back with interest. And they say the interest is coincidentally about $13 billion.

But I’m going to talk about qualitative issues now instead of quantitative. What the Fed did was keep the details of this bailout secret for three years. Bloomberg News first asked the Fed for details in the spring of 2008, so before the crisis really got bad — the crisis really hit a peak in the fall of 2008. Since then, we’ve had to fight the Fed to get the details — the specific banks that borrowed, how much they borrowed and what the dates were. We sued them to get that information and it went all the way to the Supreme Court. In March of 2011 the Supreme Court refused to rule on the issue, and the Fed was forced to reveal all those details.

Now, what is the legacy of the secrecy? We had a Congress that debated the Dodd-Frank regulations without knowing that, for instance, Morgan Stanley borrowed $107 billion on a single day, or that Bank Of America or Citigroup had borrowed, on a single night, a peak of over $90 billion. These are banks that are now classified as “systemically important financial institutions,” a euphemism for too big to fail, meaning that their failure would take down the financial system.

Senators and Congress members debating a law that would try to prevent the next financial crisis had no idea of the details of the last one, so then voted against any kind of legislation that would have broken up the biggest banks and would have made the financial system — perhaps — safer.

Do you think things might have turned out differently if the process had been more open?

I really don’t know. But what I want to emphasize is, the Fed says — and we take them at their word — that these loans have been repaid. But that’s only part of the price. The secrecy surrounding it — Sen. Kaufman of Delaware, a Democrat who introduced legislation with Sherrod Brown [D-OH] to break up the biggest banks, said that he doesn’t know if that legislation would have passed if people had known the huge numbers that individual banks were taking — at the same time, by the way, that their executives were telling the public and investors that they were doing just fine. He doesn’t know if the legislation would have passed, but what he can say is that the atmosphere of the debate would have been different.

We’ve been talking a lot here at billmoyers.com about crony capitalism and the revolving door between big banks and government agencies. Was that a factor here? Were members of the Fed helping out their friends?

There’s a very famous meeting that’s been written about almost ad nauseam that was in Sept. 2008 at the New York Fed office in downtown Manhattan. One of my sources refers to it as the Weekend at Bernanke’s. The Secretary of the Treasury Hank Paulson, Federal Reserve Chairman Ben Bernanke, and New York Federal Reserve President Tim Geithner convened the top men — almost exclusively men — of Wall Street and foreign banks to “save the system.” There were no representatives from labor, no consumer representatives, no one from the worlds of politics or industrial business. There were only bankers.

It’s almost too easy a point to make that there’s cronyism going on, of course there is. I’m not sure I can point to a person who played both sides. It’s more the protection of a broken status quo that benefits a certain type of person, and that is the wealthy and the bankers. So, to answer your question, it’s less this person or that person than ‘all of them.’

Eliot Spitzer wrote an article in the wake of your report saying that there ought to be prosecutions from these revelations, because it’s illegal to willfully deceive Congress and to mislead shareholders. Do you think there’s any chance of that happening?

The answer to your question is no. Now let me answer the question “should there be?”

When Jamie Dimon, CEO of JP Morgan Chase, tells the world that their bank has a “fortress balance sheet,” that they’re only borrowing from the Fed to do their patriotic duty by testing a lending program, and then to find out years later that he’s borrowed a lot more than we thought, and borrowed at a time when all testing of that problem is probably over because the program has been in place for a year, well, maybe someone should ask Jamie Dimon what he was talking about. If the CEO of Bank of America, Ken Lewis, says he has one of the strongest and most stable banks in the world, and that same week he’s borrowing $90 billion from the Federal Reserve to keep his head above water, somebody ought to ask Ken Lewis how he defines strong and stable.

Do you feel that, since your report came out, the secret loans have gotten the attention they deserve, or do people still think that TARP was the big bailout?

I don’t know. A lot of people emailed me and said “This is outrageous! I learned about it by watching The Daily Show, and then I went online and found your story and read it.”

Jon Stewart did more to publicize this than anybody. He took the $7.77 trillion and made it sound like the Fed had lent out that much money, which wasn’t exactly true. But when you refer to the TARP program, you do say the $700 billion TARP program, don’t you? That wasn’t the amount of money that went out the door, it was the amount of money that was set aside. Same with the Fed. The most that went out on one particular day was $1.2 trillion, and we very consciously chose that method of measurement — what was the peak on one day? Because it wasn’t fair if you took out a loan for a billion dollars and you renewed it every day for ten days, did you borrow $10 billion, or did you borrow one billion ten times? We decided the fairest measurement was to say you took out a billion-dollar loan on this particular day and not add them all up.

If the details of these bailout programs were kept secret for so long, could there be more that we still don’t know about?

Dodd-Frank mandated a certain disclosure of emergency lending. These were all programs that we had asked about and had sued over with the Freedom of Information Act back in May of 2008. That information came out in December 2010, but there was more that we wanted, and after the Supreme Court ruling at the end of March 2011, the Fed disclosed a whole bunch of other stuff. And in that other stuff were a bunch of emails that we received along with the loan documents. And in the emails were bar graphs. And on the bar graphs there were these pink lines with something labeled “ST OMO.”

Nobody in the office knew what the hell ST OMO was. I had to call a former Fed guy I know and ask, “what the hell is ST OMO?” And he said: Oh, it’s single tranche open market operations. What the Fed did was, in March 2008, they decided to take this lending program which they’d had since the 1940s to move money in and out of the banking system in order to stabilize interest rates, maybe $5 billion at at time, and they decided to expand it to $100 billion at a time.

I called up Barney Frank [co-author of the Dodd-Frank legislation], and I said, “Congressman Frank, have you ever heard of ST OMO?” He says, “I never heard of it in my life.” I was kind of amazed. We didn’t have the details. I put a FOIA request in, and lo and behold they responded in a timely way. The details showed a lending program with Goldman Sachs as the biggest recipient. The banks were getting up to $80 billion at a time, twice a week, for interest rates as low as .01 percent.

So, is there another shoe to drop? Is there another program that we don’t know about? I can’t answer that. I don’t know.

Read the full Bloomberg article.

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