Details Revealed of $1.2 Trillion in Secret Loans

Articles:
Bloomberg.com, The Fed's Secret Liquidity Lifelines, Bradley Keoun, Phil Kuntz et al, graphic by David Yanofsky

Bloomberg.com, Wall Street Aristocracy Got $1.2 Trillion in Secret Fed Loans, Bradley Keoun and Phil Kuntz

The Atlantic Monthly (April, 2010), Inside Man, Joshua Green
Data: http://www.federalreserve.gov/newsevents/reform_transaction.htm

My favorite part of the Bloomberg report was the beautiful interactive Adobe Flash graphic, by David Yanofsky.  It gives a list of all the banks that participated in the lending program (407 of them!), with the peak lending amount and date.  If you click on an individual bank, you are taken to another graphic which gives you the bank's borrowing over time, as well as their market value, plus some additional description.  It also lets you graph multiple banks together in order to do a comparison.

Click on the image below to take a look.    

from Bloomberg.com -- click for original graphic

Where would we be without the Fed?

Among the Federal Reserve Bank's most important functions is serving as lender of last resort for the U.S. banking system.  In ordinary times this function is used sparingly, through the Discount Window.

New York Fed headquarters, from www.newyorkfed.org

But during the liquidity crisis of 2007-2009, a lot of financial institutions borrowed money from the Fed, under the guise of various lending programs with names like: Term Securities Lending Facility (TSLF), Primary Dealer Credit Facility (PDCF), Commercial Paper Funding Facility (CPFF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), etc.

Today, Bloomberg.com released a report giving many details of the lending programs, based on databases released by the Fed under the Dodd-Frank Act, as well as information obtained under the freedom of information act.  Some of this information can be seen on the Fed's website.

The lending reached a peak of $1.2 trillion in December 2008, a number which Bloomberg reporters note was:

• 3 times the size of that year's U.S. budget deficit
• 25 times the previous lending peak reached on September 12, 2001
• More than the total earnings of all federally insured banks from 2001 - 2010
• Enough to fill 539 Olympic-sized swimming pools if denominated in $1 bills (which it certainly was not)

It should be noted that these programs were not exactly bailouts.  All the loans were collateralized (though the quality of the collateral varied) and repaid for the most part.  Still, it gives a sobering picture of the extent to which the Fed, and by extension the U.S. government was propping up the banks at that time.

Why did we do it this way anyway?  I think Joshua Green's April 2010 Atlantic Monthly article gives a pretty good idea of the thinking at the time.  Basically, propping up (and reforming) the existing financial institutions was the cheapest option.  There would have been some justice in letting banks fail, and wiping out the bastards who played fast and loose with our trust and destroyed our economy.  But it would have been even more disruptive of the economy, and probably would have caused deficits to balloon even more than they did.  Basically, both administrations --Bush and Obama-- were taking a conservative, low-cost approach, provocative statements by Republican candidates and Fox News commentators notwithstanding.  But what a shame that they had to leave the same people who caused the mess in charge of Wall Street, and that those people proceeded to fight tooth and nail against any meaningful reform.

It is also interesting to note how much we depend on the Fed even today.  While our elected officials fight endlessly over fiscal matters, generating unprecedented volatility in the stock market, statements from the Fed that rates will remain low for the next two years and bond purchases by the European Central Bank seem to be the only thing that have made the markets feel any confidence lately.