Due Diligence

Too Big to Fail Takes on New Meaning: New Documents Reveal $7.7 trillion in Secret Fed Loans to Banks

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toobigtofail

If you thought $700 billion was a lot, you might want to reconsider. That was the total loaned to the country's biggest banks at the end of George W. Bush's presidency in a bailout package called the Troubled Asset Relief Program, or TARP. Apparently, they got quite a bit more to stay afloat--without anyone in Congress knowing a thing about it. As legislators were designing new government regulations to prevent future financial crises, and voting to go ahead and bestow that $700 billion on the banks, the Fed had begun its own program of secret loans, which eventually totaled $7.7 trillion.

The details of this secret rescue have just been released by Bloomberg Markets magazine, which obtained 29,000 pages of documents under the Freedom of Information Act. The Fed and bank lobbyists fought to keep these documents secret for two years, but the U.S. Supreme Court declined to hear their appeal in March of this year.

Fed officials say almost all of the loans were repaid and there were no losses, but the banks earned an estimated $13 billion of income by taking advantage of the Fed's low-market rates, according to Bloomberg calculations. Meanwhile, taxpayers funded a bailout that allowed these ailing institutions to not only survive but grow bigger. Total assets held by the six biggest U.S. banks increased to $9.5 trillion on Sept. 30 of this year, a 39 percent increase versus the same day in 2006, according to Fed data cited by Bloomberg.

Again lawmakers made decisions about the TARP bailout and about the Dodd-Frank Wall Street Reform and Consumer Protection Act without knowing how dire the situation at many of these banks had become. For example, says Bloomberg,

They had no clue that one bank, New York-based Morgan Stanley took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible.

Banks also did not disclose the emergency funding they received to investors. In one particularly egregious example:

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation.

Groups who lobbied against breaking up the big banks successfully argued that this would be like punishing them for their success. But "success" is possibly not the word you would use in this context, considering what we know now about the scale of the emergency cash injection they needed just to stay in business.

Here's hoping, uh, there is no next time.

For the full Bloomberg article, go here.

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