We got the preliminary results of one of the better provisions of the Dodd-Frank bill today. The Federal Reserve has released the results of its first “audit” – information on all its emergency lending during the financial crisis. This contains over 21,000 individual transactions of over $2 trillion dollars outside of the so-called “successful” TARP program, including the controversial “Maiden Lane” program and other lending facilities. Zach Carter is liveblogging the results as he finds them, and it’s quite astonishing:
Until September 15, 2008, the collateral accepted by the Fed at the Primary Dealer Credit Facility remained relatively robust, in terms of credit ratings.
On September 15, as Lehman Brothers and everything else hit the fan, the Fed began accepting total garbage as collateral. Including CCC-rated (beyond junk bond status) collateral from JPMorgan Chase, Citigroup, Lehman Brothers, Goldman Sachs and Morgan Stanley [...]
The Fed accepted a total of $1.31 trillion in junk-rated collateral between Sept. 15, 2008 and May 12, 2009 through the Primary Dealer Credit Facility. TARP was nothing compared to this.
Let me posit that anyone who claims that TARP was a successful, cheap program to “save the financial system” is just ignorant of the facts. TARP makes up 2% of the total bailout cost at most. And what we’re finding in this report is that the Fed just bought everyone’s trash, as collateral, and in turn advanced trillions to the banks. THAT’S what saved them, and it was plenty costly, from both a raw financial standpoint and especially a moral hazard standpoint.
Matt Stoller writes at Naked Capitalism about the importance of this release:
This network of politicians, advocates, and bloggers will go to town on whatever revelations come out of that (though the Fed obnoxiously put its Maiden Lane disclosures in a non-copy or printable PDF format, so we’ll see how easy they make it to get this info). The defenders of technocracy are out in force as well. Paul Krugman is standing behind the institution, if not its every decision. The Democratic partisan class is going after right-wing Fed critics, while more liberal independents are pointing to the Fed in the 1940s and the Reconstruction Finance Corporation as a very different monetary model.
Not since the populist movement of the 1890s has there been this much discussion of monetary structures among the public, and so much dissent about how money is created and circulated throughout the economy. It’s happening for a reason. The public is now paying attention to finance. We did a focus group in Orlando last year, and one of the surprising conclusions was that nearly every independent voter knew who Ben Bernanke was. People don’t like the structure of our financial oligarchy, and they are talking about it. Even the deficit hysteria and the Fannie/Freddie GSE fights are a function of this monetary debate.
This heated debate is an important step forward. It means that we will be able to examine the real power structure of the American order, rather than the minor foodfights on view in our current political system. This will bring deep disagreements, profound ones, but also remarkable possibility. Modern American industrial policy is to push capital into housing, move manufacturing abroad, build a massive defense establishment, and maintain an oligarchic financial sector. This system isn’t a structural inevitability. People built it, and people are unbuilding it. People with names, motivations, and reputations. People like us, and like Sarah Palin.
The Fed used to be an extremely secretive place, but the castle walls have been pierced. Today’s release is a real and legitimate step forward. Alan Grayson, Ron Paul and Bernie Sanders should be proud of their work. But it’s really just a beginning. Hopefully we’ll have a lot more to report about the Fed and these disclosures in the weeks to come.
UPDATE: Chris Hayes and Nomi Prins detail exactly how the government propped up the banks in five different ways. This is a year old and it’s irresponsible for anyone pushing the “TARP worked!” line not to know all of this.
UPDATE II: From Zach:
This Fed Audit data should shame all of the conventional-wisdom Democrats out there declaring TARP a success because of the recent CBO score. To put it mildly, these folks are totally missing the point. TARP was a “success” in large part because of the Fed’s no-strings-attached efforts. And we now know that the Fed was willing to accept junk– literally junk bonds– as collateral for its no-strings-attached loans.
TARP and the stress tests only “worked” insofar as they convinced banks that the government would shoulder infinite future losses from the banking sector. We’re now paying the price for that commitment in the form of massive foreclosure fraud, in which untold numbers of borrowers are being improperly kicked out of their homes in the name of bank profits.
TARP failed. Its losses are so low because the Fed stood behind the banks, allowing them to play one arm of the government against the other. Even if we had “turned a profit” on TARP at its formal interest rate without Fed malfeasance, look what we got in return. In the Depression, FDR secured massive national foreclosure relief and still turned a profit. Today, we have a predatory program called HAMP.
UPDATE III: I’m intrigued by one part of Shahien Nasiripour’s excellent roundup:
The Fed effectively telegraphed its intentions to the Street before buying the bonds. Legendary money manager Bill Gross, who oversees more than $1.2 trillion at Pacific Investment Management Co. said last month during a television interview that part of his success over the last 18 months was due to buying securities in front of the Fed, and selling them to the Fed at a premium, allowing him to profit handsomely. Gross runs PIMCO’s $252.2 billion Total Return Fund.
Morgan Stanley sold the Fed more than $205 billion in mortgage securities from January 2009 to July 2010, while it’s much bigger rival, Goldman Sachs, sold $159 billion. Citigroup, the nation’s third-largest bank by assets, sold the Fed nearly $185 billion in mortgage bonds. Merrill Lynch/Bank of America sold about $174 billion.
It’s not clear how much these firms profited by engaging in the kind of activity that allowed Gross to profit so well, known as “front running.” However, it’s abundantly clear that they did turn a profit.
He also notes that foreign banks like Deutsche Bank profited the most from the sale of mortgage-backed securities to the Fed. Notably, Deutsche happens to be the biggest trustee for MBS as well.
UPDATE IV: Lots of non-bank corporations benefited from Fed largesse. Verizon took $800 million dollars. McDonald’s took some.