Apparently the Fed didn’t take kindly to that Bloomberg News investigation of their $7.7 trillion largesse to domestic and foreign banks during the financial crisis. The Fed took the rare step of publishing a public document, with a cover letter by Ben Bernanke, objecting to the report.
Recent articles “have made repeated claims that the Federal Reserve conducted ‘secret’ lending that was not disclosed either to the public or the Congress,” the Fed document says. “No lending program was ever kept secret from Congress or the public.”
The Fed disclosed the existence of its lending programs in 2008 and 2009, and the total volume of loans outstanding under each, but it did not name the specific recipients and terms of that lending until required to by legislation and a successful lawsuit by Bloomberg and Fox Business News.
The Fed also says the report that it lent or guaranteed $7.77 trillion during the financial crisis is misleading, noting that its total emergency lending outstanding never exceeded $1.5 trillion. Bloomberg arrived at the $7.77 trillion figure by counting Fed loan guarantees even when no money changed hands.
Amusingly, the letter is not addressed to Bloomberg News, but to the heads of the relevant Congressional banking committees, and it never mentions Bloomberg by name. This appeal from authority falls a bit short. As Bloomberg writes in their rebuttal, the Fed declined to make available to Congress information on the amounts, names of borrowers, dates and interest rates of the loans in question. I’d say that qualifies as “secret.” And the quotes about Congress not being aware of that information came not from Bloomberg out of thin air, but from members of Congress themselves. It’s hard to square Bernanke saying Congress was fully apprised with Barney Frank saying “We didn’t know the specifics.”
The real tell here is that the Federal Reserve spent well over a year trying to block Bloomberg News from receiving and publishing the information in their report. Bloomberg had to take the Fed to court over it. But never mind, the Fed claims, all this information was public and Congress was well-informed. That doesn’t wash.
As for the $7.7 trillion number, here’s what Bloomberg has to say:
Bloomberg News reported that Fed lending peaked at $1.2 trillion, a figure that didn’t include any double- counting. Instead of adding all the outstanding Fed loans to get a large number, Bloomberg used peak loan amounts that were outstanding on a single day. On the day after the Nov. 28 story, the Fed published that $1.2 trillion figure, affirming Bloomberg’s calculation [...]
In a March 31, 2009, story, Bloomberg News tallied the potential commitments of the Fed using as sources statements the central bank made and its weekly balance sheet. The amount, $7.77 trillion, was never characterized by Bloomberg as money lent by the Fed, though other commentators have mistakenly used it in that context. Rather, Bloomberg has said that that amount represents what the Fed “lent, spent or committed” or the total of all “guarantees and lending limits.” Bloomberg has been careful to characterize this number as total commitments, not loans that went out the door.
I don’t know why total commitments is somehow a less accurate number than money lent out. Loan guarantees have a value to them, one that is routinely given a number in media reports. Without the guarantees, banks would have to pay market value for other loans. It reduces their overall lending profile. This is real money even if the Fed doesn’t want to admit it. Furthermore, the Fed confused this issue by refusing to explain which loans were rolled over and which weren’t.
The Fed also whines about how they made money for the taxpayer, and fault Bloomberg News for not mentioning that they also lent, through their commercial paper facility, to businesses like Harley-Davidson and McDonald’s (I’m not sure why they want credit for that). It’s also not surprising that the Fed enlisted willing tribunes in the media like David Wessel, who wrote a book on the Fed that spoke in glowing terms about the 2008 bailout. This has the feel of a coordinated media campaign.
First, these programs are only a subset of the total subsidies extended to the banks. Andrew Haldane has taken a stab at what they save in borrowing costs via being too big to fail and having a state guarantee. Ed Kane has estimated they ought to pay $300 billion a year more in insurance premiums. The entire banking system is also getting massive subsidies via super low interest rates, which is a transfer from savers to banks.
The Fed has also taken the unusual step of hoovering up securities in an effort to lower spreads on certain types of longer term assets. It would show real losses from a taxpayer perspective if this were accounted for properly; the vagaries of Fed/Treasury reporting allow for this sorry fact to be masked [...]
But the biggest lie in this fabric of Big Lies is that the banks were just suffering a wee liquidity crisis in the crisis, not a solvency crisis. If that was true, why did we need a TARP plus making failed credit default swap hedges good via the AIG rescue? In addition, Steve Waldman has described, long form, that bank equity is such an abstraction, in that there is a very high degree of uncertainty in the value of both assets and liabilities, that you need much bigger buffers of equity than anyone now has to properly deem a bank to be solvent [...] The regulators determine whether a bank was insolvent. And since no regulator was willing to say a bank was insolvent (although Sheila Bair was clearly close to doing so with Citi), ipso facto, they were all solvent. Nice to have such accommodating people handing out grades.
The Fed might want to stop digging here.