StateImpact
1:38 pm
Mon November 28, 2011

How Big Banks (Some With NH Branches) Benefitted From Secret Fed Loan Program

Yesterday, Bloomberg released a stunning report about a massive, secret bank loan program run by the Fed.  The story is the culmination of a two-year-old Freedom of Information request Bloomberg made to the central bank that was fought out in federal court.  What the news organization won the right to see was thousands of pages of data about which banks got below-market-rate Fed loans, how much they got, and when.

Bloomberg reporters Bob Ivry, Bradley Keoun, and Phil Kuntz found:

“A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.”

That’s compelling.  But the raw numbers are even more so:

“The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he ‘wasn’t aware of the magnitude.’ It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

‘TARP at least had some strings attached,’ says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. ‘With the Fed programs, there was nothing.’

Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then - Bank of America Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.”

The Bloomberg reporters roll out example after example similar to the Bank of America story.  (B of A, incidentally, is one of a small handful of major banks with a presence in New Hampshire.)  They also point out that many of the same banks that got secret Fed loans also got TARP money.  Then, there’s the bargain-basement rates:

“The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.”

In the counter-point column, Ivry, Keoun, and Kuntz note the Fed argument that the loan program fell under the central bank’s regulatory umbrella, and therefore it wasn’t necessary for its inner workings to be public knowledge.

Besides the dollars-and-cents implications, the reporters found that Congress didn’t even know the scope of the program.  And if they did, some votes on key bills during the financial crisis–TARP, Dodd-Frank, and even a failed measure to break-up too-big-to-fail banks–maybe would have gone differently.  And that’s a big maybe.  Besides Ohio Democratic Senator Sherrod Brown, no one outright committed to the idea that positions on major legislation would change.  But they did get some compelling quotes from major financial players in the Senate (including former New Hampshire Senator Judd Gregg):

 

“‘I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability,’ says Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee.

Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.

‘We didn’t know the specifics,’ says Gregg, who’s now an adviser to Goldman Sachs.

‘We were aware emergency efforts were going on,’ Frank says. ‘We didn’t know the specifics.’”

There’s a lot more to the Bloomberg piece.  You can read it here, and it will be time well-spent.  (In an earlier version of the story, they also threw in an interactive chart showing what the banks got–which we used below.)  In the meantime, here’s a breakdown of which banks with Granite State outposts got Fed loans from August 2007 to April 2010–and Bloomberg’s data-based estimates of how much:

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