A Bailout Monstrosity

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On Monday, after two years of efforts to pierce the veil of secrecy surrounding the largest bank bailout in history, Bloomberg.com revealed the true scope of the phrase, “too big to fail.” In short, the number is staggering: total loan guarantees and lending limits engineered by the Federal Reserve to rescue the financial system amounted to $7.77 trillion as of March 2009. Bloomberg got the information after the Supreme Court rejected an appeal last March by the Clearing House Association LLC, a group comprised of the nation’s largest commercial banks. They, along with Fed Chairman Ben Bernanke, tried to prevent the details from becoming public. The ultimate question: was both the scope of the effort–and the secrecy surrounding it–necessary? Unfortunately, the answer to that question is far from clear.

One thing is certain. In order to accept that any or all parts of the numerous transactions involved were necessary, one is required to accept as a given that the entire financial world was on the brink of systemic collapse. Was it? Perhaps a more accurate answer to that question is that the status quo was on the brink of collapse. It was a status quo where “too big to fail” had been institutionalized long before this particular crisis took hold. In 1984, faced with the failure of Continental Illinois, a large commercial bank, the government not only engineered a rescue, but extended FDIC insurance to both the bank depositors and all its other lenders, including those whose accounts exceeded FDIC limits, as well as global bondholders. In 1998, Long-Term Capital Management, a hedge fund whose financial excesses had many major Wall Street firms on the hook, was rescued by the Federal Reserve with funding from its member banks. Thus, long before the government-engineered housing crisis that led to the debacle of 2008 took hold, the pattern of “privatizing profits and socializing losses” had been established. This situation virtually invited financial institutions to take greater and greater risks.

As this latest revelation shows, those risks reached astronomical levels. In a single day, December 5, 2008, the banks were in such dire straits they needed a combined $1.2 trillion to remain solvent. Yet even as financial institutions were taking Fed funds, some of their leading officers were touting the strengths of the institutions involved. On Nov. 26, 2008, Bank of America Corp.’s former CEO, Kenneth D. Lewis, informed shareholders that B of A was “one of the strongest and most stable major banks in the world” despite owing the Federal Reserve $86 billion at the time. In a March 26 letter to shareholders, JP Morgan Chase & Co. CEO Jamie Dimon claimed his firm used the Fed’s Term Auction Facility (TAF) “at the request of the Federal Reserve to help motivate others to use the system,” even though the bank’s total borrowings were nearly twice its cash holdings. He also failed to mention that the height of Chase’s borrowing, which crested to $48 billion, occurred on Feb. 26, 2009–over a year after the TAF had been created. Spokesmen for both banks declined to comment.

Furthermore, borrowing by banks from the Fed substantially exceeded the $700 billion they borrowed from the Troubled Asset Relief Program (TARP), the rescue plan engineered by the government. The six largest U.S. banks–JP Morgan, Bank of America, Citigroup, Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley–received $160 billion of TARP funds, even as they took  $460 billion from the Fed. Such borrowing amounted to 63 percent of the average daily debt owed to the Fed by all publicly traded U.S. banks, money managers and investment-service firms. That represented a 13 percent increase from the 50 percent the Big Six owed prior to the bailout.

And then there was the secrecy. Bush administration officials who managed the TARP program were unaware of what the Fed was doing. So were top aides to then-Treasury Secretary Hank Paulson. So was Congress, including Judd Gregg, former New Hampshire senator who was a lead Republican negotiator on TARP, and Rep. Barney Frank (D-MA), who chaired the House Financial Services Committee. Cryptically both men claim they were unaware of the “specifics,” although Frank admitted both men “were aware emergency efforts [by the Fed] were going on.” Even Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, said he “wasn’t aware of the magnitude” of Federal Reserve lending taking place.

Fed Chairman Ben Bernanke justified the secrecy, claiming that borrowers would be “stigmatized” if the extent of their loans were revealed. He further contended that investors and counterparties would shun such firms, and that needy firms would be reluctant to borrow — in the next crisis. Others contend revealing the extent of the crisis as it was happening would have exacerbated it, leading to a run on financial institutions, subsequently leading to even greater lending by the Fed as a result.

Whether either argument is reasonable is debatable. But what is now known is that the lack of knowledge was undoubtedly influential. The results of congressional legislation enacted–and not enacted–may have been radically different if those voting would have been privy to the extent of the Fed involvement. For example, the amount of money doled out via TARP legislation was based on information supplied by the Fed to the Treasury Department. Ostensibly, only banks that were still “healthy” enough to survive would merit funding, a point reinforced by Bernanke himself in a speech in April of 2009. Yet Fed internal memos described one of its biggest borrowers, Citigroup, as “marginal.” At its peak in January of 2009, Citigroup owed the Fed $99.5 billion. One month later Bank of America owed the Fed $91.4 billion. Yet the top prize for a “healthy” borrower goes to Morgan Stanley. On the day of September 29, 2008 alone, they owed the Fed $107 billion.

Another piece of legislation undoubtedly influenced by the secrecy was the Safe Banking Act of 2010. Introduced by Senator Sherrod Brown (D-OH) and former Senator Ted Kaufman (D-DE), the bill was about placing hard caps on the leveraging abilities and size of financial institutions, aimed primarily at the aforementioned Big Six banking institutions. “The amount of pain that people, through no fault of their own, had to endure–and the prospect of putting them through it again–is appalling,” Kaufman said. “The public has no more appetite for bailouts. What would happen tomorrow if one of these big banks got in trouble? Can we survive that?” he asked.

Bank lobbyists weren’t about to give up without a fight. From 2006 to 2010, spending to defeat the bill increased from $22.1 million to $29.4 million. The Financial Stability Board (FSF) sent a letter to Congress November 13, 2009, touting the “stability of large banks” and citing the “irreparable economic harm to the growth and job-creating capacity of the U.S. economy” if such a bill were to pass. Top Obama administration officials sided with the FSF, including Treasury Secretary Tim Geithner who, according to Kaufman, told the ex-senator that issue was “too complex for Congress and that people who know the markets should handle these decisions.” The bill was defeated 60-31. Kaufman believes support for the bill would have been much greater if Congress knew the extent of the Fed’s intervention.

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  • http://BanksOwnAmerica.com Mad

    So we should all be rioting or what?

    • WTF

      YES! bofa STOLE this money from the AMERICAN public BUT yet REFUSES to modify home loans, foreclosing on the SAME people they STOLE the money from! YES we should be RIOTING!!!

  • alex n


  • StephenD

    Being a VERY simple person, I find it extraordinary to think that someone ~ Anyone, could be “bailed out” if their business is failing. I always thought that the risk is true and accepted by businesses because the rewards of success are great. Some business ventures fail. That is part of the system…and it is a good thing. It is what sparks innovation and competition and the striving for excellence we in America have come to take for granted. I recall seeing pictures of cars and appliances from the Soviet Union; they looked like relics even then! Why? Because there was no incentive to do any better. They COULD NOT FAIL. It was laughable to me then. Now with America heading in the same direction…it’s not so funny.

    • Steve

      Yes, these financial institutions were too big to be allowed to fail….but when "bailed out" the top 10% of the executives should have been fired with no severence and the last three years of bonuses clawed back.

  • http://www.tartanmarine.blogspot.com Robert A. Hall

    I’m currently reading “Reckless Endangerment” which suggests that everyone the right or left blame–Republicans, Democrats, the Fed, Fannie Mae, S&P, the banks, Wall Street, the big lends like Countrywide—all were guilty of making tens of millions of dollars while shifting the risk to the rest of us. I will link to this from my Old Jarhead blog.  

    Robert A. Hall
    Author: The Coming Collapse of the American Republic
    (All royalties go to a charity to help wounded veterans)
    For a free PDF of my book, write tartanmarine(at)gmail.com 

    • Jim_C

      Robert–that's where the real outrage is. I compare it to the Penn State abuse scandal. Sandusky is a sick, deranged man, but like many of his ilk, probably had been abused himself at some point to become that perverse. People inclined to actually act out their perversions, to a certain extent, can't help it. Sandusky is like the American people looking to get rich quick in the housing market and looking to buy stuff they can't afford.

      But Sandusky's bosses at Penn knew what happened, did nothing about it, and tried to cover it up. And that's what true evil is–cold, dispassionate, removed. They allowed it to continue. These are the bankers, economists, and government officials who stood by KNOWING what was happening, doing nothing, and sometimes even encouraging it.

      There's a special circle in h(-ll for these folks.

  • LindaRivera

    An inferior health care plan that no one wants and CANNOT afford to pay. The threat to jail and/or fine those who don't purchase the government enforced plan.

    Massive spending as if there is no tomorrow. Fighting wars we have no money for. Massive borrowing.

    The Massive giving away of Billions of dollars every year to other countries, including the oil-wealthy Middle East, Hamas-controlled Gaza and the Palestinian Authority organization who fill their war chests, build mansions and laugh all the way to the bank with FREE infidel money. Whilst in America, homeless shelters are filled to capacity; tent cities have sprung up all over the U.S. filled with desperate, jobless, homeless, neglected Americans.

    Massive debt. The massive printing of paper money out of thin air to DELIBERATELY create out-of-control inflation. There is no question that the total DESTRUCTION of America's economy is planned. The results will be horrifying. In the once wealthy and great nation of America, millions of Americans will become destitute, hungry and homeless with no money or resources to help them.

  • LindaRivera

    Organic, non-GMO avocado, fruit and nut trees and berries must be planted in all of our nation’s cities’ and towns’ parks to help the many millions of Americans who will soon be in a desperate struggle to survive because of the frightening, highly destructive economic policies of our government.

    Watch it. And weep for our great nation and people:

    FALL Of The Republic – The Presidency Of Barack H Obama – The Full Movie HQ http://www.youtube.com/watch?v=F8LPNRI_6T8&fe

  • Ellman

    One of the primary functions of the Creature from Jekyll Island (Fed Res) has been "the lender of last resort". In practice this meant bailing out banks and other financial institutions, domestic and international, since its inception, such bailouts increasing with each passing decade. One of the first books I read about the Fed documented dozens of cases where the Creature rescued institutions from their own incompetence. The Fed has various ways of accomplishing the rescues and Congress has often been complicit in facilitating its mission – always at the risk and expense of the tax payer, ultimately. Anyone even slightly familiar with the operations of this corrupt institution probably supports Ron Paul's continual calls to audit the Fed. Whether one examines the actions of the Fed, the Treasury, the Congress or the President and his cabinet, there is one conclusion which is unavoidable: the taxpayer receives the least regard or consideration in their deliberations and decisions and always pays the bill unless the Fed decided to print money instead.

  • Steve

    The problem is not bailing out too big to fail financial institutions but not firing the top ten percent of the executives of these firms at the time of the bailout with no severance pay and the past three years bonuses clawed back.
    Please check out the ideas of the economist Martin Hutchinson (“Alchemists of Loss”) for the SEC regulations necessary for a transparent stable financial market that will not crater again due to Wall Street banksters. (Bring back Glass Steagall, outlaw derivatives no one understands while setting up an exchange for the others, outlaw "naked shorting" of equities, require buyers of credit default swaps have a direct insurance need as the counterparty, treat CDS’s like insurance and require reserves to be set aside like every other insurance firm, require banks to continue to have a financial interest in any MBS or CDO products they sell).

    • Jim_C

      It really is a remarkable level of chicanery that has been perpetrated against the American people. Goldman Sachs and other big houses betting against positions they actively pushed to their customers. Academic economists from Harvard and U of C, who served in this and the last bunch of administrations, corrupted by consulting fees, pushing pure hokum and acting put out when called on it. And as long as the money pours in, Washington has enabled this for thirty years. And it brought us to the monstrosity of socialized risk, privatized gain.

      Of course, we are also to blame, to an extent. Excessive borrowing is a big factor. The CRA accounts for about 10% of bad mortgages, but most of the housing bubble was privately induced–people buying homes twice as expensive as what they should have been buying or lured into ARMs and whatnot. The easy access to money should never have been encouraged. Yeah it'd be nice if every human being acted responsibly and ethically but that's not human nature, that's what regulations are for. Hopefully we've learned a lesson about deregulation.

      • Jim

        If the housing prices were inflating to impossible then a potential home owner would almost be forced to buy sooner rather than later. If he waited to long he would be completely priced out of a home.
        The potential buyer would have little knowledge of the intensity of the fraud behind the rising prices.
        The buyer probably thought he was acting responsibly . As usual the public is very trusting of what they are told by so called professionals. The public will probably always be so.

  • alexander

    FULL U.S. employment! Stopping terrorism by defunding it! Simple solutions:
    drill wherever possible.Oh, it "does not look nice"?
    Unemployment lines and dead Americans look better?

  • Jim

    Truer words were never written Sounds more and more like the Occupiers, think God.

    (No not the would be co opters)