A new report from Bloomberg Markets Magazine reveals that the Federal Reserve made a stunning $7.7 trillion in loans to struggling financial institutions during the 2008 financial crisis.
While the $700 billion TARP (Troubled Assets Relief Program) remains highly controversial, what immediately stands out from this report is that the secret loan program was ELEVEN times larger than TARP, or, to put it another way, TARP plus $7 TRILLION.
Let that digest for a moment.
The Federal Reserve and the Big Banks fought for two years to keep this information secret. It was only after going to court and using the leverage of the Freedom of Information Act that Bloomberg was able to get to the bottom and discover the truth.
What they uncovered is simply staggering.
During the financial crisis — which spanned form 2007 to 2009 — the Fed carried out a whopping 21,000 secret transactions in which it doled out $7.77 trillion dollars to financial institutions around the globe. That amounted to more than half the value of everything produced in the U.S. that year.
Through its so-called "discount window," the Fed loaned enormous sums of money to banks at rates as low as 0.01 percent. This essentially amounted to free money, allowing the banks to make an estimated $13 billion in previously undisclosed profits.
These loans, an extraordinary privilege not afforded to non-financial institutions, allowed the banks to avoid selling assets to pay investors and depositors who were withdrawing their money out of fear of collapse. That allowed the banks to continue earning interest on these assets, which they otherwise would have needed to sell.
JPMorgan Chase, for instance, borrowed nearly twice its cash holdings. Clearly, that was not appropriate collateral.
The six biggest U.S. banks (JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) received $160 billion in TARP funds, then subsequently — and secretly — borrowed as much $460 billion from the Fed. That accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and financial services firms.
As a result of these secret Fed loans, the Big Six banks received a $4.8 billion subsidy, according to Bloomberg, or 23 percent of their combined net income during the time they were borrowing from the Fed.
When you're in the business of lending, it's difficult not to make a hefty profit on essentially free money.
Though Chairman Ben Bernanke said in April 2009 that the Fed was making loans only to "sound institutions," it is now known that Citigroup was near collapse. Citigroup hit its peak borrowing of $99.5 billion in January 2009.
Morgan Stanley borrowed $107 billion from the Fed in September 2008, while Bank of America's peak borrowing topped out at $91.4 billion in February 2009.
However, all of this borrowing was independent of the TARP funds allocated to these very same banks. Congress was allegedly kept in the dark about the previously unreported Fed loans, which raises the question of whether TARP would have ever been approved had Congress been informed.
As a result of these essentially free loans from the Fed, the biggest banks — the ones deemed "too big to fail" — had the means to grow even bigger, buying out other struggling financial institutions, as well as paying their employees huge sums in the form of bonuses.
For instance, Bank of America acquired Countrywide Financial and Merrill Lynch; Wells Fargo bought Wachovia; and JP Morgan Chase bought Washington Mutual and Bear Stearns. Each of these banks, already arguably too big, became substantially larger.
In September of 2006, the total assets of the six biggest U.S. banks totaled $6.8 trillion. Six year later, in September of 2011, their assets had jumped to $9.5 trillion — a 39 percent increase.
This has made these institutions too big and too powerful. They are not only too big to fail, but could even be too big to save. This not only jeopardizes the entire U.S. financial system, but also the entire economy. These banks are so powerful, so connected, and so well-armed with money and lobbyists that they've made themselves virtually impervious to regulation.
The Big Six banks spent $22.1 million on lobbying in 2006. By 2010, after the crisis and the bailouts, that sum had surged to $29.4 million — a 33 percent increase. Call it government for hire, or democracy to the highest bidder.
According to OpenSecrets.org, a research group that tracks money in U.S. politics, lobbying by the American Bankers Association, a trade organization, increased at about the same rate.
The Big Six have created a monopoly that is anti-competitive and anti-capitalistic. This is bad for the economy, the country as a whole, and democracy itself.
These banks have, in effect, been incentivized to take on tremendous risks, to in fact be quite reckless. This is the essence of "moral hazard." The Big Banks operate with the implicit guarantee of government — meaning taxpayer — support, should they enter another crisis.
That's just the problem; the next crisis is a matter of when, not if. And the U.S. is wholly unprepared for this certain eventuality.
There is one final outrage in all of this. Ask yourself this; where does the Federal Reserve get an amount of money equalling more than half of the entire U.S. economy?
It creates it out of thin air, that's how. It's like a magic trick.
What other corporation can create its product out of thin air, without any investment in the resources needed to create that product? One quick look at the Dow Industrials is illustrative. The answer is none — other than the central bank.
The Fed has granted a rather extraordinary and outrageous privilege to banks and other financial institutions by allowing them to profit on free money, instantly created by computer key strokes.
All of this money creation devalues the existing money supply (meaning the money in your pocket and bank account) because there isn't a concurrent increase in the number of goods and services in the economy.
This is the essence of inflation; the money supply is inflated in relation to goods and services, devaluing the value of all money. The price of goods increase and the citizens suffer as a consequence of something they had no say in, and didn't vote for.
Those very same citizens are still suffering from the outrageous risks that banks took in the last decade, and the taxpayers are on the hook for all these trillions of dollars in bailouts.
That is outrageous. That is unjust. That should never be tolerated.
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