Secret Fed loans gave US banks undisclosed $13 bn

Written by Bloomberg | Updated: Nov 29 2011, 08:44am hrs
The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in US history a secret. Now, the rest of the world can see what it was missing.

The Fed didnt tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on December 5, 2008, their single neediest day. Bankers didnt mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Feds below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

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.

The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest US banks called Clearing House Association LLC to force lending details into the open.

The Fed, headed by chairman Ben S Bernanke, argued that revealing borrower details would create a stigma investors and counterparties would shun firms that used the central bank as lender of last resort and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloombergs lawsuit up to the US Supreme Court, which declined to hear the banks appeal in March 2011.

The amount of money the central bank parcelled out was surprising even to Gary H Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he wasnt aware of the magnitude. It dwarfed the treasury departments better-known $700-billion Troubled Asset Relief Program (TARP). Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescue the financial system, more than half the value of everything the US produced 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 programs executive-pay ceiling.

Bankers didnt disclose the extent of their borrowing. On November 26, 2008, then-Bank of America 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 didnt say that his firm owed the central bank $86 billion that day.

JPMorgan Chase & Co CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Feds Term Auction Facility at the request of the Federal Reserve to help motivate others to use the system. He didnt say thatbanks total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on February 26, 2009, came more than a year after the programs creation.

The Fed has been lending money to banks through its so- called discount window since just after its founding in 1913. The Fed has said that all loans were backed by appropriate collateral. The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.