Fed Lending: Bailing Out Banks over People

Bloomberg has a good summary and even better visual database of the various forms of Fed lending that have been revealed over the years since the bailout.

I encourage you to go play around in the database. For example, check out this summary of how the Fed lent Hypo Real Estate Holding AG, a German real estate company, $28.7B to keep the German banking system afloat after HRE’s subsidiary Depfa crashed in Ireland. Germany had already given HRE $206B; the Fed’s lending amounted to $21M for each of HRE’s 1,366 employees. And at its height, just the Fed’s lending represented 15,000% of HRE’s market value. And yet all of this remained a secret for three years after the Fed first started lending to HRE.

With the scope of all that in mind–with a way to visualize the incredibly leveraged house of cards this secret lending held up–now read what I consider to be the most important line in Bloomberg’s summary.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.” [my emphasis]

That is, the money the Fed lent out to these highly leveraged risk takers could have paid off (much less merely guaranteed) the 6.5 million delinquent and foreclosed mortgages that are currently dragging down the American economy.

But instead of offering money to homeowners who would have used it to stay in their homes and sustain their neighborhoods, the Fed instead loaned it to the banks that were leveraged to the hilt.

So here we are worried about the moral hazard of modifying principal on loans that were vastly overvalued. Here we are shredding the rule of law to try to let Bank of America (which borrowed $91.4B) off for its crimes for a mere $20B or so.

And, for the most part, all those corporations that secretly sucked of the Fed’s teat are still in business, gleefully lecturing others about moral hazard.

35 replies
  1. Peterr says:

    Yeah, gotta watch out for that moral hazard.


    Maybe if we got a bunch of homeowners together and incorporated them as a bank, the Fed would shovel some money at these newly-minted bankers.

  2. Skilly says:

    Peter, that sounds too much like some sort of “class action.” Everyone knows anything with “class action” in it is BAD.

  3. joberly says:

    EW—I took up your invitation to look at the Bloomberg database and chose Wells Fargo.

    From Bloomberg’s story and database released today: “Wells Fargo, based in San Francisco, borrowed as much as $45 billion in February 2009, a day after regulators released details of how they would conduct stress tests on the nation’s 19 largest banks.”

    And then, I recall the Wells Fargo chairman blustering about how unfair it was to limit bonuses in 2009. Here’s what I dug up:
    From Reuters, March 16, 2009: “Wells Fargo & Co’s chairman lambasted the U.S. government for imposing new curbs on lenders that receive federal bailout money, and called the federal plan to subject big banks to stress tests ‘asinine.’ In remarks after a speech Friday at Stanford University, Chairman Richard Kovacevich said the fourth-largest U.S. bank should not be lumped with weaker rivals in being forced to adhere to new rules governing such matters as lending and pay. Wells Fargo took $25 billion of capital last year from the government’s Troubled Asset Relief Program at the behest of regulators including then-Treasury Secretary Henry Paulson, but has said it did not need the money. It was one of nine original TARP recipients.”

    Comment: It sure looks like Wells Fargo would have been revealed as insolvent upon the Fed-Treasury-FDIC stress test of 2009, but for the secret loans from the Term Auction Facility. And Kovacevich had the gall to complain about it! Pot. Kettle. Black? More like Ass. Asinine. Asshat.

  4. emptywheel says:

    You also gotta wonder whether the Fed is doing the same secret lending as we speak.

    Bank of America’s market value is currently $69B. Even if it got the most favorable settlements it dreams of, settling the securitizations and the servicer problems would eat up $16B, and that’s before GSE putbacks and the AIG suit. BoA was bragging of its reserves at a time when its market cap was over $100B during the crisis–it had already taken over $15B in loans by that point.

  5. prostratedragon says:

    Somehow I failed to hear the ringing of the jubilee bells.

    I do remember those fond days a few years back, however, when institutions like BofA that were found to have received loans from the Fed and the special facilities were said to be doing it only to lessen the stigma attached to getting such aid, so that the threadbare insolvents who really needed it (Citibank was always a handy gong to strike here) would feel less hesitant to step up and take their tonic.

    Just providing a public service, you understand.

  6. joberly says:

    @emptywheel: Here’s another nugget from Bloomberg–borrowing from the Fed’s Commercial Paper Funding Facility (CPFF), which began post-Lehman collapse at the end of October 2008. The biggest borrower was General Electric, which sold $16B worth of short-term obligations to the Fed at a time (Nov. ’08-Feb. ’09) that it could not refinance some part of the paper in the private market. That’s about one-sixth of the $91B of short-term paper it had to refinance. Borrowers from the CPFF had to show that the assets behind the paper were rated A-1 (S&P) or P-1 (Moody’s). The fee for applying was 10 basis points, or in GE’s case, $91M, as the charge was based on the total amount of outstanding paper, plus an interest charge of one percent on top of the roll-over rate, or for GE, another $160M. For the comparatively cheap price of $250M in emergency Fed loans, GE survived the Great Crash and can continue, in the company’s own words, “to harness the power of imagination.”

  7. MadDog says:

    What the Bloomberg database doesn’t show is what the loan recipients did with the money the Fed loaned them.

    Take EW’s example, Hypo Real Estate Holding AG, the German real estate company that got $28.7B.

    According to the Bloomberg picture, Hypo had “invested in mortgage-backed securities in the years before the financial crisis”.

    Ok, that makes Hypo an “investor”, somebody who buys stuff and holds onto it in expectation of making a profit further down the road.

    But what it doesn’t make Hypo is a “bank”. You know, an institution that makes money by loaning money their depositors lent them.

    If Hypo was only an “investor” and not a “bank”, that their casino “investment” in mortgage-backed securities was tanking doesn’t begin to explain why they weren’t allowed to fail, nor does it begin to explain why on earth the US Federal Reserve would loan $28.7 Billion dollars so that Hypo could play in the casino some more.

    OT – For perhaps a later post or just a place on EW’s daily Links list, this News & Observer transcript of their interview with former CIA and NSA Director Mikey Hayden might make the cut. A small nugget to consider:

    “…Q: You were at the helm of the NSA when it developed programs for warrantless monitoring of domestic communications, monitoring that has been criticized as illegal. The details of that have been hashed out pretty thoroughly…

    A: Actually there is no accurate description of what we were doing in the public domain…”

    Btw, the fishing was great, but Rancho Emptywheel was calling.

  8. MadDog says:

    @MadDog: In case some thought I was being dense and missed the obvious, no.

    The $28.7 Billion dollars that Hypo got from the US Federal Reserve was undoubtably used by Hypo to pay off loans from its creditors, and these were likely “banks” (casino players themselves) who’d have to post ginormous losses and might even fail themselves if Hypo went belly-up.

    No, the real problem with the Bloomberg database is it really doesn’t “follow the money”. It just identifies some of the “couriers”.

    It doesn’t identify who finally got the $1.2 trillion of public money, and make no bones about it, somebody did, and it wasn’t the “front” companies like Hypo.

  9. whodoes says:

    “They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.” — Kathryn Wylde, Director, Federal Reserve Bank of New York.

    Just imagine if folks running the government felt that way about regular, everyday people – like homeowners struggling to pay their bills in a depressed economy.

  10. Gitcheegumee says:


    re: Wells Fargo-dated April 18,2011

    A U.S. appeals court ruled April 15 that Wells Fargo & Co. wrongly claimed $115 million in tax deductions for the 2002 tax year from transactions the court called “abusive tax shelters.” The so-called SILO deals involve banks that bought railcars or other equipment from the public agencies, claimed millions in depreciation tax benefits, and then leased the equipment back to the agency.

    The U.S. Court of Appeals for the Federal Circuit ruled that 26 SILO transactions involving Wells Fargo were “purely circular transactions” that were “abusive tax shelters.” The appeals court said a trial judge in the case “permissibly found that the claimed tax deductions are for depreciation on property Wells Fargo never expected to own or operate, interest on debt that existed only on a balance sheet, and write-offs for the costs of transactions that amounted to nothing more than tax deduction arbitrage.”

    Inner City Press (Bank Beat)

  11. Gitcheegumee says:

    SILO transactions: Wells Fargo Loses

    The court noted that prominent law and accounting firms Ernst & Young and King & Spalding had merely performed “window dressing … to generate fees and lengthy documents to give the SILOs an appearance of validity.” Id.

    In the late nineties and early “aughts”, SILOs were the “new” tax shelter, whereby a municipality or other tax-exempt entity transferred assets such as public transit buses or telecommunications equipment or metro-rail cars to a taxable party and then leased the assets back. In Wells Fargo’s case, it claimed more than $115 million in depreciation, interest, and transaction cost deductions for 2002 connected with participation in 26 SILO deals. The parties dealt with five specific transactions at trial–four involving public transit agencies (in New Jersey, California, Houston, and Washington) and one involving cellular telecommunications equipment (Belgacom Mobile, S.A.).

    This case comes after the American Jobs Creation Act of 2004 limited the use of SILOs (Section 848 of the Act) and their designation as an abusive tax shelter in Notice 2005-13. The IRS provided some transition relief from the 2004 crackdown in Notice 2007-4 (at page 260) (extending the transition relief of earlier notices 2006-2 and 2005-29 for one year). The IRS also offered a settlement deal to corporate taxpayers, letting them keep 20% of the tax savings from lease-back transactions. Two-thirds of the 45 companies targeted accepted that offer. See Schroeder, Federal Judge Rejects Wells Fargo’s Bid to Get Deduction for SILO Deals, The Bond Buyer (Jan 12, 2010).

    NOTE: I thought it of interest to note the particular entities involved in the “window dressing”.

  12. Gitcheegumee says:


    ataxingmatter: SILO transactions: Wells Fargo Losesataxingmatter.blogs.com/tax/…/silo-transactions-wells-fargo-loses.ht… – C

    Jan 12, 2010 – Wells Fargo engaged in a number of SILO (sale-out, lease-in) transactions–26 in all that figured into a substantial refund claim in 2002.

  13. joberly says:

    @Gitcheegumee: Thanks for the link on the Wells Fargo ruling. And to MadDog # 9 and 11. You’re right, Bloomberg doesn’t say what the borrowers did with the money. But it’s still shocking to see that even McDonald’s couldn’t borrow money in the private market during the Crash. Big Mac had to go to the Fed to borrow $109M in late 2008, early 2009 just to cover the accounts payable for the two-all-beef-patties-special sauce-and-sesame-seed buns. I guess the Fed saved the Happy Meal for a whole new generation of kids.

  14. MadDog says:

    @joberly: I think one of the reasons that the “private market” wouldn’t loan to folks like McD is that they had bet much of their money in the casino themselves or had loaned it out to other casino players.

    When the croupier demanded the casino losers pony up, all the casino players had nothing but empty pockets.

  15. rugger9 says:

    As I understand it, it was something like 3-4 $ for every $ in a real asset that was out there, which means that 2-3 $ would be strictly vapor. Bloomberg (doubtful) or someone else (Taibbi?) needs to dig down to see where the $$$ money ended up, since I’m not real keen on USA tax $$$ paying off foreign operatives or the Saudi princes that bankrolled 9/11/01.

  16. rugger9 says:

    One other note, they still had $$$ for consolidations/acquisitions and excessive bonuses (even AIG didn’t “get it” on that, nor do the banksters). I think it was more of a choice on who got $$$. Kind of surprising that McD got stiffed, lots of name recognition there if McD wanted to use it.

  17. Mad Hemingway says:

    Now would probably be a good time to guess when Obama will pull out of the 2012 race because “he wants to spend more time with family”. (giggle)

    Seriously, he and the Dem Party now recognize he can’t win next year, and I think they’ll start paving the way for him to depart.

  18. Bob Schacht says:

    I’m just hoping that the hubris of the MOTUs will be their downfall. Never has there been such Chutzpah since Theodore Bikel told us about the boy who killed his parents and then threw himself on the mercy of the court on grounds that he was an orphan.

    This has got to stop.

    Bob in AZ

  19. bmaz says:

    Quick Update: Just heard from Jim White’s wife and Jim is resting well after the procedure and everything looks good!

  20. rkilowatt says:

    Unfairness leads to chaos.

    Merely kicking-the-can postpones and magnifies the chaos; it preserves and strengthens the status of the sources of unfairness.

    The sense of fairness is the meaning of justice.

  21. Thingumbob says:

    It is pretty apparent now that these bailouts were immediately put to work speculating on commodity futures. See Bernie Sanders leak of CFTC info.

  22. Gitcheegumee says:

    Tom Burghardt has a new and very interesting piece that deserves a look,imho:

    Leaks Reveal Insider Tips on S&P’s U.S. Credit Downgrade to …www.cjournal.info/…/new-leaks-reveal-insider-tips-on-sps-u-s-credit- …-

    1 day ago – New Leaks Reveal Insider Tips on S&P’s U.S. Credit Downgrade to Killer-Drone Firm ·

  23. joberly says:

    @MadDog # 19 and # 21: Well, I checked the McDonald’s financial reports for 2008 and 2009. No mention in either one of the loan from the Federal Reserve. Also, it doesn’t appear from MickeyD’s financial reports of 2008 or 2009 that it had any exotic investments, but I’m no expert in reading financials. Anyway, I prefer a new nickname for the chairman of the Federal Reserve: “Happy Meal Ben.”

  24. JohnT says:

    That is, the money the Fed lent out to these highly leveraged risk takers could have paid off (much less merely guaranteed) the 6.5 million delinquent and foreclosed mortgages that are currently dragging down the American economy.

    I don’t remember the numbers, but that’s the point Bernanke made a year or so prior to the TARP bailout

  25. MadDog says:

    @MadDog: If I had to guess, I’d bet that the $28.7 Billion dollars that Hypo got from the US Federal Reserve was in Hypo’s account for only a tiny amount of time before it was whisked away to the MOTU TBTF predator(s) who had Hypo on their loan hook.

    No way did that money stay in Hypo’s hands.

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