There were so many bailouts going on in 2008 that Congress apparently forgot about some of them.
Bloomberg gets a scoop this morning on details of an $80 billion Federal Reserve lending program that flew under the radar.
Barney Frank, whose name is on the financial reform legislation that forced the Fed to reveal details about its bailout programs, tells reporter Bob Ivry that he didn’t know about the program, which was left out of legislation requiring disclosure. Ivry found the details buried in 29,000 pages of documents the Fed was forced to release after the Supreme Court ruled for Bloomberg in its lawsuit against the central bank.
It was a sweet deal for giant American banks like Goldman Sachs and a notably foreign-dominated list, including UBS, Credit Suisse, Deutsche Bank, and the Royal Bank of Scotland. They borrowed money from the Fed at rates as low as 0.01 percent. Credit Suisse at one point had $45 billion outstanding, while Goldman had $30 billion.
Crucially, the Fed kept this program open even after the other bailout programs were well under way, including TARP:
In March 2008, ST OMO was “desperately needed,” because of the shaken state of short-term credit markets, said Michael Greenberger, a professor at the University of Maryland School of Law in Baltimore and former director of the division of markets and trading at the Commodities Futures Trading Commission. After the Fed created other lending mechanisms and the Treasury Department began distributing money from the Troubled Asset Relief Program in October, ST OMO became “just a way for banks to have at it,” he said.
“At such low interest rates, it’s no longer a rescue, it’s a profit-making enterprise,” Greenberger said. “By December, a lot of money was made off this program.”
You can probably guess who was using the program in December, then:
Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein, tapped the program most in December 2008, when data on the New York Fed website show the loans were least expensive. The lowest winning bid at an ST OMO auction declined to 0.01 percent on Dec. 30, 2008, New York Fed data show. At the time, the rate charged at the discount window was 0.5 percent.
Bloomberg reports that Goldman’s ST OMO loans peaked in December 2008 as its borrowing from other Fed programs peaked at $43.5 billion. That means the Fed was lending about $75 billion at one point to Goldman on super-favorable terms, all while giving it a backdoor bailout via AIG and while the Treasury was handing it billions in TARP money.
Ivry couldn’t get precise numbers, though, having to eyeball them from graphs in the Fed’s doc dump.
The records don’t provide exact loan amounts for each bank. Smith, the New York Fed spokesman, would not disclose those details. Amounts cited in this article are estimates based on the graphs.
After getting smacked around by the Supreme Court and Congress for its lack of transparency, the Fed clearly still hasn’t learned its lesson.
Good for Ivry and Bloomberg for shining the light here as best they can.
I am happy that these are revealed, but apparently this is an academic exercise. People need to understand, as I have explained at http://strategicdefaultbooks.com that not only did the central banks bail out the banks in an obscene fashion, but that they created the ponzi housing scheme in the first place. They were well aware, at Basel 2 in 1998 that they were going to allow less capital for and off balance sheet banking in order to hide bad loans they knew would be made. They also covered this scam with phony math that assumed little risk for failure of mortgages en masse, even though Japan failed and Enron risk models failed. Yet they pressed on and applied this lending right at the time the subprime would have fizzled out, in late 2003.
Central bankers are not public employees and they should be prosecuted for allowing phony risk all so they could overvalue the CDO's that they sold to unsuspecting investors. It doesn't matter if the prosecutors understand the math. What matters is that the math was based upon assumptions of risk that had nothing to do with the real world. And so, this was just a good ole boy scam, dressed in sophisticated equations.
#1 Posted by Gary Anderson, CJR on Fri 27 May 2011 at 11:26 PM
As of 5/29/11, the fourth paragraph terminal sentence includes the word "oldman" where it should read "Goldman."
#2 Posted by Joshua Zatkin-Steres, CJR on Sun 29 May 2011 at 11:14 PM
Thanks, Joshua. Fixed.
#3 Posted by Ryan Chittum, CJR on Sun 29 May 2011 at 11:17 PM
BTW, I totally appreciate the fact that Ryan has been on this story and has exposed quite a bit of the fraud.
The premeditated nature of the scam must be front and center in any analysis. After all, it was Allan Greenspan, good soldier of central banks everywhere, who said in 1998 that you could get a "better deal" with an adjustable mortgage.
These are words that he no doubt regrets saying, not because he feels bad, but because they expose him as being a scamster. The ponzi housing scam makes Madoff look like an amateur in comparison.
#4 Posted by Gary Anderson, CJR on Mon 30 May 2011 at 01:00 PM
I am so sorry. Correction needed. Greenspan made the comments about a "better deal" with an adjustable in February, 2004. 1998 was Basel 2 engineering the originate to distribute scam. The CRA subprime start had fizzled by late 2003 and at that point the private mbs originate to distribute model was put into place to really juice the ponz housing scheme. And in early 2004, Greenspan proved he was both aware of, and supportive of that predatory bubble.
#5 Posted by Gary Anderson, CJR on Mon 30 May 2011 at 01:04 PM