Back when our late pal Mark Pittman and Bloomberg sued the Federal Reserve to force it to disclose secret details on its massive crisis lending programs, he told me that he suspected the Fed was shoveling money out the door with any old asset pledged as collateral.
Pittman: But a lot of [the assets] have gone to the Fed, though, as collateral for loans. They’re still on their balance sheet, but you borrowed against them. We don’t know if those are cracked CDO’s or prime RMBS…
The Audit: That’s what you guys are suing (the Federal Reserve) for—to find out what the collateral is.
Pittman: Yeah, and that’s the secret part of the story that nobody wants to let you know.
A Bloomberg investigation today shows how the Fed took on just about anything as collateral, including equities, and how completely the financial system—and most revealingly, individual banks—depended on the Federal Reserve during the Crash of 2008.
Bradley Keoun and Phil Kuntz report that the Fed lent out $1.2 trillion during the height of the crisis—about half of it to the ten largest U.S. banks, including those protesting publicly that they had plenty of capital and liquidity.
This was a sort of TARP for short-term loans that kept the financial system afloat after those markets collapsed. Whereas TARP injected capital into the banks via government purchases of preferred equity, the Fed’s emergency loan programs lent money backed up by toxic collateral. The big difference: The Fed’s program was four times as large and it fought tooth and nail, along with the big banks, to keep the public from knowing what it was doing and had done with our money.
That’s stunning if you stop to think about it: We wouldn’t know this stuff if not for a bold lawsuit by Bloomberg News, pushback against the executive branch by the judiciary, and an amendment by the unlikeliest legislator, Vermont Socialist Bernie Sanders. Checks and balances, kids—and the press was and is still, as we continue to see with today’s story, an essential ingredient.
The scale of the interventions is mind-numbing, so we need some context. Here’s Morgan Stanley’s $9 billion equity injection and its profit history, for instance, juxtaposed with a day of emergency borrowing from the Fed:
Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.
That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show.
And regarding Pittman’s suspicions on collateral, we have this:
As the crisis deepened, the Fed relaxed its standards for acceptable collateral. Typically, the central bank accepts only bonds with the highest credit grades, such as U.S. Treasuries. By late 2008, it was accepting “junk” bonds, those rated below investment grade. It even took stocks, which are first to get wiped out in a liquidation.
Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.
“What you’re looking at is a willingness to lend against just about anything,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc.
The Fed, fortunately, got all the money back, but the no-strings-attached bailouts allowed Wall Street to fend off any real reform and to keep paying itself outlandish sums.
The big problem with Bloomberg’s story is we’re not told exactly how this is new information and what separates it from what is already known about emergency federal lending programs. We’re told about how the process of analyzing the information was new but not why the result was. We needed at least a couple of step-back paragraphs that told us how it fits in with previously reported information.
For instance, here’s a Bloomberg story from December, “Fed Names Recipients of $3.3 Trillion in Crisis Aid.” Like today’s story, it talks about examining 21,000 Fed transactions. But back then the headline number was $3.3 trillion number, which eight months later has become $1.2 trillion. What gives? It’s only two trillion dollars, you know.
Bloomberg does have some great context in here, though. Like just how big is $1.2 trillion, anyway?
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.
That’s way up in the third paragraph. Very good.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.