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Secret loans let banks earn $13 billion

  • Bloomberg News
  • Published Tuesday, Nov. 29, 2011, at 4:25 p.m.

NEW YORK — The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required emergency loans of a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars 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 Fed’s below-market interest rates.

Saved by the 2007-2010 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.

While Fed officials say that almost all the loans were repaid without losses, details that emerge from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions 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.

“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” said Sen. Sherrod Brown, D-Ohio. “This is an issue that can unite the tea party and Occupy Wall Street.”

The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court battle against the Fed and a group of the biggest banks called Clearing House Association. The amount of money the central bank parceled out dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP.

Few people were aware of this, partly because bankers didn’t disclose the extent of their borrowing. JPMorgan Chase Chief Executive Officer Jamie Dimon told shareholders in March 2010 that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion came more than a year after the program’s creation.

On Nov. 26, 2008, Bank of America’s then-CEO Kenneth Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that Bank of America owed the Fed $86 billion that day. Bank of America’s borrowing peaked at $91.4 billion in February 2009.

Howard Opinsky, a JPMorgan spokesman, declined to comment, as did Bank of America’s Jerry Dubrowski.

The Fed, headed by Chairman Ben Bernanke, has been lending money to banks since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to financial firms that couldn’t get short-term loans from their usual sources.

The central bank initially released lending data in aggregate form only. Who borrowed and how much were kept from public view. The secrecy extended even to top aides of then- Treasury Secretary Henry Paulson who managed TARP, say two former senior Treasury officials who requested anonymity.

The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt. Morgan Stanley was the top borrower with a peak of $107 billion on Sept. 29, 2009.

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