Catching up on my news reading on a Sunday afternoon, top of the headline at Bloomberg was an investigative piece finally revealing how much, when and whom the Federal Reserve provided the discount window and emergency lending facilitiesto from August 2007 through April 2010. The loans were intended to bridge the liquidity crunch and maintain the credit market during the 2008 financial crisis.
Based on Bloomberg’s account, the Federal Reserve provided to the “Wall Street Elite” as much as $1.2 trillion in public money to banks and other companies from August 2007 through April 2010. And remember this is on top of the $700-billion TARP program from the U.S. Treasury Dept., which is also funded by the public.
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The graph below from Blooomberg includes the top 10 who’s-who-on-Wall-Street recipients of Fed’s loan, while the interactive detail is available here.
“The Wall Street Elite” – Not Above Borrowing
Many of these borrower-banks had reported record profits prior the 2008 financial crisis and have sugar-coated their “involvement” with the government bailout in their shareholder and press releases post-crisis.
While Morgan Stanley tops the list with a peak loan of $107 billion, Citigroup debt to the Fed peaked at $99.5 billion, while BofA also had to borrow $91.4 billion. Goldman Sachs, which became the most profitable securities firm in Wall Street history in 2007, borrowed $69 billion from the Fed on Dec. 31, 2008.
Mum’s The Word
Our last article–Wall Street Bailout: Too Big To Collect?–cited another analysis by the Center for Media and Democracy (CMD) that $4.8 trillion has gone out of the door to bail out Wall Street, including “loans with below-market interest rates and for questionable collateral to banks directly from the Treasury and Federal Reserve.”
However, the full information regarding Fed’s loans to banks has remained secret as the Fed was fighting to withhold the information. Some banks, such as London-based Barclays Plc borrowed $64.9 billion and Frankfurt-based Deutsche Bank AG got $66 billion, tapped the Fed through programs that promised confidentiality.
European Banks Dipping In
Bloomberg said it has obtained data through the Freedom of Information Act, and litigation, and found that:
“Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG (UBSN), which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.”
The largest borrowers also included Dexia SA, Belgium’s biggest bank by assets, and Societe Generale SA, France’s second largest bank, whose stock price plunged 15% on Aug. 10 as investors speculate the contagion of European sovereign debt crisis may spread to France despite that France’s AAA top credit rating was affirmed by all three major rating agencies (???Question mark here in the context of the recent U.S. downgrade by the S&P).
According to Bloomberg, there were more than 21,000 transactions between the Fed and various banking institutes. The combined outstanding balance under the seven programs reviewed by Bloomberg peaked at $1.2 trillion on Dec. 5, 2008, more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2011, the day after the 9/11.
“A Wall of Maturing Debt”
The scary thing is that according the Global Financial Stability Report issued by the IMF in April, the aggregate balance sheets of global banks, particularly banks in Europe (American banks have their own problems with a huge shadow housing inventory to write off), still remain leveraged and reliant on the wholesale funding, including central banks liquidity support:
“The result is that global banks face a wall of maturing debt, with $3.6 trillion due to mature over the next two years.”
“A number of banks in Europe—including nearly all banks in Greece, Ireland, Portugal, many of the small and mid-size Spanish cajas, and some German Landesbanken—have lost cost-effective access to term funding markets.”
|Chart Source: IMF|
|Chart Source: IMF|
Bailed-out Once Shame on You
The U.S. Federal Reserve already bailed out banks on both sides of the Atlantic Ocean once, and may have been an unwilling participant in driving up inflation and commodity prices as banks borrow from the cheapest source, but instead of lending to ease the tight credit market, banks use the money to speculate in commodity markets to maximize profits. And things in the banking sector have not improved much since the bailout mostly due to the lack of a comprehensive set of globally accepted and implemented policies to address banking system vulnerabilities.
In light of the ongoing sovereign debt crisis and rising bond spreads n the Euro zone, and since the value of bank exposures to troubled sovereigns is uncertain, which is something investors increasingly have very little appetite for, it is quite possible that a similar banking and liquidity crisis contagion could erupt again, which would require central banks including the Federal Reserve acting again as the ultimate go-to bailout guy. By then, I think moral hazard would be the least of the problems.