"It's Worse Than You Know..."

Over the weekend, Bloomberg.com dropped this article concerning the reality behind just how in bed the largest banks were with the federal reserve:

Wall Street Aristocracy Got $1.2 Trillion In Secret Fed Loans

The article demonstrates how the Fed went above and beyond the admitted 2008 public bailout of banks when the economy first started to crash.  The public bailouts amounted to $160 billion to the top 10 largest banks, which seems like a lot of tax dollars taken from us to go to the banks that DWI'ed everyone into this problem in the first place.

Turns out, some of the nation's largest banks also went to the federal reserve for additional loans, initially amounting to just under $670 billion, to help stabilize the banks and to try and keep the lending markets moving.  Let's name some names...

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.

Turns out that it wasn't just our banks that got federal help, a chunk of the loans went overseas.

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.

But one of the worst potential offenders was Goldman Sachs, who may have taken a Fed loan in order to turn around and re-lend that money to financial institutions that didn't qualify for those Fed loans in the first place.  This was so profitable because the Fed offered loans at one third the rate banks were loaning to each other (1.1% vs. 3.8%).

Goldman Sachs Group Inc. (GS), which in 2007 was the most profitable securities firm in Wall Street history, borrowed $69 billion from the Fed on Dec. 31, 2008. Among the programs New York-based Goldman Sachs tapped after the Lehman bankruptcy was the Primary Dealer Credit Facility, or PDCF, designed to lend money to brokerage firms ineligible for the Fed’s bank-lending programs.

They weren't alone in taking loans they may not have needed.

Even banks that survived the crisis without government capital injections tapped the Fed through programs that promised confidentiality. London-based Barclays Plc (BARC) borrowed $64.9 billion and Frankfurt-based Deutsche Bank AG (DBK) got $66 billion...

...Herring, the University of Pennsylvania professor, said some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”

Other banks milked the system by taking out one loan and having a subsidiary get a separate one.

In March 2009, Charlotte, North Carolina-based Bank of America drew $78 billion from one facility through two banking units and $11.8 billion more from two other programs through its broker-dealer, Bank of America Securities LLC.

Like most loans, banks had to offer collateral, but as the crisis worsened, the Fed relaxed those requirements in order to get more cash into the hands of banks.

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.

Meanwhile, the banks went to the public and reassured them that they were the pictures of stability.  Morgan Stanley's $107 billion already mentioned was basically all the cash they had available and it totaled almost three times the amount of profits they made in the past decade.  Meanwhile they were telling people they had "strong capital and liquidity positions."  JP Morgan Chase, which took about $48 billion in loans, told people they had a "fortress balance sheet."

The federal reserve refused to disclose any of these activities until an act of Congress, specifically the Dodd-Frank Act, forced their hand.  In March 2011, the Fed finally released numerous databases detailing all of the confidential loans they offered back at the height of the crisis.

The argument can easily be made that since lending markets completely froze, someone had to step up in some capacity to get those moving again.  The Fed couldn't practically act as a general lender, so it makes some sense to get lending cash to those who normally fulfill that role.  It's the secrecy and the abuse of that system that make it sound so outrageous, especially given that these banks were already given our tax dollars to stay in business.

The article throws out one statistic just to put things in perspective.  The total amount of these loans, $1.2 trillion, is "about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages."  When offered the choice of who to help, the largest banks took precedence over average citizens.  Some of those largest banks seized the opportunity to build even further on their profits, all while some people lost their homes.

Between these secret loans and TARP, it's not that the federal government couldn't directly help the average people devastated by this recession.  It's that they specifically chose not to.  Any time someone utters the phrase "class warfare," they should get pelted with statistics and facts until they can't stand up under the weight of how stupid they sound.