The Fed’s secret loans reveal just how real sudden collapse could be.
Twenty-three thousand loans—$3.3 trillion worth: That is what it took in terms of hard currency for the Federal Reserve to stop the financial meltdown of the United States. Yet where has this huge amount of money gotten America? Is the system fixed? Or is the Fed’s latest disclosure actually evidence that the economy is far more precarious than anyone admits?
The Federal Reserve finally made available details concerning its massive Wall Street bailout, corporate bailout, and—as it turns out—foreign central bank bailout. Although everyone knew the Fed went to extremes to prop up the banking system during the tense days of 2008, few knew just how far it had actually gone.
Yet the significance is lost on far too many people.
“What’s the big deal? Nothing really, at this point,” writes Charlie Low, forum editor for St. Louis’s Washington University Student Life paper. The list of recipients is mostly what one would expect, he says. And the money has mostly been paid back and with some interest too.
It’s a non-story, he argues.
Unfortunately, Low’s understanding of the financial crisis is far too typical of the highly opinionated, but woefully ignorant American student.
Actually, the Fed’s disclosure is a big deal—a very big deal. That is why the Federal Reserve fought so hard for two years to keep it secret.
It paints a picture of an economy in danger of sudden collapse.
Much focus has been given to the scale of the bailouts. $3.3 trillion is a massive amount of money. Measuring at more than two times America’s budget deficit, it is incredibly significant in terms of the U.S economy.
The fact that this money was created out of thin air seems to be missed by most people. But maybe that is fitting, since much of what the Fed traded that $3.3 trillion for appears to be vastly overpriced junk. $1.5 trillion worth of collateral came with the “ratings unavailable” designation. Only 1 percent of the pledged collateral was highly rated government treasuries.
It was also revealed that the Federal Reserve not only lent $600 billion to foreign central banks, but also to foreign auto makers like Toyota, and billions more to foreign private banks at very low interest rates (sometimes at 0.15 percent).
In other words, at the height of the crisis, the Fed was printing and lending money to anyone with a pulse, regardless of who they were and what collateral they pledged.
The Federal Reserve even lent cheap money to speculative hedge funds and pension plans—like the Major League Baseball Players Pension Plan—to “invest,” in an attempt to get money flowing through the economy again.
The California Public Employees’ Retirement System, one of the most underwater retirement plans in the country, was among the most enthusiastic takers of Fed money. It borrowed $5.14 billion to speculate with. It says it profited $175 million from the deal.
Under one of the Federal Reserve’s lending programs, it was revealed that the Feds cycled a mind-boggling $9 trillion in and out of the economy between the collapse of investment bank Bear Stearns in March 2008 through to January 2010, when the last loan was made.
To be fair, the Fed never had $9 trillion outstanding at any one time. Many of the loans were very short term and were paid back very quickly. For example, during one part of the crisis, British bank Barclays borrowed $14 billion on four separate occasions—basically rolling over the loan. In all likelihood, the bank only had $14 billion outstanding, but when the Fed released its data, it showed four different loans, which cumulatively totaled $56 billion for Barclays during this time period.
Through this program, Citigroup alone borrowed an astounding $2.2 trillion in multiple revolving transactions to stay afloat. Merrill Lynch borrowed $2.1 trillion across 226 loans. Bank of America borrowed $1.1 trillion in emergency money to avoid failure. It asked the Fed for credit a whopping 1,000 different times. Morgan Stanley took out 212 loans to stay in business. Even the venerable Goldman Sachs borrowed $620 billion across 84 loans.
Small banks too went to the Fed for money to keep them going. Bank of Oklahoma asked for money 16 times. MidFirst Bank took out emergency loans on 23 occasions.
More ominously, it wasn’t just the banks and failing hedge funds that the Fed propped up—it directly propped up many of the biggest, most famous names in corporate America.
Credit card companies, insurance companies, vehicle manufacturers all got loans. Some of this was known. But did you know that Caterpillar took government money? That Verizon Communications needed $1.5 billion? That Harley-Davidson received bailout money 33 times, for a total of $2.3 billion? General Electric Co. needed funding 12 times for a total of $16 billion?
That Big Mac hamburger you ate last year was made possible by the Federal Reserve. Yes, even McDonald’s borrowed money from the Fed.
Why did the Fed give loans to these companies? How is it that Harley-Davidson poses such a systemic risk to the economy that it gets special bailout funding?
All these companies borrow money each and every day. They need credit just to keep up business as usual. During the economic crisis surrounding Sept. 11, 2008, the debt markets froze. No one would lend money—at all. Banks were failing. The government was nationalizing trillion-dollar corporations. The whole system was balanced on a razor’s edge.
Just imagine what would have happened if Caterpillar, or Verizon—or worse yet, McDonald’s—had a failed debt auction. If MacDonald’s, one of America’s highest rated companies, couldn’t borrow money. Contagion could have gone national, even international. A massive domino effect might have swept the business world. The Fed had to step in to provide the money—or it risked total shutdown of corporate America.
That is how addicted to debt America is. It cannot function without daily—hourly—debt injections. Stop the debt and the system goes into cardiac arrest. Twenty-three thousand times the Fed had to jump-start the system.
The massiveness of the Federal Reserve’s bailouts, the frequency, and the recipients of the bailouts all point to a system far more precarious than most dare to imagine.
And most startling of all, nobody knows if the bailouts will work next time.
The Fed has thrown a lot of money at the problem—and America doesn’t really look too different from 2008. In fact, it looks a lot worse: slower growth, much higher unemployment, massive government budget deficits, and even higher debt.
In the process, all this money-printing from the Fed, coupled with massive government borrowing and spending (with no talk of austerity), is discrediting and devaluing the dollar.
Guess who the Federal Reserve is bailing out now?
In November, Fed Chairman Ben Bernanke announced it would print up another $600 billion to purchase government treasuries—in effect bailing out the Federal government. Over the weekend, during a 60 Minutes interview, he said that even more “quantitative easing” might be needed.
See, the bailouts never end. They don’t fix anything. But the debts continue to grow. And the whole system gets evermore precarious.Who is going to bail out the Federal Reserve?