2011 August 27 Saturday
Secret Fed Bank Loans: $1.2 Trillion

When "helicopter Ben" Bernanke was trying to prevent another Great Depression back during the global financial crisis in 2008 and 2009 the US Federal Reserve Bank lent large to the biggest banks in America and abroad. Bloomberg News won a court case to find out how ginormous the lending was. The cost of preventing (delaying?) Great Depression II:

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.

What I'd like to know: Why the big lending to German, British, and other foreign banks? Couldn't their own central banks bail them out? Or are too many of their loans in dollars?

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.

$84.5 billion for the Royal Bank of Scotland too.

There's another aspect of this that's interesting: The timeline of the big borrowing. Most people think that the big borrowing started after Lehman collapsed in September 2008. But there's this:

U.S. Federal Reserve borrowings by Societe Generale SA, France's second-biggest bank, peaked at $17.4 billion in May 2008,

Societe Generale was in trouble at the time due to their trader Jerome Kerviel losing $7.2 billion. But why didn't the French government or the European Central Bank lend to Societe Generale? Why did this burden fall on the Fed?

Also, Citibank's TAF (Federal Reserve's Term Auction Facility) borrowing started in December 2007 on the day TAF opened. So the financial crisis really was already playing out in late 2007.

All the above is worth thinking about because we might be heading into another financial crisis. A debate is currently raging about the financial soundness of Bank of America with Henry Blodget (see link) taking a skeptical view of BofA's soundness. Since BofA hides too much about its financial position we can't be sure.

With much greater certainty it is possible to see a big sovereign debt and banking crisis brewing in Europe. a silent bank run in Greece and signs that other southern European banks are getting frozen out of credit markets suggests that at very least the countries of southern Europe, Ireland, and possibly Belgium are at risk of sovereign default, major bank failures that their own governments can not afford to handle, and even exit from the Euro zone. Hard to see how all that can go wrong without at least another recession.

Share |      By Randall Parker at 2011 August 27 04:22 PM  Economics Sovereign Crises


Comments
bbartlog said at August 27, 2011 6:04 PM:

Are you sure all these loans are banks in liquidity trouble and not just the Fed recruiting straw buyers for US bonds? 2010 was the first year when the numbers - total (real) bond buyers versus total bond sellers - were so out of whack that it was blindingly obvious that there had to be such a program. But there's no reason it couldn't have been going on for years earlier just as a way to keep rates down...

REN said at August 30, 2011 2:08 PM:

I don't understand it completely, but the Eurodollar market needed a quick infusion of cash. If you have a dollar account at an European bank, the FED will insure that a Federal Reserve note is available for you. In the same way Euros can be exchanged in those same banks. The Federal Reserve maintains reserve status at European banks for the Eurodollar market. This is a consequence of the dollar being the reserve currency of the world.

We also are counterparties to a lot of European bonds, especially through European Commercial Banks. Counterparties and Derivitives and AIG, etc. essentially back up credit formation with promises to pay....they are insurance. When the regualar forms of insurance fail, the insurer of last resort (FED and the taxpayer) must step in.

(Credit money stands in for real money, but it isn't. Credit asks to be backed up to stem risk inherent in its nature. To my mind, this is why we need 100% reserve systems.)

The bailout in Europe was the same as here. The idea was to stem counterparty risk and prevent systemic collapse.

Usually a credit based banking system will collapse when Mary doesn't pay Paul, who doesn't pay Richard, who doesn't pay James, etc. The levels of leverage and counterparties can go deep. Most of the bailout money went to bondholders and counterparties, essentially the top 10% of the economic pie. So, in this way, the bottom part of the economy bailed out the top part. It was the biggest heist in history.

Sam said at August 30, 2011 2:26 PM:

$1.2 Trillion? Ha that's nothing. I heard it was $16 Trillion. It would seem impossible to get out from under the level of debt created world wide.
http://www.ronpaul2012.com/2011/08/02/the-feds-16-trillion-debt-ceiling/

Zamman said at August 31, 2011 6:59 PM:

Does that mean our debt is a little bigger now? lol


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