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|