Some staggering figures..
We begin with the most staggering one, $29 Trillion…
Economist: True Fed Exposure $29 Trillion
Tuesday, 13 Dec 2011 06:52 AM
By Greg Brown
The true total of Federal Reserve emergency lending to Wall Street is not $1.2 trillion, as Fed Chairman Ben Bernanke contends, nor the $7.7 trillion figure reported by Bloomberg News, which Bernanke publicly contests.
The real number, argues economist L. Randall Wray, is a staggering $29 trillion.
Wray writes that Bernanke’s recent defense of the lower figure is “misleading” and that the chairman’s claim that Fed bailouts do not constitute a form of spending is plain wrong.
“If he really believes the last claim, then he apparently does not understand the true risks to which he exposed the Treasury as the Fed made the commitments,” writes Wray, a professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College, NY.
He uses data compiled by Ph.D. students under his direction to make the case of Bernanke’s “obfuscation” of the facts about Fed spending during and since the 2008 credit crisis.
Wray argues that the various means of calculating the exposure of the Fed does provide plenty of ways to argue about what “commitment” means but that it is hard to avoid the full number and its effects.
“Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken,” he writes.
“At any instant, the bar-keep has committed only six ounces of booze. That is a useful measure of whiskey outstanding. But it is not useful for telling us how much the drunks drank.”
That means that Bernanke’s view of the total underestimates dramatically the effect of all that cash into the system, Wray argues.
“Bernanke would like us to believe that if the Fed newly lent a trillion bucks every day for 3 years to all our drunken bankers that we should total that as only a trillion greenbacks committed. Yes, that provides some useful information but it does not really measure the necessary intervention by the Fed into financial markets to save Wall Street.”
The public dispute about the totals is in contrast to a concerted effort by the Fed to communicate more, not less, about its policies. Bernanke has instituted regular press conferences after Fed actions in an attempt to make its decisions more transparent.
This week, the Fed might even begin to publish a forecast of its future rate decisions, reports The New York Times.
If it decides to do that, such a plan would not be announced any sooner than its next meeting in January, the newspaper reports.
————–[End of Article]———–
Secrets of the Bailout, Now Told
A FRESH account emerged last week about the magnitude of financial aid that the Federal Reserve bestowed on big banks during the 2008-09 credit crisis. The report came from Bloomberg News, which had to mount a lengthy legal fight to wrest documents from the Fed that detailed its rescue efforts.
It is dispiriting, of course, that we are still learning about the billions provided to various financial firms during the crisis. Another sad element to this mess is that getting the truth requires the legal firepower of an organization as rich as Bloomberg.
But that’s the way our world works. Billions are secretly showered on troubled financial institutions to stave off disaster. Individuals get little or no help.
Here are some of the new figures:
Among all the rescue programs set up by the Fed, $7.77 trillion in commitments were outstanding as of March 2009, Bloomberg said. The nation’s six largest banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — borrowed almost half a trillion dollars from the Fed at peak periods, Bloomberg calculated, using the central bank’s data.
Those six institutions accounted for 63 percent of the average daily borrowings from the Fed by all publicly traded United States banks, money management and investment firms, Bloomberg said.
Numbers for individual companies were equally astonishing. For example, the Fed provided Bear Stearns with $30 billion to see it through its 2008 shotgun marriage with JPMorgan. This was in addition to the $29.5 billion in assets purchased by the Fed from Bear to assist in the buyout by JPMorgan. Citigroup, meanwhile, tapped the Fed for almost $100 billion in January 2009 — its peak during the crisis — and Morgan Stanley received $107 billion in Fed loans in September 2008.
Some may see all this as ancient history or as ho-hum disclosures that confirm what everybody already knew — that our banks were on the precipice and that only hundreds of billions of dollars could save them. The Fed says that the money it lent in these programs was paid back without generating any losses.
But the information is revealing nonetheless. The fact is, investors didn’t know how dire the situation was at these institutions. At the same time that these banks were privately thronging the teller windows at the Fed, some of their executives were publicly espousing their firms’ financial solidity.
During the first three months of 2009, for example, when Citigroup’s Fed borrowing apparently peaked, Vikram Pandit, its chief executive, hailed the company’s performance. Calling that first quarter the best over all since 2007, Mr. Pandit said the results showed “the strength of Citi’s franchise.”
Citi’s earnings release didn’t detail its large Fed borrowings; neither did its filing for the first quarter of 2009 with the Securities and Exchange Commission. Other banks kept silent on these activities or mentioned them in passing with few specifics.
These disclosure lapses are disturbing to Lynn E. Turner, a former chief accountant at the S.E.C. Since 1989, he said, commission rules have required public companies to disclose details about material federal assistance they receive. The rules grew out of the savings and loan crisis, during which hundreds of banks failed and others received government help.
The rules are found in a section of the S.E.C.’s Codification of Financial Reporting Policies titled “Effects of Federal Financial Assistance Upon Operations.” They state that if any types of federal financial assistance have “materially affected or are reasonably likely to have a future material effect upon financial condition or results of operations, the management discussion and analysis should provide disclosure of the nature, amounts and effects of such assistance.”
Given these rules, Mr. Turner said: “I would have expected some discussion in the management discussion and analysis of how this has had a positive impact on these banks’ operating results. The borrowings had to have an impact on their liquidity and earnings, but I don’t ever recall anybody saying ‘we borrowed a bunch of money from the Fed at zero percent interest.’ ”
I asked officials at Citigroup and Morgan Stanley about these disclosures. Jon Diat, a spokesman for Citigroup, said the bank’s disclosures in its quarterly filings with the S.E.C. “were entirely appropriate.” He added that Citi and other financial services firms “utilized numerous government programs that provided significant funding capacity and liquidity support which helped increase the flow of credit into the economy.”
Morgan Stanley pointed to its annual report for 2008, which mentioned the various Fed programs and the bank’s ability to tap them. The filing noted that the Fed was authorized to extend credit to Morgan Stanley’s broker-dealer units in both the United States and Britain but contained no dollar amounts used.
Of course, there is stigma associated with a company tapping into federal assistance programs. This is the Fed’s main argument for keeping its operations under wraps. And companies want to avoid frightening investors by disclosing their reliance on this type of emergency cash, even if it is only temporary.
But keeping this information from shareholders is no way to engender their trust. And a lack of investor confidence often translates to depressed valuations among companies’ shares. If investors doubt that a company is coming clean about its financial standing — the current worry is how exposed our banks are to European debt woes — its stock price will suffer. This is very likely one of the reasons that big bank stocks trade at such low price-to-earnings multiples today.
It will be interesting to see whether the S.E.C. does anything to enforce its rules that companies disclose federal assistance in financial filings, either in the recent past or in the future. You could certainly argue that requiring such disclosures is even more important nowadays, given that so many banks are considered too big to fail and that the taxpayer will undoubtedly be asked once again to rescue them from their mistakes.
“These banks and the Fed have never believed in transparency,” Mr. Turner said. “I actually think their thought process is sorely flawed. If the banks knew this stuff was going to be made public they’d behave differently. Instead of runs on the bank you’d have bankers doing things intelligently to avoid getting into trouble.”
What an idea!
————-[End of Article]————
And here is a yet smaller assessment
More on those secret Federal Reserve loans to banks
The claim that the Federal Reserve extended trillions of dollars in secret loans to banks continues to be spread. Here at Econbrowser we will continue to try to correct some of the misunderstanding that is out there.
Consider for example this item from the Levy Institute blog written by University of Missouri Professor L. Randall Wray, which begins:
It literally took an act of Congress plus a Freedom of Information Act lawsuit by Bloomberg to get [Bernanke] to finally release much of the information surrounding the Fed’s actions. Since that release, there have been several reports that tallied up the Fed’s largess. Most recently, Bloomberg provided an in-depth analysis of Fed lending to the biggest banks, reporting a sum of $7.77 trillion.
This is a common misunderstanding. As the reporters for the Bloomberg story verified to me personally, their $7.77 trillion figure did not come from the records that Bloomberg obtained under the FOIA. Instead, their figure came from this article published by Bloomberg on March 31, 2009. That original $7.77 trillion estimate in turn was based entirely on publicly available sources which were being quite widely discussed at the time.
Another key fact that seems to be underappreciated by those passing along these numbers is that the vast bulk of this $7.77 trillion figure was never lent at all. For example, $1.8 trillion of the total is attributed to the Commercial Paper Funding Facility. But the fact is that the maximum quantity of loans ever outstanding under this program only came to $351 B. The $7.77 trillion also includes $900 B for the Term Asset-Backed Securities Loan Facility, whose maximum outstanding balance was only $49 B, and includes $540 B for the Money Market Investor Funding Facility which never lent so much as a single dime. The table below breaks down the individual components of the $7.77 trillion and compares them with the actual maximum amount lent under each program. Numbers in the first column come from Bloomberg (2009) and numbers in the second column come from the Fed’s weekly H.4.1 releases.
| Category | Theoretical potential |
Actual maximum |
Date of maximum |
|
|---|---|---|---|---|
| 1 | Net Portfolio CP Funding | 1,800 | 351 | Jan 21 2009 |
| 2 | Term Auction Facility | 900 | 493 | Mar 4 2009 |
| 3 | Term Asset-Backed Loan Facility | 900 | 49 | Mar 17 2010 |
| 4 | Currency Swaps/Other Assets | 606 | 583 | Dec 17 2008 |
| 5 | MMIFF | 540 | 0 | |
| Sum of 1 through 5 | 4,746 | 1,350 | Dec 17 2008 | |
| 6 | GSE Mortgage-Backed Securities | 1,000 | 1,129 | Jun 23 2010 |
| 7 | GSE Debt Purchases | 600 | 169 | Mar 10 2010 |
| 8 | Commitment to Buy Treasuries | 300 | ? | |
| 9 | Other | 1,120 | ||
| Sum of 1 through 9 | 7,766 |
The $7.77 trillion also includes $1 trillion for the Fed’s purchases of mortgage-backed securities. These MBS were guaranteed by Fannie Mae and Freddie Mac. Since the U.S. Treasury had already taken over Fannie and Freddie before the Fed made any of these purchases, essentially the guarantor was the U.S. Treasury. It makes no sense to claim that the Fed’s purchases of these securities in any way increased the net liabilities or commitments of the U.S. government. Moreover, at the date when the first 5 categories in the table reached their combined maximum (Dec 17, 2008), the Fed was not holding any MBS. The Fed’s MBS holdings would not reach a trillion dollars until Feb 17, 2010, at which date the combined outstanding balance on the first 5 categories was down to $71 B.
The $7.77 trillion also includes $600 B for outright purchases of Fannie and Freddie debt (which turned out to be only $169 B), and another $300 B for Treasury debt. Buying Treasury debt is what the Federal Reserve has always been doing, and certainly the Fed is holding much more today than it did before the crisis. I have made no effort in the table above to quantify what the “actual” purchases of Treasury securities turned out to be, but wish to point out that, if it is the intention of anyone to talk about the magnitude of “Fed lending to the biggest banks”, it makes no sense to include purchases of Treasury bonds or either of the previous two categories in the total.
The remaining 14% of the $7.77 trillion comes from 12 other separate items whose details I have not tried to track down.
Now, as for the relevance of the observation that the sum of the “potential” amounts for the first 5 categories is almost 4 times the size of their actual combined amounts at any date, I return to Professor Wray’s discussion:
the Fed quibbles about the differences among lending, guarantees, and spending. For the purposes of this blog I will accept these differences and call the sum across the three “commitments.” In spite of what Bernanke claims, these do commit “Uncle Sam” since Fed losses will be absorbed by the Treasury.
But the discrepancies between the “potential” and “actual” columns in the table above cannot reasonably be described as “guarantees.” For example, the basis for the $1.8 trillion figure for CPFF is the following statement issued publicly by the Fed on Oct 14, 2008:
Limits per issuer
The maximum amount of a single issuer’s commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between January 1 and August 31, 2008.
The $1.8 trillion was calculated by assuming that every single institution that qualified would in fact issue new commercial paper that would then be purchased by the Fed up to this maximum amount. Notwithstanding, the same Fed statement continued:
The Federal Reserve reserves the right to review and make adjustments to these terms and conditions, including pricing and eligibility requirements.
I do not believe that “guarantees” is the correct term to use for this or most of the other items included in the Bloomberg tally.
A separate issue concerns whether it is appropriate to add together outstanding loan balances as of different points in time in order to generate a total, for example, adding MBS to items 1-5. Here Professor Wray reasons by analogy:
Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken. At any instant, the bar-keep has committed only six ounces of booze. That is a useful measure of whiskey outstanding. But it is not useful for telling us how much the drunks drank. Bernanke would like us to believe that if the Fed newly lent a trillion bucks every day for 3 years to all our drunken bankers that we should total that as only a trillion greenbacks committed.
But here’s what’s wrong with that analogy. The omitted detail is that after each sailor takes a glass of whiskey, he returns the glass, filled with more whiskey than it originally held, to the bartender. In other words, the loans were always paid back with interest before a new loan was extended. If an individual sailor ended up consuming more than one glass, somebody other than the bartender must have paid for it, if the maximum tab with the bartender that any individual sailor ever had at a single point in time was a single glass.
If you take the position that each new loan should be added as a running contribution to some total, then you are led to maintain that when the Fed loans $1 B to Bank A in the form of a 30-day loan, and loans $1 B to Bank B in the form of an overnight loan that is repaid and renewed each day, then the Fed has 30 times the exposure to Bank B as it does to Bank A. You are further led to infer that the Fed could have lost $1 B in lending to Bank A but somehow could have lost $30 B lending to Bank B. And you are led to infer that it is 30 times safer to make a 1-month loan than it is to make a series of overnight loans in the same amount. Good luck managing your or anybody else’s finances, if that’s your way of thinking.
But Professor Wray goes on to speak admirably about an analysis by his student James Felkerson that does exactly that, and concludes that the Fed lent not $7.77 trillion but instead $29 trillion. For example, Felkerson takes the gross new lending under the Term Auction Facility each week from 2007 to 2010 and adds these numbers together to arrive at a cumulative total that comes to $3.8 trillion. To make the number sound big, of course you want to count only the money going out and pay no attention to the rate at which it is coming back in. If instead you were to take the net new lending under the TAF each week over this period– that is, subtract each week’s loan repayment from that week’s new loan issue– and add those net loan amounts together across all weeks, you would arrive at a cumulative total that equals exactly zero. The number is zero because every loan was repaid, and there are no loans currently outstanding under this program.
But zero isn’t quite as fun a number with which to try to rouse the rabble.
————–[End of Article]—————-
However, there are other secret loans:
No One Says Who Took $586 Billion in Fed Swaps Done in Anonymity
By Scott Lanman and Bradley Keoun – Dec 12, 2011 12:01 AM GMT+0100
For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank’s emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself.
As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent.
The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.
“Increased transparency is warranted here,” given the size of the Fed’s aid and current pressures on European banks, said Representative Randy Neugebauer, a Texas Republican who heads the House Financial Services Subcommittee on Oversight and Investigations.
Whether the U.S. should make disclosure of the recipients a condition of the swap lines is “probably a discussion we need to have,” possibly in a hearing that includes Fed Chairman Ben S. Bernanke, Neugebauer said.
Unprecedented Transparency
The secrecy surrounding foreign central banks’ emergency lending contrasts with unprecedented transparency at the Fed, which was compelled by the 2010 Dodd-Frank Act and court-upheld Freedom of Information Act requests to release details on more than a dozen programs used to combat the U.S. financial crisis from 2007 through 2010. Bernanke this year began holding regular press conferences and has said he is considering ways to make the Fed’s objectives more clear to the public.
Michelle Smith, a Fed spokeswoman, said there is “no formal reporting channel” for the identities of borrowers from other central banks, which are the Fed’s only counterparties on the swap lines and assume any credit risk.
“U.S. taxpayers have never lost a penny” on the program, she said. “Decisions about disclosure by foreign central banks of their financial arrangements with financial institutions in their jurisdictions is an issue for the foreign central banks.”
Turmoil Overseas
Americans may have to accept nondisclosure as a condition of protecting the U.S. economy from turmoil overseas, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
“As much as we might like to say they should have at least as much transparency as the Fed, I don’t know if we want to say, ‘Well, if you don’t, you’re not going to get the money,’” Baker said. U.S. policy makers should encourage international standards for disclosure through talks at forums such as meetings of the Group of 20 nations, he added.
The swaps are separate from Fed emergency loans to banks and other businesses that peaked at $1.2 trillion in December 2008, including about $538 billion that European financial companies borrowed directly, according to a Bloomberg News examination of available data.
The Fed last week released a letter from Bernanke and a staff memo criticizing recent news articles for portraying its crisis-lending efforts as secret, saying that it made aggregate amounts of the loans public. Bloomberg, which published a Nov. 28 article on the topic, said in a point-by-point response that it considered the data secret because the terms of the loans and names of borrowers were withheld. The Fed had resisted disclosing them for more than two years.
Century-Old Program
The Dodd-Frank Act overhauling U.S. financial law included legislation proposed by Senator Bernard Sanders, a Vermont independent, that required the Fed in December 2010 to disclose recipients of aid it provided during the crisis, except for banks that used the liquidity-swap lines or the discount window — a century-old emergency-lending program. Under Dodd-Frank, new Fed borrowers from the discount window are subject to identification with a two-year delay.
Bloomberg LP and News Corp.’s Fox News Network LLC won a court case forcing the Fed last March to name the crisis discount-window borrowers. There hasn’t been any case or law requiring disclosure of banks that borrowed via the swap lines.
“That is certainly a legitimate piece of information for the American people,” and “we’re going to be vigilant in increasing transparency,” said Warren Gunnels, Sanders’ senior policy adviser.
Borrowing Dollars
Foreign central banks borrowed dollars from the Fed for terms as long as three months in return for euros, pounds and yen. The ECB accounted for 80 percent of total swap-line loans during the mortgage-induced financial crisis, according to the U.S. Government Accountability Office, the congressional auditor. The ECB won’t publicly disclose names of borrowers under any circumstances and doesn’t share the identities outside the 17 euro-area central banks, a spokesman wrote in an e-mail.
“These banks have a right to enjoy the standard confidentiality attached to banking transactions,” the spokesman wrote.
European officials may be concerned that future lending might be inhibited by a “stigma phenomenon” if past borrowers are made public, said Ralph Bryant, former director of the Fed’s international-finance division and now a senior fellow at the Brookings Institution in Washington. The concept is “usually overplayed by people, but it’s not something that’s trivial.”
‘Matter of Principle’
The Bank of Japan, which tapped 3.9 percent of the aggregate swap dollars according to the GAO, has no plans to publicize borrowers’ identities and declined to comment on whether it shares the names with the Fed, a spokesman said. The Swiss National Bank, which accounted for 4.6 percent, “as a matter of principle” doesn’t publish counterparties, said Walter Meier, a spokesman.
The Bank of England doesn’t publish details of individual financial institutions’ use of its facilities. Confidence in banks “can best be sustained” if support is disclosed “only when conditions giving rise to potentially systemic disturbance have improved,” it said in its annual report.
Fed policy makers let the program expire in February 2010 then revived it after three months to try to contain Europe’s debt crisis. Nineteen months later, European officials still struggle to contain the market turmoil, which has spread to sovereign bonds in France and Italy as investors increasingly question governments’ ability to repay debt.
Expanding Crisis
The expanding crisis spurred the Fed and other central banks in November to extend the program by six months to Feb. 1, 2013, and lower borrowing costs by half a percentage point to make them more attractive. Last week, European leaders agreed to make loans of as much as 200 billion euros ($267.7 billion) to the International Monetary Fund and tightened rules to curb future debts.
The Fed swap program had a combined balance of $2.3 billion in loans outstanding as of Dec. 7 for all five participating central banks. That doesn’t account for the ECB’s latest dollar auction because the loans hadn’t settled yet.
The GAO, which released its emergency-lending report in July, wasn’t required to delve into the final destinations of the swap dollars, said Orice Williams Brown, the agency’s lead official on Fed audits. As a result of the study, the GAO learned that UBS AG (UBSN)’s October 2008 bailout from the Swiss government included an “atypical use” of swap-line dollars “generally not exceeding about $13 billion,” the report said.
Didn’t Know
Bernanke didn’t know which financial institutions got dollar loans, he said during a July 2009 House Financial Services Committee hearing.
Not having the identities would restrict the Fed’s ability to understand the “overall risk exposure of the institutions it’s supervising,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors Inc.
The Fed may not need all the details, said Al Broaddus, former president of the Federal Reserve Bank of Richmond. The ECB and other central banks “are obliged to pay the Fed back. They’re the ones that are taking the credit risk with the institutions that are actually being lent to.”
In 2008, the dollar-based money markets that many foreign banks used to finance their holdings of U.S. mortgage-backed securities froze, forcing them to turn to the Fed to fill the funding gap. Much of the borrowing was done through U.S. branches that are legally eligible to draw emergency loans from the Fed’s lender-of-last-resort programs, according to the Bloomberg examination.
Biggest Foreign Borrower
The U.K.’s Royal Bank of Scotland Group Plc (RBS) was the biggest foreign borrower, drawing $84.5 billion in October 2008. UBS, based in Zurich, got $77.2 billion, while Frankfurt-based Deutsche Bank AG (DBK) took $66 billion and London-based Barclays Plc (BARC) borrowed $64.9 billion, according to the Bloomberg data.
One of the borrowers, Dexia SA (DEXB), is being broken up after running out of short-term funding. The French-Belgian lender had 120.6 billion euros of central-bank liabilities on Dec. 31, 2008, according to a company report; $58.5 billion came directly from the Fed, the Bloomberg examination showed.
Fed officials, including Governor Daniel Tarullo, have emphasized the need for improved monitoring and control of risks throughout the banking system, as well as global coordination among financial-policy makers. Regulators “must not lose sight of the importance of supervisory cooperation in pursuit of the shared goal of a stable international financial system,” he said in a Nov. 4 speech.
Full Disclosure
Ohio Senator Sherrod Brown, a Democrat who heads the Banking Subcommittee on Financial Institutions and Consumer Protection, said he isn’t sure swap-line borrowers should be made public. Still, the Fed “should follow the money in terms of disclosure, period,” he said. “Full disclosure from start to finish is the goal.”
Massachusetts Representative Barney Frank, the senior Democrat on the House Financial Services Committee, said he saw no need for the disclosure because the Fed has no role in approving the ultimate borrowers.
“What the Fed is doing with regard to the ECB is very important for the American economy,” Frank said. “Our interest is to make sure we get paid back. I think the ECB is a pretty good debtor and a pretty reliable one.”
‘Fundamental Problem’
Joseph Stiglitz, a Nobel Prize-winning economist who led President Bill Clinton’s Council of Economic Advisers, said the “fundamental problem” is that capital markets need information to work properly, yet the Fed is saying, “we believe in capital-market discipline without information.”
“It would be very useful to see” those names, said Stiglitz, a professor at Columbia University in New York. With the dollar auctions of foreign central banks shielded from disclosure, “what we have now is a very partial picture.”
To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net
