Bloomberg: The Secret Bailout? Secret Fed Program Lent Big Banks $1.2 Trillion

A Fight for Secrecy

The fact that the largest stabilization program happened almost entirely in secret is nothing new, Litan says. It has been the Fed’s policy for decades to keep its emergency loans to banks private.

“The thought was that you didn’t want information like this to come out because you could create a panic and make it worse,” Litan says. “If it had come out at the time that some of these banks were borrowing $100 billion each, you could push depositors to take more money out, which then increases how much it would cost the Fed” to shore up the banks.

The loan recipients and the Fed fought tooth and nail to keep the information secret. For two years the Fed denied Bloomberg’s Freedom of Information Act request for documents related to the program. Large commercial banks also asked the U.S. Supreme Court to overturn a lower court’s ruling that the documents should be made public.

When the top court declined to hear the appeal, the Fed was forced to turn over 29,346 pages of documents.

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Big Surprises Revealed

Some of what Bloomberg found in the documents is truly surprising. In September 2008, two weeks after Lehman Brothers declared bankruptcy, Morgan Stanley squelched concerns that it too might go under by releasing a statement that it had “strong capital and liquidity positions.” In the announcement, Morgan Stanley pointed out that it had just secured a $9 billion investment from Mitsubishi UFJ Financial Group.

But it neglected to mention the fact that on that same day, it owed the Fed $107.3 billion, which accounted for nearly all of the company’s liquidity.

That amount equaled nearly three times Morgan Stanley’s total profits for the entire last decade, Bloomberg reports.

Nor was it just American firms that benefited from the Fed’s lending spree. The Royal Bank of Scotland received $84.5 billion, and the Swiss bank UBS borrowed $77.2 billion.

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