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

At the height of the 2008 financial crisis, the Federal Reserve ran a massive, secret program that gave $1.2 trillion in low-cost loans to the largest banks in America and Europe, according to a report by Bloomberg News.

To put that in perspective, $1.2 trillion is roughly equivalent to the federal debt. It’s roughly the same amount that American homeowners owe on foreclosed and delinquent mortgages, Bloomberg reports.

And it equals roughly one-third of all the assets owned by the Federal Reserve.

[Article: BofA Gets Out of International Credit Card Business: Why?]

“That’s a big number,” says Robert Litan, who served on a commission during the 1990s that probed the causes of the savings and loan scandal, and is now a senior vice president at the Kauffman Foundation. “They loaned out basically a third of their balance sheet. It’s clearly a measure of how much trouble the financial sector was in.”

The secret loan program dwarfs all the other federal bailouts, which themselves were hugely controversial for the amount of money at stake, and for the perception by many voters and political leaders that the bailouts were done with little public input. The perception of unbridled spending to bail out the financial sector was one of the primary motivators for the Tea Party movement.

“So I guess I could see this as a third bailout: Fannie & Freddie, TARP, and then the Fed efforts,” says Paul Kiel, who covers the bailout programs for ProPublica. “Of course, these have occurred alongside one another and sometimes have been interrelated.”

Others say this secret Fed program wasn’t a bailout at all.

“That’s literally why we created the Fed, to be a lender of last resort when there’s no liquidity in the system,” Litan says. “I think the Fed was doing its job.”

[Resource: Get your free personalized Credit Report Card]

The Total Bill: Almost $2 Trillion

The largest bailout, known as the Troubled Asset Relief Program (TARP), used $470 billion to shore up large financial institutions and car companies. That included $85 billion to A.I.G., the behemoth financial company that sold mortgage-backed securities as well as insurance policies in case those securities went sour.

In a report published last year, the Obama administration predicted that the government will lose $17 billion on its TARP investments in car companies, plus another $46 billion on housing programs including the Home Affordable Modification Program. Those losses may be balanced by profits the Treasury made from its loans to financial institutions.

Then there were the bailouts of Fannie Mae and Freddie Mac, the government-backed companies that sell, buy and insure mortgages. Those bailouts will cost taxpayers another $154 billion, according to a report from the companies to Congress.

In the case of its secret lending program, the Fed expects to recoup all the money it lent out. In a statement to Bloomberg, the Fed said it had “no credit losses” on any of its emergency loans, and a report by the Fed’s New York branch said it actually gained a $13 billion profit from interest and fees from the loans.

Regardless of how much will eventually be repaid, the amount of money the Fed and Congress lent out or gave away to prevent a full-blown depression is truly staggering. Between TARP, Fannie and Freddie, and the Fed’s secret loan program, $1.824 trillion was spent to stabilize the economy.

[Featured Product: Looking for credit cards for poor credit]

A Fight for Secrecy »

Image: David Beyer, via Flickr.com

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.

[Article: Getting Government Out of Fannie and Freddie]

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.

[Featured Product: Need credit monitoring options?]