Federal Reserve's 'astounding' report: We loaned banks trillions
The Federal Reserve offers details on the loans it gave to banks and others at the height of the financial crisis. One program alone doled out nearly $9 trillion.
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Some other economists echo that view, arguing that the Fed and other bank regulators should have done much more to safeguard against a surge in high-risk mortgage lending during the years leading up to the crisis, at a time when US home prices were soaring.Skip to next paragraph
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Once a crisis is under way, however, the standard view among economists is that a central bank should act as a "lender of last resort," providing credit as freely as possible to prevent widespread bank failures at a time when ordinary investors are in a panic.
Even if the Fed's general approach was the correct one, Wednesday's data release is sure to prompt close analysis of the money lent, and who got it.
Sen. Bernie Sanders, a Vermont independent who led the charge for Fed transparency, characterized the new details as "astounding" and called for an investigation to determine whether banks borrowed at near-zero interest and then loaned money back to the government at higher rates.
He said the bailouts may have helped to line the pockets not only of banks in general, but also of their top executives.
“How many big banks [that] repaid Treasury Department bailouts in order to avoid limits on executive compensation received no-strings attached loans from the Federal Reserve?" Mr. Sanders asked in a statement released Wednesday.
The transaction details may also call into question whether the Fed was too loose in the quality of collateral that it accepted in making loans to banks and in some cases to industrial firms. (McDonald's and Verizon got Fed help.)
Scores of banks, from large to small, came to the Fed's lending windows. But in some cases the rescue programs ended up targeting aid at a few prominent firms.
For example, at the height of the crisis, just four large securities firms were the main recipients of loans from the Fed's Primary Dealer Credit Facility, an overnight loan program for securities firms. Of $3.6 trillion doled out in the six weeks after Sept. 15, 2008 (when Lehman Brothers failed), nearly $3.1 trillion went to Morgan Stanley, Citigroup, Goldman Sachs, or Merrill Lynch.
The Fed argued against disclosing the names of firms that received loans from this and other programs, saying that in a crisis firms should not be worried about a possible stigma attached to getting emergency funds.
Since the loans have largely been repaid in full, the crisis response appears on one level to impose little direct cost on the public. The biggest cost of the rescues may be indirect. Propping up financial firms can encourage risky behavior, and thus sow the seeds of future crises, by making financial firms believe they are too important to be allowed to fail.
Congress recently passed financial reforms designed to address this problem, but Mr. Kyle and other finance experts say the measure has not fully resolved that problem.