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Dec 17

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Details of the Federal Reserve’s Mammoth Secret Loan Program

In a November 29, 2011 article entitled “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress”, Bloomberg provided details of detailed original analysis of the Federal Reserve’s loan program that began in 2008 and continued at a high level throughout 2009. This Federal Reserve loan program has not received anywhere near the attention that it deserves.

The $13 billion giveaway is Bloomberg’s estimate of what returns the borrowers could have earned by investing the low-interest-rate funds, even if every penny of the loans is repaid. The $13 billion estimate was calculated as each borrower’s net interest margin, times the amounts borrowed from the Fed, times the periods that the loans were outstanding. While some might claim that the borrowings from the Fed were not used for a typical loan, it is undeniable that (i) the Fed loans were at favorable interest rates when compared to other borrowing alternatives, and (ii) the loans were outstanding for a sufficiently long period that income-generating activities were certainly possible.

Putting aside the give-away using public funds, the loans lacked transparency and oversight. Bloomberg described the previously-available information as follows:

The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view. The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak. ”

The loans had no Congressional or other meaningful oversight or restrictions outside of the Fed itself. Bloomberg described the enormity of the secret loan program as follows:

It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.”

Bloomberg reported the loans to each company separately, which made it more difficult to understand how the various loans compared between companies. We compiled the following table based on the Bloomberg statistics. Our article further summarizes Bloomberg’s methodology and details.

Company Company’s
Headquarters
Average
Balance
# of Days
in Debt to
Fed
Peak Balance
Amount Date
Royal Bank of Scotland United Kingdom 21.4 billion 661 84.5 billion 10/10/2008
Barclays United Kingdom 19.2 billion 724 64.9 billion 12/24/2008
Citigroup Inc. U.S. 19.7 billion 692 99.5 billion 1/20/2009
Dexia SA Belgium/France 15.4 billion 756 58.5 billion 12/31/2008
Bank of America U.S. 20.7 billion 519 91.4 billion 2/26/2009
Hypo Real Estate Holding Germany 10.7 billion 750 28.7 billion 11/4/2008
JPMorgan Chase U.S. 12.0 billion 525 68.6 billion 10/1/2008
UBS AG Switzerland 13.9 billion 435 77.2 billion 11/28/2008
HBOS PLC United Kingdom 8.3 billion 672 18.0 billion 11/20/2008
Deutsch Bank Germany 12.5 billion 439 66.0 billion 11/8/2008
Credit Swiss Group Switzerland 13.3 billion 386 60.8 billion 8/27/2008
BNP Paribas France/UK 7.1 billion 717 29.3 billion 4/18/2008
Societe Generale SA France 6.9 billion 686 17.4 billion 5/22/2008
Fortis Bank SA Belgium 6.5 billion 672 26.3 billion 2/28/2009
State Street Corp U.S. 7.1 billion 606 77.8 billion 10/1/2008
Wells Fargo & Co U.S. 8.5 billion 504 45.0 billion 2/28/2009
Norinchukin Bank Japan 7.6 billion 543 22.0 billion 6/29/2009
Commerzbank AG Germany 5.1 billion 709 22.0 billion 7/16/20009
Dresdner Bank AG Germany 5.8 billion 574 18.4 billion 7/2/2008
Goldman Sachs Group U.S. 7.5 billion 438 69.0 billion 12/31/2008
Merrill Lynch U.S. 8.3 billion 376 62.1 billion 9/26/2008
Wachovia Bank U.S. 6.9 billion 449 50.0 billion 10/9/2008
AIG U.S. 5.4 billion 544 16.2 billion 1/27/2009
Morgan Stanley U.S. 6.9 billion 377 107.0 billion 9/29/2008
Arab Banking Corp Bahrain 1.9 billion 784 5.7 billion 7/18/2009
Bayerische Landesbank Germany 1.4 billion 611 4.3 billion 4/23/2009
Lehman Brothers U.S. 3.1 billion 195 46.0 billion 9/15/2008
Bear Stearns U.S. 1.4 billion 104 30.0 billion 3/28/2008

I found the identity of the loans shocking. More than half of the largest borrowers are banks and investment companies that are not U.S. based. The Federal Reserve has not publicly justified these foreign bank loans. Congress should change the laws to prevent this type of activity from occurring without additional oversight, control, and disclosure.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2011/12/details-of-the-federal-reserve%e2%80%99s-mammoth-secret-loan-program/

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