Federal Reserve's 'Astounding' Report: We Loaned Banks Trillions

By Trumbull, Mark | The Christian Science Monitor, December 1, 2010 | Go to article overview

Federal Reserve's 'Astounding' Report: We Loaned Banks Trillions


Trumbull, Mark, The Christian Science Monitor


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.

The Federal Reserve has lifted its veil of secrecy regarding special lending programs during the financial crisis, responding to a mandate from Congress by revealing the specifics of transactions with firms like Goldman Sachs and Citigroup.

Critics of the Federal Reserve are poring over the data, seeking red flags regarding potential improprieties. And Congress has asked its Government Accountability Office to sift through the numbers and offer its own analysis.

At the same time, it's possible that the release of details will end up largely vindicating the Fed for the massive financial support that it gave the economy at a time of severe stress. The emergency loans, in the view of many finance experts, helped to avert a much deeper economic slump. And those loans have now been largely paid back without losses to the central bank.

The numbers are staggering, encompassing more than a dozen emergency programs set up starting in 2007 or 2008. In one program alone the Fed doled out nearly $9 trillion in funds to borrowers such as Morgan Stanley and Merrill Lynch, largely at interest rates below 1 percent. (This program involved overnight loans, so the amount of Fed credit outstanding at any single point in time was much smaller.)

Other programs, with longer-term loans also measured in the trillions of dollars.

The Fed actions were just part of a larger array of government bailouts for the financial industry, which were deeply unpopular with most Americans. Rescue programs run outside the Fed included insurance-style backstops for bank debts and the investments from the Treasury's $700 billion TARP (Troubled Asset Relief Program).

Despite the public outrage stirred by the actions to prop up firms like Citigroup and AIG, the Fed's biggest mistakes may have come before the recession rather than in response to it.

"My view is that the Fed has done an excellent job since the crisis started, but they didn't do a very good job before the crisis started," says Pete Kyle, a finance expert at the University of Maryland. He says the central bank, as a key financial regulator, should have ensured that US banks had plenty of capital on hand to weather a storm.

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. …

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