On Monday, after two years of efforts to pierce the veil of secrecy surrounding the largest bank bailout in history, Bloomberg.com revealed the true scope of the phrase, “too big to fail.” In short, the number is staggering: total loan guarantees and lending limits engineered by the Federal Reserve to rescue the financial system amounted to $7.77 trillion as of March 2009. Bloomberg got the information after the Supreme Court rejected an appeal last March by the Clearing House Association LLC, a group comprised of the nation’s largest commercial banks. They, along with Fed Chairman Ben Bernanke, tried to prevent the details from becoming public. The ultimate question: was both the scope of the effort–and the secrecy surrounding it–necessary? Unfortunately, the answer to that question is far from clear.
One thing is certain. In order to accept that any or all parts of the numerous transactions involved were necessary, one is required to accept as a given that the entire financial world was on the brink of systemic collapse. Was it? Perhaps a more accurate answer to that question is that thestatus quo was on the brink of collapse. It was a status quo where “too big to fail” had been institutionalized long before this particular crisis took hold. In 1984, faced with the failure of Continental Illinois, a large commercial bank, the government not only engineered a rescue, but extended FDIC insurance to both the bank depositors and all its other lenders, including those whose accounts exceeded FDIC limits, as well as global bondholders. In 1998, Long-Term Capital Management, a hedge fund whose financial excesses had many major Wall Street firms on the hook, was rescued by the Federal Reserve with funding from its member banks. Thus, long before the government-engineered housing crisis that led to the debacle of 2008 took hold, the pattern of “privatizing profits and socializing losses” had been established. This situation virtually invited financial institutions to take greater and greater risks.
As this latest revelation shows, those risks reached astronomical levels. In a single day, December 5, 2008, the banks were in such dire straits they needed a combined $1.2 trillion to remain solvent. Yet even as financial institutions were taking Fed funds, some of their leading officers were touting the strengths of the institutions involved. On Nov. 26, 2008, Bank of America Corp.’s former CEO, Kenneth D. Lewis, informed shareholders that B of A was “one of the strongest and most stable major banks in the world” despite owing the Federal Reserve $86 billion at the time. In a March 26 letter to shareholders, JP Morgan Chase & Co. CEO Jamie Dimon claimed his firm used the Fed’s Term Auction Facility (TAF) “at the request of the Federal Reserve to help motivate others to use the system,” even though the bank’s total borrowings were nearly twice its cash holdings. He also failed to mention that the height of Chase’s borrowing, which crested to $48 billion, occurred on Feb. 26, 2009–over a year after the TAF had been created. Spokesmen for both banks declined to comment.
Furthermore, borrowing by banks from the Fed substantially exceeded the $700 billion they borrowed from the Troubled Asset Relief Program (TARP), the rescue plan engineered by the government. The six largest U.S. banks–JP Morgan, Bank of America, Citigroup, Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley–received $160 billion of TARP funds, even as they took $460 billion from the Fed. Such borrowing amounted to 63 percent of the average daily debt owed to the Fed by all publicly traded U.S. banks, money managers and investment-service firms. That represented a 13 percent increase from the 50 percent the Big Six owed prior to the bailout.
And then there was the secrecy.
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