top of page

And We Thought TARP Was Big

The Treasury Department’s Troubled Asset Relief Program was funded by $700 billion in public money. But that number was dwarfed by the Federal Reserve’s secret (now public) lending program during the financial crisis.

Through the Freedom of Information Act and litigation, Bloomberg obtained data that show the Fed lent $1.2 trillion in public money to financial institutions from August 2007 to April 2010. The Fed held a veil over the program because disclosing the numbers would “stigmatize” banks and impact stock prices.

And the numbers are nothing to scoff at. Morgan Stanley borrowed the most with a peak loan of $107.3 billion. That peak was reached on September 29, 2008… that very same day the firm issued a press release indicating that it had “strong capital and liquidity positions”. But what’s striking here is that the total borrowed amounts to almost three times the bank’s total profits over the past decade, according to Bloomberg.

Citigroup borrowed $99.5 billion. At one point the firm was simultaneously taking loans from six Fed programs. Those programs sustained the firm for a long time: from August 2007 to April 2010 the firm had an average daily balance of $20 billion. And the totaled borrowed equaled more than double the Department of Educations total budget for 2011.

Bank of America borrowed $91.4 billion. Goldman Sachs borrowed $69 billion. And it wasn’t only American banks. Nearly half of the top 30 borrowers were European.

But to really put the lending in perspective, that $1.2 trillion is about equal to the total owed on 6.5 delinquent and foreclosed mortgages in the U.S, according to Bloomberg. And when the borrowing peaked in 2008, it was almost three times the federal budget deficit for that year. And to give you a visual, that $1.2 trillion, if denominated in $1 bills, would fill 539 Olympic-sized swimming pools.

Perspectives and visuals aside, the problem is the risk that was taken with public money. The Fed reduced its standards for collateral on the loans. Normally collateral would consist of the highest credit quality bonds, such as Treasuries. But during the financial crisis those standards were reduced to junk bonds…even shares of stock. The bottom line is the Fed was willing to lend against just about anything.

As bad as all of this sounds, it turned out in the end. The Fed didn’t experience any losses, and made $13 billion in interest payments. But that doesn’t erase the fact that risks were taken behind closed doors with taxpayers money. To put it simply, “Resolving the financial crisis is one of those events in which justice and success do not occur together”, according to New York Times columnist Floyd Norris.

The bottom line: U.S. bank stocks didn’t need the veil lifted on the Fed’s lending to hit their stock prices…the market already took care of that. Financials have been lagging other sectors for the past year, down -18.8% year-to-date. And looking at a proxy, Financials Select Sector SPDR, the space has been a long-term sell since late June.


bottom of page