Fed handed out $1.2 Trillion in secret loans during the crisis.

[maple_leafs182]

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

tocracy-got-1-2-trillion-in-fed-s-secret-loans.html'>Source

End the Fed!

[Oleg Bach]

Just goes to show you that America is a capitialist state - run by capitialist - elected and non-elected - They just put out the word and say to government...We want some money - we are running low -go into the public purse and steal a trillion and send it our way - the people are to damned stupid to figure it out" - If the average person understood how the status quo maintains itself during a crisis - there would be a revolution - but not to worry - the public are a trusting bunch of sheep who admire and worship the super rich and powerful - not understanding that it is their power that they reliquish to maintain established orgainzed crime..

[MiddleClassCentrist]

Their two party system is way to easy for corporations to control.

American hasn't been a democracy for a long time.

It's plutocracy and it's about time Americans wake up to this fact.

[joeblack]

Yes, because we all know bank runs and financial institutions collapsing is an even better alternative....

[charter.rights]

Yes, because we all know bank runs and financial institutions collapsing is an even better alternative....

In a truly market economy the survival of any business including banks, is subject to the whim of the market. Had the banks collapsed it would have been devastating. However, their bailout is proof that a market economy does not work.

[MiddleClassCentrist]

In a truly market economy the survival of any business including banks, is subject to the whim of the market. Had the banks collapsed it would have been devastating. However, their bailout is proof that a market economy does not work.

If only die hard conservatives would realize this...

[joeblack]

The bailout is proof that bad credit extended to people who shouldn't have said credit in the first place and multiplied hugely, and using said credit as a financial instrument that can be used as hedging capital can cause very large problems.

It has no bearing on the validity of the market economy. What's the alternative? Central planning? Marx called, he wants his economic policies back.

Edited August 23, 2011 by joeblack

[bush_cheney2004]

Their two party system is way to easy for corporations to control.

American hasn't been a democracy for a long time.

It's plutocracy and it's about time Americans wake up to this fact.

Sure...just as soon as Canada does.

[msj]

The bailout is proof that bad credit extended to people who shouldn't have said credit in the first place and multiplied hugely, and using said credit as a financial instrument that can be used as hedging capital can cause very large problems.

It has no bearing on the validity of the market economy. What's the alternative? Central planning? Marx called, he wants his economic policies back.

The problem was with the people and institutions who were lending that credit. Rational banks do not lend money to people unless they expect that money to be repaid. But when the incentive system gets as screwed up as it has, well, then banks do stupid things.

Read Michael Lewis' "The Big Short" and maybe Barry Ritholtz' "Bailout Nation" and then you will know enough about the US banking system to make a coherent argument.

As for the title of this thread: the "loans" weren't really secret for those of us who have been paying attention.

[Bonam]

The problem was with the people and institutions who were lending that credit. Rational banks do not lend money to people unless they expect that money to be repaid.

They do if they can sell the risk to someone else.

[msj]

They do if they can sell the risk to someone else.

Very good.

The "dumb money" ended up being held by Wall Street and some people in Dusseldorf....

[msj]

Of course, the really "dumb money" is the US taxpayer who has been poorly served by politicians who cow tow to Wall Street.

[joeblack]

MSJ, pretty broad brush you're painting with...

Like I first said, the issue was the extension of credit to people who shouldn't have had it in the first place. I could have gone into more detail about how the "little lenders" in turn sold that debt to the investment banks, the investment banks turned around and bundled that credit into AAA-rated tranches, Freddie Mae and Fannie Mac in turn guaranteed said investment vehicles, AIG took the other side of the trade, and due to the loopholes of US FASB accounting, turned that debt into an asset that can be used for leveraging the purchase of more of those credit tranches, funded by loans from other big banks. Then the whole mess was sold to institutional investors all around the world, and the house of cards stayed together until the teaser rates on the mortgages ran out (hence "sub prime) and everything came tumbling down...

Suffice it to say we are actually on the same page. And interestingly enough, for those who don't want to read, South Park actually did an excellent job of explaining the above as well.

And as was stated, the "loans" this thread is talking about are not a surprise/secret. I think the next "sky is falling" article that should be posted should be about how the private non-investment banks (Ie. JP Morgan, Wells Fargo) gave out billions in secret loans too. We could have a real conspiracy on our hands.

The problem was with the people and institutions who were lending that credit. Rational banks do not lend money to people unless they expect that money to be repaid. But when the incentive system gets as screwed up as it has, well, then banks do stupid things.

Read Michael Lewis' "The Big Short" and maybe Barry Ritholtz' "Bailout Nation" and then you will know enough about the US banking system to make a coherent argument.

As for the title of this thread: the "loans" weren't really secret for those of us who have been paying attention.

Edited August 23, 2011 by joeblack

[msj]

So, Joe, if you understand it so well, then why aren't you pointing a finger at the complete and utter failure of the "free market" to regulate itself so that the "subprime" debacle (aka crying all the way to the US taxpayer to cover Wall Street losses) never would have happened in the first place?

Of course this has a bearing on the market economy and yes we should be judging accordingly.

[joeblack]

MSJ,

I'm not necessarily disagreeing with you. My argument would be that the US financial system specifically is the issue, not free market theories. I also think that the Freddie Mac and Fannie May programs are heavily to blame, as is the US FASB system of allowing insured debt to be classified as an asset.

Free market and regulation are contradictory in the sense that you've described it. The free market did its thing, with the investment banks making a killing while the getting was good. Then the market responded accordingly by dumping the worthless sub prime mortgage vehicles. The trouble was that the dumping put an unbearable strain on the banking systems of the US, most specifically the investment banks that were hugely leveraged. A strong argument can be made that the market DID "regulate" itself, for better or worse, via the stock sell-offs in '08.

With that in mind, I'm not saying it was the most beneficial thing to have happen. I quite like the Canadian system, where banks are regulated a heck of a lot more than the US instituions are/were. We also have heavier liquidity requirements up here, so that banks can't be so heavily leveraged as to cause problems. The Canadian system also follows IFRS accounting principles, so that insured debt can no longer be classified as assets. A combination of the above I think leads to a far more stable financial system than the one our US brothers have, through a combination of a more liquid foundation as well as more accurate balance sheet info.

I guess my beef is that a lot of people cry foul about the current system, when I tend to think it's the "least worst" option. Like Churchill said, democracy is the "...worst form of Gov­ern­ment except for all those other forms that have been tried..." and I would measure our current market system the same way. I guess you have to ask yourself what other options we have, and personally, I can't come up with anything else other than the current system with slightly more/slightly less regulation. And to keep on topic, the bailouts were a way to keep the current system running, as it was the "least worst" option we had at the time.

Edited August 23, 2011 by joeblack

[maple_leafs182]

Yes, because we all know bank runs and financial institutions collapsing is an even better alternative....

Yes it would have been. Wait till the bubble bursts in the bond market and you will see the collapse of the dollar which will be far more devastating then letting some banks and big corporations fail.

[joeblack]

"Some" banks fail? Lehman failed, and look at the crash it caused. The thing is if the US had let any more of the banks fail, the whole system would have collapsed over night, taking with it the Western European banks as well as the Canadian ones. It wasn't that "some" banks would fail; they all would have. Then what?

And forgive my ignorance but you're going to have to explain this bond bubble to me. Especially after the S&P downgrade, and how instead of people fleeing bonds, they bought more. And have after a third round of "quantitative easing" there is still a huge market for US T-Bills... I don't see the US dollar collapsing. Losing value, yes, but that's relatitive to what side of the currency you're on.

[msj]

"Some" banks fail? Lehman failed, and look at the crash it caused. The thing is if the US had let any more of the banks fail, the whole system would have collapsed over night, taking with it the Western European banks as well as the Canadian ones. It wasn't that "some" banks would fail; they all would have. Then what?

It's called pre-packaged bankruptcy. Sweden did it in the mid '90's and the US should have done it too.

[Pliny]

Yes, because we all know bank runs and financial institutions collapsing is an even better alternative....

No, not banks and financial institutions...scam operations yes. Why should crooks; or at the least poor managers, who abandoned prudence, be bailed out? Actually, I believe the government laid the grounds that created the moral hazard to abandon prudence in the first place. It only takes one to start the snowball rolling and everyone was clamoring to get on board old Barney's bus. That's Barney Frank who reassured everyone All was well, with a, "Don't worry, we'll buy up those mortgages. We're getting all Americans to own a home."

[Pliny]

In a truly market economy the survival of any business including banks, is subject to the whim of the market. Had the banks collapsed it would have been devastating. However, their bailout is proof that a market economy does not work.

Sorry, it's proof it does. The bailout is proof that bad business too big to fail will be supported by taxpayer dollars and not the market.

[Sir Bandelot]

Sorry, it's proof it does. The bailout is proof that bad business too big to fail will be supported by taxpayer dollars and not the market.

This 'secret' payment is the QE3 I said they already did, the day after they lost the credit rating. Now on to 'QE4' already.

Sad, politicians have no problem writing big checks for the rich who are in danger of losing their percentages, while they bitch about using public money for health care. And then we shake our heads in disbelief when huge riots start breaking out...

[dre]

No, not banks and financial institutions...scam operations yes. Why should crooks; or at the least poor managers, who abandoned prudence, be bailed out? Actually, I believe the government laid the grounds that created the moral hazard to abandon prudence in the first place. It only takes one to start the snowball rolling and everyone was clamoring to get on board old Barney's bus. That's Barney Frank who reassured everyone All was well, with a, "Don't worry, we'll buy up those mortgages. We're getting all Americans to own a home."

Your history lesson is full of bogus facts as usual. The instituions subject to government control and regulation were actually reducing securitization prior to the meltdown, and the vast majority of mortgages were being securitized by investment banks and other institutions not subject to much regulation.

THe mortal hazard was created in the last 90's when the private sector started experimenting with new vehicles to hide risk.

[dre]

Sorry, it's proof it does. The bailout is proof that bad business too big to fail will be supported by taxpayer dollars and not the market.

An orgy of gambling and irresponisble behavior by private financial institutions that would have brought down the financial system and damaged the livelyhoods of billions of people is proof something works?

[Bonam]

An orgy of gambling and irresponisble behavior by private financial institutions that would have brought down the financial system and damaged the livelyhoods of billions of people is proof something works?

The effects of letting these reckless institutions fail have been direly overstated and people bought into it hook, line, and sinker. It would not have "brought down the financial system". Far from it, it would have improved the system, as we flushed out the garbage. Prudent companies would have remained and come out much stronger after acquiring their old competitors at major discounts. The bailouts were a horrible horrible mistake.

The fact that many companies that were acting recklessly were about to get destroyed is indeed proof the market works, as Pliny said. These companies were getting what was coming to them. Then the government decided to bail them out. To prop up worthless garbage companies so that they could continue to spam the financial system with their junk. That's not the market anymore, that's politics interfering with it to no good end.

[charter.rights]

The effects of letting these reckless institutions fail have been direly overstated and people bought into it hook, line, and sinker. It would not have "brought down the financial system". Far from it, it would have improved the system, as we flushed out the garbage. Prudent companies would have remained and come out much stronger after acquiring their old competitors at major discounts. The bailouts were a horrible horrible mistake.

The fact that many companies that were acting recklessly were about to get destroyed is indeed proof the market works, as Pliny said. These companies were getting what was coming to them. Then the government decided to bail them out. To prop up worthless garbage companies so that they could continue to spam the financial system with their junk. That's not the market anymore, that's politics interfering with it to no good end.

However, the problem with the banks is that they are holding debt which is secured by the federal treasury. Had they folded, the treasury would have had to assume their debt. With only 10% of retained assets the treasury did not have the money to cover the debt.