So That’s Where the Money Went

By GRETCHEN MORGENSON for the New York Times

HOW the truth shines through when you shed a little light on a subject.

Such is the message from the massive document drop the Federal Reserve made last week. The Dodd-Frank law forced the Fed to disclose the recipients of $3.3 trillion from emergency lending programs put in place during the crisis days of 2008, so the taxpayers who paid for those rescue efforts now know whom they were helping.

Not that we should expect to receive any thank-you notes from these institutions for rescuing them from themselves.

Still, it’s good to know who got what at the bailout banquet. This helps us understand how expensive it is to live in a nation where big, politically interconnected financial institutions are not allowed to fail — even after they mess up in the most catastrophic of ways.

The Fed data showed that the biggest recipient of taxpayer assistance was, naturally, Citigroup. It was followed closely by Morgan Stanley, Merrill Lynch and Bank of America. Goldman Sachs was also a large beneficiary during the darkest moments of 2008.

Remember that the Wall Street firms were imperiled by their excessive use of borrowed money, which generated huge paydays when the cost of those funds was cheap and the values of the assets they were buying were rising at a steady clip. After the bubble burst and financing evaporated, the firms were able to tap into a lending program created by the Fed in mid-March 2008 after Bear Stearns collapsed. It was called the Primary Dealer Credit Facility.

The program allowed firms to borrow at low interest rates — ranging from 3.25 percent when the program began to 0.5 percent when the last loan was made in May 2009. The firms had to post various securities as collateral when they borrowed, and some of those securities were risky indeed.

Last week, the Fed provided spreadsheets identifying the companies that used the credit facility each day. Changes in these borrowings offer a window onto how quickly panic tore across Wall Street in September 2008.

For example, there were zero borrowings during August and even in early September, when Fannie Mae and Freddie Mac collapsed. But on Sept. 17, the day after the government rescued the American International Group with an $85 billion infusion, borrowings from the facility neared $60 billion. Lending in the facility peaked at $156 billion on Sept. 29, the day the House of Representatives voted down the Treasury’s bank bailout plan.

IT is interesting to review the borrowings of specific companies. Right after Lehman failed, for example, Morgan Stanley began tapping into the credit facility every day; it didn’t stop until early March 2009. Morgan Stanley’s borrowings peaked at $61.3 billion on Sept. 29.

Between Sept. 15 and Nov. 26 of 2008, Goldman Sachs also tapped the facility each day. The company began by borrowing $2.5 billion; its peak was $24.2 billion on Oct. 15.

By Nov. 10, Goldman’s borrowings had fallen to $7 billion; that was the day the New York Fed said it would make Goldman and other A.I.G. trading partners whole on credit insurance they had purchased from A.I.G. on troubled mortgage securities. Under that deal, Goldman received $5.6 billion from the Fed.

All of the emergency lending data released by the Fed are highly revealing, but why weren’t they made public much earlier? That’s a question that Walker F. Todd, a research fellow at the American Institute for Economic Research, is asking.

Mr. Todd, a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland, said details about the Fed’s vast and various programs should have been available before the Dodd-Frank regulatory reform law was even written.

“The Fed’s current set of powers and the shape of the Dodd-Frank bill over all might have looked quite different if this information had been made public during the debate on the bill,” he said. “Had these tables been out there, I think Congress would have either said no to emergency lending authority or if you get it, it’s going to be a much lower number — half a trillion dollars in the aggregate.”

Better late with the data than never, of course. And the release of these figures just ahead of Friday’s grim employment data — the jobless rate rose to 9.8 percent in November — makes them even more compelling. Clearly, the federal government was much more willing to deliver mountains of money to big banks that made big mistakes than it was to lend a financial hand to rank-and-file Americans struggling through foreclosures.

Federal officials have always argued that plowing money into errant banks and trading shops was the best way to rescue the economy, but to Edward J. Kane, professor of economics at Boston College, details of the Fed’s largess are reminiscent of a famous Winston Churchill quotation.

“Never have so few owed so much to so many, and given them so small a return,” Mr. Kane said. “We see, for example, how little these institutions have given back to troubled homeowners whose houses are threatened with foreclosure.”

Mr. Kane’s point is important. Certainly, the low interest rates the Fed charged to institutional borrowers during the disaster translate into a significant subsidy, indeed a gift, to many of the firms that set the financial collapse in motion.

But the Fed is silent on how big that subsidy actually was.

Estimating its size will be the subject of much work in the coming months and years. For now, here’s a quick and dirty estimate of how much the Fed subsidized borrowers in just one program — the Primary Dealer Credit Facility — for just two weeks in September 2008.

From Sept. 15 through the end of that month, borrowings averaged around $100 billion a day. The interest rate charged on those loans was 2.25 percent.

Given that markets were frozen at that time, and given the dubious quality of some of the collateral posted to the Fed to back the loans, an interest rate of 10 percent would be a reasonable benchmark for measuring the size of this subsidy.

On the one hand, Citigroup, Barclays, Morgan Stanley, Goldman and the others paid roughly $75 million in interest over that September fortnight. Had the Fed charged 10 percent, the firms would have paid about $325 million. For just those firms, over only that period, that’s a $250 million subsidy.

“The justification was, this was to prevent the markets from exploding and the economy from being ruined,” Mr. Kane said. “They always explain their actions against doing nothing: ‘If we had done nothing, this would have been a terrible mess.’”

But the Fed has never identified any alternative approaches it might have taken other than the one it chose: simply hurling huge snowballs of cash at Wall Street.

One could argue that the size of the subsidy provided by the Fed to financial institutions during the crisis was a direct result of the fact that the government simply had no plan in place for resolving failing institutions.

“I see this as somewhat of a measure of the panic in which the Fed was operating,” Mr. Kane said. “The way I see it, they were mugged. And through them, the taxpayer was mugged.”


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