Wall Street Secretly Borrowed $1.2 Trillion From the Fed

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Home of the Money. Photo: Mark Wilson/Getty Images

The largest and most powerful financial institutions in the world all borrowed billions of dollars in emergency loans from the United States Federal Reserve during the financial crisis, totaling up to $1.2 trillion, a number that has remained secret until now. The $160 billion public bailout was "dwarfed," Bloomberg reports, by the Fed's covert lending, which included $107.3 billion to Morgan Stanley, $99.5 billion to Citigroup, and $91.4 billion to Bank of America. As one expert put it, "You’re talking about the aristocracy of American finance going down the tubes without the federal money."

The borrowing spanned American banks, brokerage firms, and international institutions, and peaked on December 5, 2008; all told, the figure "was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010," according to Bloomberg's math. If that's not enough perspective, think of it as enough to fill "539 Olympic-size swimming pools" in $1 bills.

Even banks that did not use government bailout money still participated in the confidential program, which allowed them to "engage in excessive risk-taking with borrowed money," according to a former chief economist at the IMF. If they didn't need the money to survive, banks could still use the program to maximize profits by borrowing "from the cheapest source, because this was supposed to be secret and never revealed," one economics professor explained to Bloomberg. As collateral, the government was accepting "just about anything," one researcher said, including junk bonds and stocks.

The Fed "argued for more than two years that releasing the identities of borrowers and the terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs," but this year a court disagreed, and the numbers and borrowers are now public (and colossal). JPMorgan's Jamie Dimon said in a letter to shareholders that his bank used the program "at the request of the Federal Reserve to help motivate others to use the system," but in February of 2009, a year after the program was created, JPMorgan's government borrowing hit $48 billion. Citigroup, at one point borrowing from six Fed programs simultaneously, had loans amounting "to more than twice the federal Department of Education’s 2011 budget." And even Goldman Sachs, the most profitable of the bunch, borrowed $69 billion in government money on December 31, 2008.

Although American homeowners are still behind on their payments and the chances of another recession are rising, the Fed reported that their emergency Wall Street programs resulted in "no credit losses," and even earned $13 billion in interest and fees: "Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses."

Wall Street Aristocracy Got $1.2 Trillion in Loans from Fed [Bloomberg]