On December 5th, 2008, the Fed secretly bailed out banks for a combined total of $1.2 trillion. To place that figure ever so slightly into perspective, that’s about one-twelfth of the 2010 US GDP, approximately half of the total tax revenue collected in 2010, and about three times Obama’s proposed stimulus package. But instead of simply not telling the whole truth, banks misleadingly assured investors of their financial health and stability while concomitantly taking on covert emergency loans. In retrospective, we now recognize this deceptiveness when, for example, 2008 Bank of America CEO described his company as “one of the strongest and most stable major banks in the world.” Note: BofA’s debt to the central bank totaled $86 billion at the time.
However, the Fed claims that almost all the loans were repaid from the transactions and that naturally, a core function of the central banks is stabilizing markets. But the problems lie in the effects: possible taxpayer burdens, enablement of further bulge bracket bank growth and a distorted financial picture of America. The Fed was able to advise the misinformed Treasury Department of propitious TARP loan recipients—which, to no surprise, consisted of the six biggest banks: JPMorgan, BofA, Citigroup, Wells Fargo, Goldman and Morgan Stanley. If the US Treasury had practically no idea, we can only imagine how ill-informed lawmakers were. So if this information had been out in the open, legislation would have placed much more weight on the matter when considering fiscal reforms and policies.
An equally controversial matter is the implication that with these loans, banks might have pocketed some profits due to the Fed’s low interest rates: approximately $13 billion. Of course, this figure is a mere estimate, calculated by investing the entire funds at the stated margins. But it suggests that while the Fed didn’t necessarily lose out, banks benefited—quite an unsettling idea given the current economic landscape.
BY: Nona Makaveeva