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Nov 28 2011

Surprise: The Banks, The Treasury Department And The Federal Reserve Lied

(4 pm. – promoted by ek hornbeck)

As if we didn’t know that they were all lying through their teeth on the extent of the bank bail out in late 2008, we’ve just never been sure of the price tag of all those lies. Now due to the dogged diligence of Bloomberg News, we have a better picture if what was handed out to the banks with no strings, $7.77 TRILLION. TARP, a mere $750 billion, was just 2% of that and who could forget the squawking from Congress that went on about that paltry sum.

Meantime the Federal Reserve has been fighting to keep the details of the largest bank bailout in US history buried from the public:

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse. [..]

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”

Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.

As expected, Obama’s Treasury Secretary, Timothy Geithner, one of the chief architects of this hand out, fought limiting the size of banks. David Dayen at FDL points this out from the article:

   On May 4, 2010, Geithner visited (former Sen. Ted) Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission.

   At the meeting with Kaufman, Geithner argued that the issue of limiting bank size (Kaufman and Brown were working on a simple bill to cap bank size) was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman.

Not only have the banks and the regulators lied, they continue to lie. From Yves Smith at naked capitalism:

I get really offended by the bogus accounting, such as the “banks paid back the TARP” or “the Fed lost no money on its lending facilities,” which this story annoyingly has to repeat out of adherence to journalistic convention. This is all three card Monte. So what if the banks paid back loans when the central bank has goosed asset prices vis super low interest rates? That’s a massive tax on savers. And we have the hidden subsidy of underpriced bank rescue insurance. Ed Kane estimates that’s worth $300 billion a year for US banks; Andrew Haldane of the Bank of England has pencilled the annual cost as exceeding the market cap of big banks (and that was in 2010, when their stock prices were higher than now).

The Fed is most assuredly going to have losses. It hoovered up a ton of Treasuries and MBS to shore up asset prices at time when interest rates were already low. The central bank intends to sell them when interest rates rise, to soak up liquidity. Buying when interest rates are low and selling when rates are high guarantees losses. As an old Wall Street saying goes, it’s easy to manipulate markets, but hard to make money from it.

This would not have happened if Glass-Steagall had still been in place. If these details had been known, they would have gone a long way into reinstitution of that law which, for most of the last century, separated customer deposits from the riskier practices of investment banking.

It is long past time that both Ben Bernanke and Timothy Geithner resign. If they don’t do so voluntarily, President Obama should demand they do. I won’t hold my breath.

BTW, so far this morning, not a peep from the traditional MSM about this revelation.

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