What Is the Fed Hiding?

According to the Wall Street Journal, the Federal Reserve is fighting a judgment that it must release documents concerning the institutions that borrowed money using the discount window and other “last resort” lending programs during the financial crisis.  One wonders why.

During the crisis, Tim Geithner, Henry Paulson, and Ben Bernanke, among others, took unprecedented steps to stabilize what they feared was a pending global financial meltdown.  In order to do so, they structured a bailout for our largest banks.  Though many of us find the whole idea of the state rescuing private firms revolting, that is not the most disturbing news to come of this fiasco.  It looks like the Fed used means other than TARP to bolster flagging banks and they don’t want us to know about it.

What the Fed does not want us to know is who needed what when.  It has already been documented in the book Too Big to Fail that banks were forced to take TARP money whether they wanted it or not.  How can you force a bank to take government money?  Easy.  You just threaten to change the rules.  Banks that wanted to refuse the money, like Wells Fargo and BB&T, were told that reserve requirements would be changed in such a way as to make them “need” the money.  That way, we taxpayers would not know which ones were in trouble.

Those of us with clear minds and good hearts have to pause at such a revelation.  Let’s go through this step by step:

  1. Some banks, armed with the knowledge that the government was unlikely to allow them to fail, took on risks that no self-responsible institution would have touched.
  2. Overjoyed at the ease with which they made billions, they invented daisy-chains of derivatives that no one understood to make more billions of magic money.
  3. At the root of many of these derivatives were home mortgages, some issued to people who could barely pay attention, much less a monthly installment.
  4. When the overheated housing market collapsed, so did the inverted pyramid of money-making schemes erected on top of it.
  5. The market started to recognize that things were not right and pounded stock prices of the most vulnerable firms.
  6. Other firms stopped, or threatened to stop, transactions with the suffering firms.  (At least one was within hours of running out of cash.)
  7. The balance sheet of many large firms was so filled with bad loans and dicey derivatives that no private firm would touch them.
  8. The government injected $700 billion (roughly) into the banks to keep them solvent.
  9. Taxpayers were on the hook for the tab.

Now we find out that this is not the whole story–apparently other mechanisms were used to save banks from their own mistakes.  Only this time, we won’t even be told who got it if the Fed has its way.  Let’s hope the judgment stands.

About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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