Last August, Bloomberg news released some uncovered details from its hard fought “Right to Know” request it launched against the Federal Reserve and its actions during the heat of the financial crisis.Â Though lauded with praise by numerous media outlets, Bernanke’s $1.2 trillion bailout kept both U.S. and foreign banks from going through the unthinkable: actually facing the consequences of their financial losses.
Today, Bloomberg revealed more information from the “Right to Know” request which suggests U.S. taxpayers paid a bigger price than was originally let on.Â Somehow, I remain not at all surprised.
A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.
Â The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.
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 â€œwasnâ€™t aware of the magnitude.â€ It dwarfed the Treasury Departmentâ€™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.
â€œTARP at least had some strings attached,â€ says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the programâ€™s executive-pay ceiling. â€œWith the Fed programs, there was nothing.â€
This report comes on the heels of a Wall Street Journal piece which details how banking insiders are briefed on the Fed’s upcoming policy manuevers before they are made public:
Hours after an Aug. 15 meeting with Federal Reserve Chairman Ben Bernanke in his office, Nancy Lazar made a hasty call to investor clients: The Fed was dusting off an obscure 1960s-era strategy known as Operation Twist.
The news pointed to a boom in long-term bonds.
It was a good call. Over the next five weeks, prices on 10-year Treasury bonds soared, offering double-digit returns in an otherwise dismal year.Â By the time the Fed announced its $400 billion Operation Twist on Sept. 21, the window for quick profits had all but slammed shut.
Ms. Lazar is among a group of well-connected investors and analysts with access to top Federal Reserve officials who give them a chance at early clues to the central bank’s next policy moves, according to interviews and hundreds of pages of documents obtained by The Wall Street Journal through open records searches. Ms. Lazar, an economist with International Strategy & Investment Group Inc., wouldn’t comment for this article.
New York Federal Reserve Bank President William Dudley also meets regularly with investors, both in his office with individuals and in committee groups. The New York Fed, one of 12 regional banks that constitute the Federal Reserve System, has the strongest ties to investors because it conducts the Fed’s bond-market transactions.
Mr. Dudley, who also is vice chairman of the Federal Open Market Committee, which sets the nation’s monetary policy, acknowledged the discussions could give the misperception that investors with access to Fed officials have an advantage.
Over the past two-and-a-half years, Mr. Dudley has had dozens of private meetings, according to his calendar, which lists SAC Capital Advisors, Citadel Investment Group, Duquesne Capital Management, and Tudor Investments, among others. Lloyd Blankfein, chief of Goldman Sachs Group Inc., and Mr. Fink, of BlackRock, also had private meetings, according to Mr. Dudley’s calendar.
These investors employ strategies tied to interest-rate policy and economic trendsâ€”making snippets of information as subtle as head nods and body language extremely valuable.
Just as Hayek taught, power centers attract the kind of people who are more than willing to exploit centralized authority for personal gain.Â Central Banks have always been a tool for insiders to gain an edge on competitors; we just have explicit proof now.Â With the Fed expected to purchase more mortgage backed securities in the first quarter of 2012, don’t expect much protest from these reports.