Revelations the Federal Reserve secretly doled out more than $7 trillion to financial institutions here and abroad during the height of the financial crisis – approximately 10 times more money than Congress approved in the Troubled Asset Relief Program – has some in Congress calling for a federal investigation.
House Oversight and Government Reform Committee ranking member Elijah Cummings (D-Md.) has sent a letter to panel Chairman Darrell Issa (R-Calif.) asking the committee to “hold a hearing with Federal Reserve Chairman Ben Bernanke and officials from the nation’s largest financial institutions that benefitted from trillions of dollars in previously undisclosed government loans provided at below-market rates.”
The Nov. 28 letter followed the release of the January 2012 issue of Bloomberg Markets Magazine, which details approximately $7.7 trillion the Federal Reserve under Bernanke’s direction secretly loaned to financial institutions. Many of those institutions received tens of billions of dollars of emergency loans even as their leaders were telling investors they were financially sound.
Benefiting by the Billions
Bloomberg Markets Magazine estimates the institutions realized $13 billion of income by taking advantage of the below-market interest rates they were being charged on the money. The loans also enabled “too big to fail” institutions to become even larger.
“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” Sherrod Brown, a Democratic Senator from Ohio, told Bloomberg. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”
Congress approved the $700 billion TARP to prop up financial institutions over the strong objections of millions of citizens late in the George W. Bush administration. The Federal Reserve, operating independently of Congress, handed out the loans without informing Congress, then-Treasury Secretary Henry Paulson, President Bush, or, later, members of the Obama administration. Recipients often were receiving additional help through the TARP.
Reminiscent of ‘Banana Republics’
“Such activities are what we commonly associate with banana republics,” said Donald Boudreaux, a professor of economics at George Mason University. “That the U.S. government for most of its history has behaved more respectably than any number of Latin American banana republics does not excuse such corrupt behavior when it does occur here.”
The information would still be secret if not for a lawsuit by Bloomberg News to force the Federal Reserve to release information about its activities at the height of the financial crisis that began four years ago. The Federal Reserve and other financial institutions fought the lawsuit all the way to the U.S. Supreme Court, which in March 2011 rejected an appeal of a lower court ruling to force the Fed to reveal the information. That left intact the lower court order to release the records.
Bloomberg has spent these past few months analyzing the thousands of pages of information.
‘Bank for the People’
Bloomberg News Editor in Chief Matthew Winkler issued a statement after the Supreme Court decision in which he said the Federal Reserve “forgot that it is the central bank for the people of the United States and not a private academy where decisions of great importance may be withheld from public scrutiny. As only Congress has the constitutional power to coin money, Congress delegates that power to the Fed and the Fed must be accountable to Congress, especially in disclosing what it does with the people’s money.”
Cummings’ letter cited Federal Reserve data showing “total assets held by the six largest U.S. banks increased 39% from 2006 to 2011. In addition, based on data from the Bureau of Labor Statistics, employees at these banks received more than $146 billion in compensation in 2010, an increase of nearly 20% from five years earlier. According to Anil Kashyap, a former Federal Reserve economist, ‘The pay level came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out.'”
“Many Americans are struggling to understand why banks deserve such preferential treatment while millions of homeowners are being denied assistance and are at increasing risk of foreclosure,” Cummings wrote in summing up why he believes congressional hearings into the secret loans are warranted.