Fed audit: $16 trillion in loans to banks in less than three years

posted at 2:30 pm on July 22, 2011 by Ed Morrissey

Yes, that’s sixteen trillion dollars in “emergency” loans to financial institutions from the beginning of the recession in December 2007 to just one year ago.  The long-awaited GAO audit shows that the Federal Reserve loaned more than the worth of the annual US economy, and not just to American banks, although US institutions got the lion’s share.  Citibank was the largest beneficiary:

Of the $16.1 trillion loaned out, $3.08 trillion went to financial institutions in the U.K., Germany, Switzerland, France and Belgium, the Government Accountability Office’s (GAO) analysis shows.

Additionally, asset swap arrangements were opened with banks in the U.K., Canada, Brazil, Japan, South Korea, Norway, Mexico, Singapore and Switzerland. Twelve of those arrangements are still ongoing, having been extended through August 2012.

Out of all borrowers, Citigroup received the most financial assistance from the Fed, at $2.5 trillion. Morgan Stanley came in second with $2.04 trillion, followed by Merill Lynch at $1.9 trillion and Bank of America at $1.3 trillion.

And there is a pattern to the disbursements, too:

The audit also found that the Fed mostly outsourced its lending operations to the very financial institutions which sparked the crisis to begin with, and that they delegated contracts largely on a no-bid basis. The GAO report recommends new policies that would eliminate such conflicts of interest, and suggests that in the future the Fed should keep better records of their emergency decision-making process.

The Fed doesn’t have a requirement to comply with the GAO’s recommendations, but its political position and independence are not exactly secure at the moment.  Congress ordered the audit based on building political pressure to make the Fed more transparent, and the apparent conflicts of interest found by the GAO will only increase that pressure.  First up, but probably not last, is Senator Bernie Sanders:

The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse.  In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

For example, the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed.  Moreover, JP Morgan Chase served as one of the clearing banks for the Fed’s emergency lending programs.

In another disturbing finding, the GAO said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds.  One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it might have created the appearance of a conflict of interest.

To Sanders, the conclusion is simple. “No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed’s board of directors or be employed by the Fed,” he said.

The investigation also revealed that the Fed outsourced most of its emergency lending programs to private contractors, many of which also were recipients of extremely low-interest and then-secret loans.

The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo.  The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts. Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG.

Sanders calls the report an exposé of “socialism for the rich and rugged, you’re-on-your-own individualism for everyone else.”  Of course, Sanders is a proponent of socialism for everyone, but put that aside for a moment.  The report shows not so much that the Fed chose crony capitalism over clean hands, but that they didn’t have a lot of choice in the matter.  By the time the crisis hit, the financial markets had narrowed to such a point that the only entities that could handle the work needed by the Fed were the same ones needing the bailouts.  It’s a predictable consequence of the too-big-to-fail approach and a lax attitude towards industry consolidation.

Actually, as the Washington Independent reports, the audit didn’t really contain that many red flags for the Fed, other than the massive amounts of cash it loaned:

The report concluded $16 trillion in emergency funds were issued to financial institutions worldwide, and that some $660 million were paid to a handful of banks to administer the emergency loans. Most of the contracts associated with the latter sum were not issued through a bid, primarily due to “exigent circumstances,” the report explains.

While the contracts were consistent with acquisition policies governing the Federal Reserve Bank of New York, the most active of the Federal Banks during the financial crisis, the authors of the report write, “policies could be improved by providing additional guidance on the use of competition exceptions, such as seeking as much competition as practicable and limiting the duration of noncompetitive contracts to the exigency period.”

Given the lack of competition available, the GAO recommendation may be more academic than useful.

For those interested in the fate of the mortgage-backed securities that created all of the financial instability when housing prices dropped, there is some good news:

On November 25, 2008, the FOMC announced that FRBNY would purchase up to $500 billion of agency mortgage-backed securities to support the housing market and the broader economy.56 The FOMC authorized the Agency MBS program under its authority to direct open market operations under section 14 of Federal Reserve Act. By purchasing MBS securities with longer maturities, the Agency MBS program was intended to lower long-term interest rates and to improve conditions in mortgage and other financial markets. The Agency MBS program commenced purchases on January 5, 2009, a little more than a month after the initial announcement. FRBNY staff noted that a key operational challenge for the program was its size. As discussed later in this report, FRBNY hired external investment managers to provide execution support and advisory services needed to help execute purchases on such a large scale. In March 2009, the FOMC increased the total amount of planned purchases from $500 billion to up to $1.25 trillion. The program executed its final purchases in March 2010 and settlement was completed in August 2010.

“Agency MBS” refers to those securities issued by Fannie Mae and Freddie Mac, and/or guaranteed by Ginnie Mae, the government-sponsored entities at the root of the housing bubble.  According to the audit, the Fed has drawn at least a significant portion of the poison out of the economy, and their ownership should make it easier for foreclosure negotiations to proceed.  The fact that foreclosures have proceeded apace despite the consolidation shows that the problem is no longer having clear title to the lien but the ability of current homeowners to sustain their investments.

It’s an interesting report overall, one that doesn’t paint the Fed in an entirely bad light.  It will, however, be a good argument for further audits in the future.


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if they just made .5% profit on that,

Katfish on July 22, 2011 at 4:39 PM

astonerii on July 22, 2011 at 5:14 PM

If you truly meant one HALF of ONE per cent then I stand (in this case sit) corrected…………I’ve sadly become accustomed to folks stating percentages in redundant fashion employing a decimal and not needing it………

still LARGE bucks either way eh?

Katfish on July 22, 2011 at 5:26 PM

So, with all these billions and trillions flying hither and yon electronically, who wants to bet that a few tenths of a percent “went astray” and is now tucked into somebody’s sock drawer?

mojo on July 22, 2011 at 5:35 PM

Ron Paul has been screaming about this for years and nobody was listening.
concernedsenior on July 22, 2011 at 5:05 PM

I listened to him. I heard him talk about this – and then in the next breath start explaining how George Bush personally piloted the planes into the Twin Towers on 9/11.

Stop and think this through for a second: there’s ONE guy in Washington who demonstrates the level of understanding the average high school graduate should have about economics and the Constitution… and every ten minutes he randomly starts screaming about how black helicopters are stealing his brain.

I hate to break it to you, but this wasn’t the guy trying to put a stop to the Kabuki dance; he was it’s freaking star performer!

logis on July 22, 2011 at 5:35 PM

and then in the next breath start explaining how George Bush personally piloted the planes into the Twin Towers on 9/11.

logis on July 22, 2011 at 5:35 PM

You’re lying, you do realize that, right?

Of course, to redeem your lying self, you might want to try posting some evidence Ron Paul ever made any claim that anyone other than Arabs flew those planes into those buildings.

Or admit that you cannot.

JohnGalt23 on July 22, 2011 at 5:50 PM

AUH2O on July 22, 2011 at 4:22 PM

The thing I find most interesting is that if you go down the column of support for Obama, he garners the lowest number against Paul. Indicates substantial Dem/Indy support.

JohnGalt23 on July 22, 2011 at 5:53 PM

The only market you would be able to trade at in the event of a full collapse would be a farmer’s market.

lexhamfox on July 22, 2011 at 5:05 PM

Oh the doom and gloom!!

Do all the damned audits you want; no one is ever going to “catch” them, and now that this has started, it can never stop.

Repeal the Federal Reserve Act of 1912.

AUH2O on July 22, 2011 at 5:54 PM

I listened to him. I heard him talk about this – and then in the next breath start explaining how George Bush personally piloted the planes into the Twin Towers on 9/11.

Stop and think this through for a second: there’s ONE guy in Washington who demonstrates the level of understanding the average high school graduate should have about economics and the Constitution… and every ten minutes he randomly starts screaming about how black helicopters are stealing his brain.

Or maybe the whole “kooky conspiracy theory nut” lines are nothing more than smears by people trying to discredit his view of economics and the Constitution. You do realize that, right?

AUH2O on July 22, 2011 at 5:59 PM

If you truly meant one HALF of ONE per cent then I stand (in this case sit) corrected…………I’ve sadly become accustomed to folks stating percentages in redundant fashion employing a decimal and not needing it………

still LARGE bucks either way eh?

Katfish on July 22, 2011 at 5:26 PM

Not really, because they didn’t actually loan that much money. It’s half (or more likely 1/4) a percent annually on mostly overnight loans. If someone loaned a trillion dollars for a year it’s a lot of coin, but if they loaned a billion dollars for a a day three years running it’s not nearly as much (you’re paying interest on a billion, not a trillion).

jonknee on July 22, 2011 at 6:08 PM

The Iceland experience is interesting: Iceland: What We Should Have Done

“Iceland didn’t rescue its banks. It couldn’t afford to do it. So, they went bust. Iceland looked like it was going down a path of permanent financial armageddon. However, Iceland is in better financial shape than the rest of Europe today.”

slickwillie2001 on July 22, 2011 at 6:08 PM

The only market you would be able to trade at in the event of a full collapse would be a farmer’s market.
lexhamfox on July 22, 2011 at 5:05 PM

Why don’t you fully define what you mean by “full collapse”.
Count to 10 on July 22, 2011 at 5:14 PM

Why don’t you Google “Weimar Republic”? Whenever a government completely dispenses with the concept of financial responsibility, bad things always happen.

And before you ask: just think of the scene in Ghostbusters, where Venkman says, “I’m fuzzy on the whole ‘good’-’bad’ thing…” The answer’s essentially the same.

History is a harsh mistress. And if you have to ask about this sort of thing, it’s because you don’t want to know.

logis on July 22, 2011 at 6:15 PM

the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

I’m not one of the sophisticated elites, but to my sloping forehead this is exactly why those conflict of interest rules exist.

disa on July 22, 2011 at 6:16 PM

Stop and think this through for a second: there’s ONE guy in Washington who demonstrates the level of understanding the average high school graduate should have about economics and the Constitution… and every ten minutes he randomly starts screaming about how black helicopters are stealing his brain. I hate to break it to you, but this wasn’t the guy trying to put a stop to the Kabuki dance; he was it’s freaking star performer!logis on July 22, 2011 at 5:35 PM

Or maybe the whole “kooky conspiracy theory nut” lines are nothing more than smears by people trying to discredit his view of economics and the Constitution. You do realize that, right?
AUH2O on July 22, 2011 at 5:59 PM

Um, does the word “obviously” mean anything to you?

logis on July 22, 2011 at 6:20 PM

The Iceland experience is interesting: Iceland: What We Should Have Done

“Iceland didn’t rescue its banks. It couldn’t afford to do it. So, they went bust. Iceland looked like it was going down a path of permanent financial armageddon. However, Iceland is in better financial shape than the rest of Europe today.”

slickwillie2001 on July 22, 2011 at 6:08 PM

Iceland was bailed out by the IMF and its fellow Nordic countries and is going to be in trouble for a long time. It also wasn’t facing the same issues as the US and is much much smaller (its GDP is a quarter the size of my state’s annual budget). You simply cannot compare the largest economies in the world to a country that has the population of a small to medium sized city.

jonknee on July 22, 2011 at 6:20 PM

The Iceland experience is interesting: Iceland: What We Should Have Done

“Iceland didn’t rescue its banks. It couldn’t afford to do it. So, they went bust. Iceland looked like it was going down a path of permanent financial armageddon. However, Iceland is in better financial shape than the rest of Europe today.”

slickwillie2001 on July 22, 2011 at 6:08 PM

That’s funny.

lexhamfox on July 22, 2011 at 6:24 PM

I listened to him. I heard him talk about this – and then in the next breath start explaining how George Bush personally piloted the planes into the Twin Towers on 9/11.

Stop and think this through for a second: there’s ONE guy in Washington who demonstrates the level of understanding the average high school graduate should have about economics and the Constitution… and every ten minutes he randomly starts screaming about how black helicopters are stealing his brain.

logis on July 22, 2011 at 5:35 PM

Oh, stow it. I am so tired of people repeating this stupid smear like it was true. Either you’re ignorant or a liar, but in either case I’m not going to put up with people on here claiming Ron Paul is a Truther anymore. How dare you say lie about Ron Paul like this?

Hey, I have an idea. Let’s look at what Ron Paul has actually said about truthers, before shooting our mouths off. Here, have a link: http://seoblackhat.com/2007/07/27/ron-paul-not-truther-interview/

Interviewer: So your position (then we’ll get off this and onto something else) your position then would be that as far as you’re concerned the official story from 9/11 . .. and this is not about the government covering up their mistakes. . . this is about the suggestions from these people who you were talking to in this video that 9/11 was orchestrated by the government: You do not support that theory?

Ron Paul: Absolutely Not!

Gee, that seems pretty clear.

So, given that Ron Paul is RIGHT about the Fed’s massive manipulations of the market, that people used to mock him for, and that he’s not a Truther, why is he nutty again? It seems he’s the only sane one in Washington – the only one leading the fight for Fed transparency, the only one who’s never voted for or approved an unbalanced budget, the only one who seem to care what the Constitution actually says the Federal government can and cannot do.

I say it again; Ron Paul isn’t crazy – if anything, he’s the last sane man!

Inkblots on July 22, 2011 at 6:30 PM

My collie says:

A trillion here, a trillion there, pretty soon you’re starting to talk about some real money.

My collie…the apocryphal Everett Dirksen.

CyberCipher on July 22, 2011 at 6:36 PM

the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

I’m not one of the sophisticated elites, but to my sloping forehead this is exactly why those conflict of interest rules exist.

disa on July 22, 2011 at 6:16 PM

I assume you’re kidding, but I genuinely DON’T understand what this means.

Does the Fed have any authority to grant people immunity from prosecution for RICO violations?

Aw, who the Hell knows. There’s probably some regulation buried somewhere that says it does.

Like I said, do all the “audits” you want. No one will ever get to the bottom of this rat’s nest. Think about it: the people behind this stuff are printing money to pay their lawyers. How can you catch up with that?

logis on July 22, 2011 at 6:37 PM

My collie…the apocryphal Everett Dirksen.

CyberCipher on July 22, 2011 at 6:36 PM

Ev Dirksen would be puking blood at the display coming out of DC these days.

JohnGalt23 on July 22, 2011 at 6:51 PM

Weimar Germany finally abandoned money-printing in November 1923 during the hyperinflation not because they saw the light, or the error of their ways, but because the head of the German central bank, Rudolf Von Havenstein, suddenly dropped dead.

Just saying.

Emperor Norton on July 22, 2011 at 6:54 PM

This isn’t at all what rupaul has been fear mongering over. In the last yr he’s qccussed the Fed of financing cia hit squads among other idiocies.

jp on July 22, 2011 at 6:59 PM

the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

I’m not one of the sophisticated elites, but to my sloping forehead this is exactly why those conflict of interest rules exist.

disa on July 22, 2011 at 6:16 PM

I assume you’re kidding, but I genuinely DON’T understand what this means.

Does the Fed have any authority to grant people immunity from prosecution for RICO violations?

Aw, who the Hell knows. There’s probably some regulation buried somewhere that says it does.

Like I said, do all the “audits” you want. No one will ever get to the bottom of this rat’s nest. Think about it: the people behind this stuff are printing money to pay their lawyers. How can you catch up with that?

logis on July 22, 2011 at 6:37 PM

They had to relax the rules because they became too onerous given that every major financial institution was receiving help. Employees and contractors would have to divest all their investments at the height of the crisis and sell their investments at less than half their value. Employees would simply walk away from their jobs rather than take the loss on their 401k and investments. RICO statutes would not apply since they weren’t engaged in fraud, theft, or criminal activity.

When I mentioned total collapse earlier I was referring to the US economy. Our economy is much more interdependent and interrelated than the preWW2 economy. Once the banks go they are quickly followed by insurance then energy, transport, manufacturing, agriculture etc… and that was happening. The FDIC would not have been able to follow through on its guarantees and even healthy banks would have gone to the wall pretty quickly as their supporting assets became worthless. If all that was allowed to fail you loose the infrastructure that allows a free market to operate. You can’t just start from scratch and build all that again in a few months or years. The only reason why other countries are able to weather bankruptcy is because the wider market is still there to take high risk positions (Argentina & Iceland).

lexhamfox on July 22, 2011 at 7:57 PM

This is the kind of spending that gets me ticked off. Most of this money will never really be paid back (though they’ll make it look like it was).

But, no, instead the focus is on the programs that directly affect millions of Americans.

What a sham.

The FDIC would not have been able to follow through on its guarantees and even healthy banks would have gone to the wall pretty quickly as their supporting assets became worthless. If all that was allowed to fail you loose the infrastructure that allows a free market to operate. You can’t just start from scratch and build all that again in a few months or years. The only reason why other countries are able to weather bankruptcy is because the wider market is still there to take high risk positions (Argentina & Iceland).

lexhamfox on July 22, 2011 at 7:57 PM

I agree. However, floating the banking and thus the economic system via the Federal government is Socialism. No one wants to see their bank accounts simply disappear, nor lose their jobs, nor be unable to acquire a loan to help their business.

But, we’ve gotten to the point where one is simply delusional if they believe that Capitalism truly exists anymore.

Next on the plate are our most basic rights, but those have been assaulted for most of our nation’s history so I guess it’s an end result of incrementalism we’ll all soon learn to live with.

No, let’s quibble about Social Security and Medicaid while they’re squirting the Dollars out the back door. Just not that interesting/sexy to the average pi$$ed-off Tea Partier out there I guess.

Dr. ZhivBlago on July 22, 2011 at 9:13 PM

I agree. However, floating the banking and thus the economic system via the Federal government is Socialism…. we’ve gotten to the point where one is simply delusional if they believe that Capitalism truly exists anymore.
Dr. ZhivBlago on July 22, 2011 at 9:13 PM

I hate to be a nitpicker but, technically, the term for that is “Fascism.”

But that’s not an improvement.

logis on July 22, 2011 at 10:02 PM

Inkblots on July 22, 2011 at 6:30 PM

It’s really quite amazing that Ed managed to write this story without a single mention of Rp who has been championing this issue for years; but for him no audit would have been done.

HA consistently ignores stories that show RP in a positive light; like the Rasmussen polll showing Obama 41%-Paul 37& or the fact that so far in the 2012 presidential campaign cycle RP has received more donations from members of the military than any other declared republican candidate.

Firefly_76 on July 22, 2011 at 10:14 PM

I hate to be a nitpicker but, technically, the term for that is “Fascism.”

But that’s not an improvement.

logis on July 22, 2011 at 10:02 PM

Mmm-if the corporations are allowed to exist and become integrated with the State, then I’d concede that point. To me it has to do with whom feeds whom.

If you’re talking European Socialism, it seems to be the State incurring heavy taxation in order to run social programs.

Italian Fascism would be a Corporate System which includes a corporate oligarchy answering to a Fascist Council, and all workers organized into state-sponsored labor unions. You’d also have to throw in a class of nobility.

German National Socialism would depend upon corporate backing and pretty much laissez-faire from that point on, as long as the corporate interests do not conflict with national party interests.

I think what we’re dealing with is a hybrid of all the above with a healthy dose of Marxism leaning more towards Italian Fascism.

In the back of my mind I’m thinking that a corporate oligarchy could take over because Socialism doesn’t work very well and traditional Capitalism would no longer be needed. Management of resources and accumulation of wealth without the trappings of ideology.

Dr. ZhivBlago on July 22, 2011 at 10:38 PM

like the Rasmussen poll showing Obama 41%-Paul 37%

oh, i see that’s now part of QOTD, so I take that back…

Firefly_76 on July 22, 2011 at 10:43 PM

Dr. ZhivBlago on July 22, 2011 at 9:13 PM

I agree. However, floating the banking and thus the economic system via the Federal government is Socialism.

If the government took ownership and was running the banks that would be socialism. TThat is not what happened and the US Government and the Administration are both anxious to unwind the deal. They were not nationalized. Same with the car industry and the insurance industry. In fact, I would go as far as to say that the tax payers are ill served by unwinding this as fast as possible because of politics rather than waiting for the values to increase to a point where at least they make all the money back on the deal.

logis on July 22, 2011 at 10:02 PM

It’s not fascism. The technical term is statism as per the PRC. Fascism has a nationalist/ethnocentric twist. Statism still has the government making key decisions.

lexhamfox on July 22, 2011 at 11:44 PM

Mmm-if the corporations are allowed to exist and become integrated with the State, then I’d concede that [this is Fascism]…. If you’re talking European Socialism… Italian Fascism would be… German National Socialism would depend upon… a hybrid of all the above with a healthy dose of Marxism leaning more towards Italian Fascism.

In the back of my mind I’m thinking that a corporate oligarchy could take over because Socialism doesn’t work very well and traditional Capitalism would no longer be needed. Management of resources and accumulation of wealth without the trappings of ideology.

Dr. ZhivBlago on July 22, 2011 at 10:38 PM

Unfortunately, it is completely irrelevant that your half-baked idea of an economic Utopia happens to be a stupid one. Because efficiency (or fairness, or whatever you imagine its most wonderful feature to be) has absolutely nothing whatsoever to do with this process.

Stalin figured it out a long time ago: Fascism, Socialism and Communism are all just different paths leading to the exact same goal. If the state controls the day-to-day money supply of businesses, then it’s academic nonsense to claim it doesn’t “own” them. As long as the state controls the money supply to all the businesses, then it’s also de facto distributing the wealth – and vice versa.

This particular fundamental transformation – just like every one that came before it – is all about two things:

A) Centralizing power, and

B) Absolutely nothing else.

It’s pure silliness to say that Fascism, Socialism and/or Communism “don’t work very well.” Of course they work absolutely perfectly at acheiving goal “A” above.

And I hate to break it to you but I’m afraid your “non-ideological, non-traditional corporate oligarchy” (whatever the Hell that is) falls very firmly into category “B”.

logis on July 23, 2011 at 1:23 AM

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