Lawmaker accuses Federal Reserve of conducting ‘backdoor bailout’ during financial crisis
The Federal Reserve Board has pulled back the curtain on the companies that took advantage of its short-term loans and other emergency programs that it set up during the financial crisis.
The Fed on Wednesday posted on a public website details of 21,000 transactions from December 2007 through July 2010 that totaled more than $3 trillion.
The help was provided not only to giant banks such as Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co., but also to companies such as General Electric Co., Caterpillar Inc. and Harley-Davidson Inc. The Fed said its aim most often was to provide them with liquidity — that is, to keep them from running out of cash — when the private credit markets froze up.
Sen. Bernard Sanders (I-Vt.), who wrote the measure that forced the disclosures, accused the central bank of conducting a secret “backdoor bailout” of big banks and corporations. The program dwarfed the much-criticized $700-billion Treasury Department program to bail out banks, automakers and the giant insurer American International Group Inc., he said.
Sanders said the Fed should have forced banks receiving assistance to step up lending to small businesses and to ease credit for consumers. By not doing so, it provided “corporate welfare,” he said.
He said the Fed’s disclosures were “jaw-dropping,” especially details of numerous transactions with foreign financial institutions such as Deutsche Bank and Credit Suisse, which had been huge players in the beaten-down market for mortgage-backed securities.
“Has the Federal Reserve of the United States become the central bank of the world?” Sanders asked.
The Fed said the loans and other transactions it made were fully secured and mostly short-term. It said that as the financial crisis has eased, the need for the programs has dissipated, and most programs were shut down this year. The central bank said it had suffered no credit losses on the programs that have been wound down and expects none on the few remaining programs.
Fed spokesman David Skidmore didn’t reply to a request for comment on Sanders’ remarks.
The Fed information is accessible at the website https://www.federalreserve.gov by clicking on “Usage of Federal Reserve Credit and Liquidity Facilities.”
As the Federal Reserve repeatedly cut interest rates, banks eventually were able to borrow funds at close to zero percent, although Sanders suggested they might have used the funds to invest in super-safe Treasury securities instead of lending to stimulate the economy.
San Francisco-based Wells Fargo, the largest bank with a headquarters in California, borrowed a total of $154 billion in 19 short-term transactions between Jan. 1, 2008, and May 21, 2009, from what was known as the Term Auction Facility, securing the borrowings with various securities it owned. Wells, which paid off the last $10 billion to the Fed in August 2009, at one point early that year had $45 billion in borrowed funds at 0.25% interest.
Pacific Investment Management Co., the Newport Beach manager of the world’s largest bond fund, was among money management and hedge funds that tapped a program aimed at restoring the flow of credit to consumers and small businesses by supporting the market for securities backed by consumer loans. The Fed data showed that Pimco borrowed more than $7 billion in more than 90 transactions with the Fed between March 2008 and March 2009.
