Bloomberg uncovers details of previously secret Federal Reserve bank loan program

The U.S. Federal Reserve had a secret program of bank lending in 2008 and 2009 that helped some banks generate nearly $13 billion profits. (Photo by Flickr user rlinger, cc-by-sa.)

According to their reporting, the Federal Reserve lent out as much as $1.2 trillion, virtually no strings attached, at very low interest rates to banks during 2008. The program had been shielded from public scrutiny and hidden even for Congress. The program netted banks a $13 billion profit.

The largest government program ever to bail out banks has been a closely guarded secret — until now.

After a three-year fight, Bloomberg News obtained access to thousands of Federal Reserve documents that show which banks got Fed loans, and how much they got, starting back in 2008. The Fed had been fighting to keep details of those loans secret, including a one-day payout to banks of $1.2 trillion in December 2008.

"No string attached. The Fed lent the money to the banks and didn't expect them to do anything with it, didn't have any kinds of restrictions," said Bloomberg News reporter Bob Ivry.

Bloomberg calculated that the banks made $13 billion in income off all those loans.

If the banks couldn't pay the loans back, then the Federal Reserve got to keep the capital that the bank put up as collateral.

The Fed said taxpayers didn’t lose money on the deal, but  Ivry said the secrecy surrounding the loans hid the true financial health of major banks.

“Congress didn’t know about this when it defeated legislation to break up the biggest banks,” Ivry said.

According to Ivry, former Senator Ted Kaufman of Delaware said the atmosphere in Congress would have been different, and there might have been a better chance of passing a bill to break up big banks, if this information had been made public at the time.

Not all of the banks needed the money to keep their doors open, though some did. Others took the money as an opportunity to gain access to extra capital at extremely low interest rates.

"We don't blame the banks for that," Ivry said. "This is what banks do. This is what anyone would do. If someone offered you $3 billion on a 0.01 percent interest rate, I would take it. You would take it. And so would Goldman Sachs."

Ivry said there's nothing wrong with the conduct of people who participated in the program. And no officials have been critical of the banks for taking the money — in fact, some banks say they didn't want the money but were strong-armed into taking it — but many people have questioned why there needed to be such secrecy around the program.

When TARP was being put together, for example, no one at the Treasury Department knew details of the program.

But the legacy of the secret loan program could last even longer and create what economists call a “moral hazard.”

“Traders for banks who know that their profits are going to be shared only by them, but whose losses will be shared by U.S. taxpayers, might be more willing to take risks,” Ivry said.

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