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$1.2 Trillion in Secret Fed Loans

This article was written by in Economy. 5 comments.

We know about TARP, the program that used taxpayer money to lend to the biggest Wall Street banks tin an effort to prevent the collapse of the financial industry. The Federal Reserve loaned more money to Wall Street, however, in secret. The details are only coming out now thanks to the Freedom of Information Act and an act of Congress.

Besides TARP, banks received $1.2 trillion in federal loans, the details of which have been sorted through by Bloomberg. The programs include the Term Auction Facility, Commercial Paper Funding Facility, Primary Dealer Credit Facility, Term Securities Lending Facility (TSLF), Single-Tranche Open Market Operations, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and Discount Window.

  • The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility gave loans to banks so they could meet withdrawal demands of customers invested in money market mutual funds.
  • The Commercial Paper Funding Facility helped companies sell short-term bonds (with maturities less tan 270 days) to find their operations.
  • The Discount Window allowed for more loans to banks to meet consumers’ withdrawal demands at a low borrowing rate.
  • The Primary Dealer Credit Facility allowed brokerages to qualify for TARP-type loans, which were originally intended for banks, not brokerages.
  • The Single-Tranche Open Market Operations created an auction for banks, using mortgage-backed assets as collateral.
  • The Term Auction Facility was another set of loans for banks who feared the negative market reaction to using the Discount Window, loans of last resort.
  • The Term Securities Lending Facility allowed banks to swap toxic assets for U.S. Treasuries.

The loans were not limited to American companies. In one of the most interesting cases, a German commercial property lender received $28.8 billion, double the amount the bank received from its own country, amounting to $21 million per employee. Like most companies taking advantage of these Federal Reserve lending facilities, this company did not make the details of the borrowing known until the program itself became public.

What kind of precedent does this set for future recessions? First, Federal Reserve lending comes at a cost to taxpayers. In some cases, government money has been exchanged for share ownership, and there’s a potential for the public to profit when that company recovers. It’s a risky investment for public money, and the public has very little influence in how their tax revenues are invested and spent. Keeping the $1.2 trillion in loans hidden from view might have been the only way the plan would have survived, with public opinion turning away from assisting Wall Street with more bailouts. Nevertheless, many economists believe these loans were necessary to prevent the destruction of the global financial industry.

Thanks primarily to the internet and the abundance of informational sources, you would think transparency is greater and that organizations would have a difficult time keeping major programs secret. While many people were aware of the existence of these programs, they weren’t nearly in the public eye as much as TARP was, and the extent of these programs and the affected companies were for the most part unknown until recently.

It’s worthwhile to note that $1.2 trillion is the peak amount of the loans. As some institutions paid back earlier loans, the proceeds were then available for new loans. The “same dollar” could have been used in several loans to several different companies at different times.

Bloomberg, Bloomberg

Published or updated August 22, 2011.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 5 comments… read them below or add one }

avatar 1 wylerassociate

I’m going to take an opposite view of this story and say that for all the anger that taxpayers have towards the bank nothing has changed between 2008 and now. Should there be another financial meltdown the banks will run to Congress and because the banks own the US Senate they will get what they want despite liberal/conservative outrage.

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avatar 2 Ceecee

Must be nice to get rewarded to mess up so badly.

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avatar 3 qixx

Am i understanding this right. Banks and firms invested money (poorly) so they needed loans when the people wanted their money back. Or the investments were doing ok (nothing was going that good) but the banks did not want to take the losses; so they took loans to keep the funds that were there in poor investments?

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avatar 4 Anonymous

two things-
1) I’d love a link. It makes it so much easier to read more and understand better, and of course, its ethical to quote your sources.
2) so what happened to these loans? I know we (US taxpayers) made money on TARP, did we turn a profit on this 1.2 trillion? I’m OK with loaning banks money-its giving them money and not expecting a return that bugs me.

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avatar 5 Luke Landes

I always include links to sources when appropriate. They’re almost always the bottom of the articles in a citation font. You can see the two Bloomberg articles linked. Other news out reported similar information around the same time, but Bloomberg’s coverage was the most complete. Whether taxpayers make money on these loans is harder to determine. Often, the loans were paid back in advance, reducing the interest taxpayers would have earned. In some cases, the loans were secured by investments or a share of ownership… if the investments increase in value, there could be a return for taxpayers.

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