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What's $7.77 Trillion Among Friends


While Tea Partiers have been venting their spleens about the $700 billion in TARP money that congress threw at the banks in order to keep the modern financial system from collapsing, Bloomberg went to court to obtain documents to shed light on how much dough the Federal Reserve really provided the banks during the 2008 meltdown.

The banks and the Fed fought against revealing this information all the way to the Supreme Court. The 29,000 pages reveal “Banks worldwide earned an estimated $13 billion by taking advantage of below-market rates on emergency U.S. Federal Reserve loans from August 2007 through April 2010,” reports Bloomberg Markets Magazine.

Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

It turns out the Fed was covering Treasury’s back. The central bank had to lend the banks all they wanted to protect the Treasury’s TARP money. “Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it,” Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed, says.

Some figure that the Fed was just doing its job. “Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”

Phillip Swagel, a professor of international economic policy at the University of Maryland, says the Fed got it right and should be praised.

Then why was the Fed and the banks so tight-lipped about this whole operation?

Maybe because not only did the bailout let the beat go on for the big banks, but has allowed the banks to get even bigger. Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data.

And shareholders of Wachovia should thank their luck stars for $50 billion in secret loans the Fed provided in order to prevent a collapse, allowing time for Wells Fargo to purchase the 4th largest bank in the country. As Wachovia was circling the drain, Citibank had offered $1 a share, but suddenly the Wells stagecoach appeared with what amounted to a $7 a share bid. “This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support,” Wachovia’s chief executive Robert Steel said at the time.

Nope, no government support at all.

No wonder the market sees banks as financial accidents waiting to happen. The price of insuring against Goldman Sachs defaulting on its debt obligations has increased 270% from a year ago, according to the Wall Street Journal. The price of credit-default swaps for Wells Fargo debt has increased 87% from last year, while Bank of America CDS prices are up 202% and Citigroup CDS are up 133%.

Attention Ben Bernanke: It appears the market thinks more secret money will be needed soon.

Douglas French is former president of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply , and author of Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master's degree in economics from UNLV, studying under both Professor Murray Rothbard and Professor Hans-Hermann Hoppe.

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