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Fed Audit's Initial Report Reveals Trillions in Secret Loans
An anonymous reader writes "The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression."
nuff said.
Its not some sort of secret, it has been disclosed by the Fed in their annual reports as required by law.
http://finance.fortune.cnn.com/2011/07/08/surprise-the-big-bad-bailout-is-paying-off/ Fortune Magazine Article
OK, so they loaned out a truly epic amount of money. A reasonable thing to do during a crisis: you borrow money to get through the bad times, then you pay it back when times are better.
The questions are:
* Did they pay it back?
* Did they pay interest?
* How much?
I don't really care about the absolute dollar figure: this was an international crisis and the dollar figures are going to be proportional to the size of economies, which will measure in the trillions. As long as the net result was that the economy survived (which it did), that it didn't blow up inflation rates (which it didn't; inflation was negative for a while), and that in the end the books balance (thus my questions).
It may well be that the interest rates were so low as to be questionable, especially given that the banks have been giving nonexistent interest to depositors and have been very chary about turning that money around to investment. But I'm not going to wring my hands over the size of it. I'm more concerned about the terms.
Stolen?
They made overnight loans on which the Fed profited. Meaning they reduced the amount the American people owe.
I thought this site explains what a trillion dollars is fairly well.
www.wtfnoway.com
It's not illegal if no one enforces the law against it.
Give me Classic Slashdot or give me death!
A) These are loans, almost all of which get paid back.
B) this is not a secret. Just because something goes on you didn't know about, doesn't mean it was a secret. It just means you where ignorant.
C) This benefits the US. The US MADE money from this.
I just had to get that out there, I know it wont stop the frothing lunatics.
The Kruger Dunning explains most post on
"No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president," Sanders said.
Since when is the Federal Reserve an agency of the United States government? Last time that I checked it was and still is a privately owned corporation.
Just be sure to wear the gold uniform when you beam down -- you know what happens when you wear the red one.
But Ron Paul does not advocate return to pure gold standard, he advocates allowing competing currencies, some backed by gold, other by silver, third by "trust in US Government", and letting people/markets decide which one do they prefer.
Because multiple competing currencies worked so great during the Articles of Confederation days, right? Oh wait, it was an abysmal failure.
As a poster suggested above, these were overnight loans that were almost immediately repaid.
Thats total, not at once. Lend out $100 Billion to someone on Monday night, they pay it back Tuesday morning, and borrow it again Tuesday night to pay back Wednesday morning. Do that for a week and you just lent out a Trillion.
Lets say I have 5 dollars.
I lend you 5 dollars, the next day you pay me back 5 dollars and 5 cents.
The I lend that 5 dollars to someone else and they paid me backs 5 dollars an 5 cents.
I lent out 10 dollars during those 2 days, but I never lent more then I had. And I ended with 10 cent more then I started.
Get it?
Listening to most slashdotters talk about finance is like listening to accounts talk about a computer. simple painful.
The Kruger Dunning explains most post on
seriously guys, this isn't news.
One of our competitors trademarked the term "hypothesis". From now on, we will call them "boneheaded ideas".
It's on page 131, table 8, bottom right:
In short, it's a pretty absurdly inflated number. Loaning 10 billion for 1 day, and doing it for 30 days, is counted as 300 billion of loans, rather than a 10 billion 30-day loan.
"Table 8 aggregates total dollar transaction amounts by adding the total dollar amount of all loans but does not adjust these amounts to reflect differences across programs in the term over which loans were outstanding. For example, an overnight PDCF loan of $10 billion that was renewed daily at the same level for 30
business days would result in an aggregate amount borrowed of $300 billion although the institution, in effect, borrowed only $10 billion over 30... In contrast, a TAF loan of $10 billion extended over a 1-month period would appear as $10 billion. As a result, the total transaction amounts shown in table 8 for PDCF are not directly comparable to the total transaction amounts shown for TAF and other programs that made loans for periods longer than overnight"
Further, this is pretty much regular operations of the Fed as part of their work in stabilizing the economy through monetary policy. It's what they were made to do.
The GAO is pointing out failures in controls. Offering some perspective as a public company auditor (not a government auditor) I see failures in control all over because there is the concept of an ideal control environment, but every control represents additional costs and times, and general inefficiency. It adds hoops to jump through to get things done. At some point companies look at the risk and the cost needed to implement additional controls on that risk and decide that it's not worth it to strive for 100% security against a problem that may or may not exist. However, auditors point out these risks because that's their job, and the risks are real, whether or not the cost/benefit makes sense. In this specific case, revolving around conflicts of interest, there's only so much you can do, but considering the nature of the issue, it is damned important to have strong controls in these area. In summary, it's not suprising to see control deficiencies, and control deficiencies are not evidence of fraud or misstatement, but it's always better to have less control risk.
Got news for you, before WWII, our solders pointed broomsticks at cars ("tanks") and said, "eh, eh, eh, eh, eh, eh", to simulate firing an imaginary weapon. During WWI, gunners trained by using their finger and pointing at imaginary targets while spinning in a swivel chair. The US absolutely did NOT become a super power until after the close of WWII. And in large part, that was thanks to the Germans (including Nazis) absorbed by the US.
At the Battle of Leyte Gulf, we had forty aircraft carriers: 8 fleet, 8 light, and 18 escort. Plus a dozen battleships and over a hundred fifty other ships.
Forty fucking aircraft carriers.
We were a super power--and the only nuclear power--before the end of World War 2.
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
Since when is the Federal Reserve an agency of the United States government?
I would guess ever since the Federal Reserve System was created by an act of Congress, which has been amended some 200 times. All banks are required to be members of the Federal Reserve.
Last time that I checked it was and still is a privately owned corporation.
It is technically private but that doesn't mean it doesn't answer to the government. The Fed needs some independence to do its job properly. But the Fed is a quasi-governmental entity. It is backed up by the full faith and credit of the US government and only exists because Congress delegated some powers to it. It is private in the same sense that Fannie Mae was private. Technically true but well understood that it had the backing of the government.
If you desire to purchase a good, let's say a loaf of bread, do you factor in the rate of change of value in the currency? How about when you purchase a new phone? Of course not, because the change in value is insignificant to the price of the good. The supply chain works to support your needs as a consumer, so the argument that deflation affects production is false, especially when we begin to evaluate how markets behaved when there really was deflation.
We did not leave the gold standard until the Federal Reserve Act of 1913. Before that we were on the gold standard, and from the ratifying of the Constitution to creation of the Federal Reserve we went from a third-world bankrupt nation to the largest manufacturer on the planet (1895). Clearly the small amount of deflation did not hamper investment in capital goods. In fact, it probably made the economy grow more quickly because investments were made more wisely.
Most people are poor at making investment decisions, but inflation puts pressure on people to invest because they know that their savings will be worthless when they want to draw on it during retirement. With this pressure they are more likely to make higher risk investments. However, if they know that a penny earned now will be worth a penny after being saved, they become much more skeptical about investing, meaning that those seeking investors will have to have much more robust business plans to convince the investors to part with their money. With less malinvestment prices are more stable and the economy will grow more quickly.
I once took an excursion to Reddit, and later HN. Unlimited up/down voting sucks when dealing with a hive-mind.
I'm not sure why this is news (google "short term loans federal bailout" for stuff back in march/april). The Fed Reserve admitted to as much months back, though it had to be coerced out of them. The loans (overseas and domestic) were done in an overnight or sub-week fashion in order to provide liquidity in the open market. Where I draw issue is that most of these banks had capital, but were unwilling to lend it. Instead, they were able to get essentially free (~0% interest) money with which they could purchase short-term positions with guaranteed returns (e.g., US Treasuries) and make considerable money. Almost *none* of this money was lent to small businesses (as that would've required a long-term loan from the Fed, which this was not).
During that interval I really wished I would've qualified as a bank so I could (1) get huge sums of zero-interest short term money from the Fed and (2) just stash it somewhere to get returns in gov't bills.
Also, the metric reported (16 trillion) is a bit skewed. If you imagine that this was done over 14 months and the loans were of a 2.5 day average, that means any given day only 95 billion dollars was actually wrapped up in loans ( e.g., the RMS loan value is $9.5e10= $16e12/(14 months*30days/month)*2.5days). However, taking that back-of-the-envelope number and calculating interest, that let (with 3% compound interest at 14 months), the collective of banks make ~3.6 billion in returns. So, given the loss to the community (e.g., free money of 3.6 billion to rich banks), versus the potential fallout if they hadn't made these loans (e.g., bank collapse??), I say that this was a *very* cost effective means of stabilizing the economy. This is in contrast to other "bailouts" and shovel-ready plans which essentially just funneled cash into poorly managed state slush funds and pet projects.