This morning a report by Bloomberg News shatters everything we thought we knew about the US financial crisis.
In 2008, as the financial crisis descended into chaos that rattled the foundations of the country, the Federal Reserve announced a $700 billion bank bailout called TARP, in addition to a $160 billion public bailout meant to bolster the balance sheets of America’s biggest banks.
As the bets they’d made turned bad and lax regulations required them to have little cash on hand to deal with such a crisis, the Fed was forced to step in as lender of last resort, or face the potential insolvency of America.
Today, for the first time, we find out that’s only half the picture—literally.
At the same time TARP was being announced, the country’s biggest banks were actually being propped up by another fund of public bailout loans—these ones secret—that dwarfed TARP and the announced $160 bailout combined.
The Fed loaned an additional $1.2 trillion at record-low interest rates—less than one third the going rate that banks themselves were charging for institutional loans—to the country’s biggest investment and retail banks. And it was all top secret.
Records of the titanic loans were kept secret for more than two years, until Bloomberg News filed a Freedom of Information Act request to obtain the records and spent months litigating the issue. The banks last year asked the US Supreme Court to keep the loans secret, but the court recently granted Bloomberg’s request and turned over the previously classified information.
But it wasn’t just the banks that were seeking to keep the loans secret—it was the US government as well. “Fed officials argued for more than two years that releasing the identities of borrowers and the terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs,” reports Bloomberg.
This pattern of protecting the interests of banks over that of US businesses and consumers has run rampant. It manifested in the unconditional nature of the loans—they were made without any requirements for actually lending the incoming capital back out to US consumers or businesses to keep the economy moving, and as bank balance sheets rebounded over the last two years the real economy remains in the toilet and unemployment remains sky-high.
Not only that, but it seems we could be on the verge of another crisis.
Last year’s new financial regulations passed in the Dodd-Frank Act still fall short of making the banks keep healthy enough balance sheets to keep this kind of thing from happening again.
The rules, which mandate that banks keep enough cash and easily liquidated assets on hand to survive a 30-day crisis, don’t take effect until 2015. Another proposed requirement for lenders to keep “stable funding” for a one-year horizon was postponed until at least 2018.
Indeed, “reforms undertaken since the crisis might not insulate U.S. markets and financial institutions from the sovereign budget and debt crises facing Greece, Ireland and Portugal, according to the U.S. Financial Stability Oversight Council.”
And all signs now point to a heightened chance of renewed recession in the US, with banks still years away from being required to fortify themselves against even so much as a 30-day crisis.
So what have we learned since 2008? Not much, it would seem.