Myrtle Beach Real Estate by Mirela

Backdoor Bailouts

Backdoor Bailouts

 

The Federal Reserve propped up banks with big infusions of cash during the depths of the financial crisis in 2008 and 2009. Banks that took billions of dollars from the Fed then turned around and loaned money back to the federal government. It was a sweet deal for the bankers. They received interest payments on the government securities that were up to 12 times greater than the Fed's rock bottom rates, according to a Congressional Research Service analysis conducted for Sen. Bernie Sanders. "This report confirms that ultra-low interest loans provided by the Federal Reserve during the financial crisis turned out to be direct corporate welfare to big banks," Sanders said. "Instead of using the Fed loans to reinvest in the economy, some of the largest financial institutions in this country appear to have lent this money back to the federal government at a higher rate of interest by purchasing U.S. government securities."

The Federal Reserve claimed at the time that the emergency loans were needed so banks could provide credit to small- and medium-sized businesses that desperately needed money to create jobs or to prevent layoffs.  "Instead of using this money to reinvest in the productive economy, however, it appears that JPMorgan Chase, Citigroup, and Bank of America used a large portion of these near-zero-interest loans to buy U.S. government securities and earn a higher interest rate at the same time, providing free money to some of the largest financial institutions in this country," Sanders said. 

The Fed transactions during the financial crisis were detailed in documents that the central bank was forced to disclose last Dec. 1 to comply with a Sanders provision in the Wall Street reform law. Sanders subsequently asked the Congressional Research Service to compare the emergency Fed loans with investments in government securities by the nation's six largest bank holding companies. The study found, for example, that:

  • In the 1st quarter of 2008, JPMorgan Chase had an average of $1.2 billion in outstanding Fed loans with a 2.1 percent interest rate while it held $2.2 billion in U.S. government securities with an average yield of 4.6 percent.
  • In the 4th quarter of 2008, JPMorgan Chase had an average of $10.1 billion in outstanding Fed loans with a 0.6 percent interest rate while it held $10.3 billion in U.S. government securities with an average yield of 1.7 percent.
  • In the 1st quarter of 2009, JPMorgan Chase had an average of $29.2 billion in outstanding Fed loans with a 0.3 percent interest rate and held $34.6 billion in U.S. government securities with an average yield of 2.1 percent.
  • In the 2nd quarter of 2009, JPMorgan Chase had an average of $7.6 billion in outstanding Fed loans with an interest rate of 0.25 percent interest. Meanwhile, it held $34.6 billion in U.S. government securities with an average yield of 2.3 percent.
  • In the 1st quarter of 2008, Citigroup received over $5.2 billion in Fed loans with a 3.3 percent interest rate and held $7.9 billion in U.S. Treasury Securities with an average yield of 4.4 percent.
  • In the 4th quarter of 2008, Citigroup received $15.8 billion in Fed loans through the Fed's Primary Dealer Credit Facility with a 1.2 percent interest rate; $11.6 billion in Term Auction Facility loans with a 1.1 percent interest rate; and $4.9 billion in Commercial Paper Funding Facility loans with a 2.7 percent interest rate. It simultaneously held $24 billion in U.S. government securities with an average yield of 3.1 percent.
  • In the 1st quarter of 2009, Citigroup received over $12.1 billion in Fed loans with an interest rate of 0.5 percent while holding $14.3 billion in U.S. government securities with an average yield of 3.9 percent.
  • In the 2nd quarter of 2009, Citigroup received over $23 billion in Fed loans with an interest rate of 0.5 percent while holding $24.3 billion in U.S. government securities with an average yield of 2.3 percent.
  • In the 3rd quarter of 2009, Bank of America had an average of $2.9 billion in outstanding Fed loans with an interest rate of 0.25 percent while purchasing $23.5 billion in Treasury Securities with an average yield of 3.2 percent.

Another Sanders provision in the financial reform law required the Government Accountability Office to audit the Fed's activities during the financial crisis. Sanders asked the non-partisan research arm of Congress to examine in greater detail the sorts of transactions that the Congressional Research Service highlighted. "I hope the GAO will closely investigate this issue as part of the top-to-bottom audit that I included in the Wall Street reform bill last year," the senator said.

http://sanders.senate.gov/newsroom/news/?id=6878E892-F5FF-4ED6-9D71-A4EDCE2C94FA

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Comment balloon 4 commentsMirela Monte • April 26 2011 11:45PM

Comments

The size of these figures is mind boggling... just hope not to have another such crisis in my lifetime!

Posted by Chandler Real Estate Liz Harris, MBA, #ChandlerRealEstateAgent (Liz Harris Realty) over 6 years ago

It's funny, I just rec'd a letter from the Big & Awesome bank. Their letter informed me the credit card / debt card I use, will now have an interest rate of 29.99 percent.  I am glad I don't carry a balance but really feal for those that do. 29.99% when they borrow at less than 1% come on!  I think it's time to buy more bank stock.

Posted by Art Welch, Broker (Superstars Realty) over 6 years ago

And ... the banks are exactly who we want to have monopolizing the lending industry.  No more brokers.  No more little guys.  Consumers will get the best mortgage rates and service then ..

Keep writing these articles, Mirela ...

Gene

Posted by Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi, 708.921.6331 - 40+ yrs experience (NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656) over 6 years ago

What to say?   This **** just gets worse with each administration.  Nobody is fixing anything, its a big CF (in military acronymology).  And we the people opt to not get educated on this and then we vote in those that promise us more money with no responsibility.

Change?  We need it.  We just got a whole lot more of the same, called it fertilizer and claimed it would help the economy grow.

 

Posted by Mick Michaud, Your Texas Lifestyle is Here! (Distinctly Texas Lifestyle Properties, LLC Office:682/498-3107) over 6 years ago

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