Issue of the week: The bailout’s alarming details

last updated 8 January 2015

The financial crisis, it seems, was even scarier than it appeared at the time, said Sebastian Mallaby in the Financial Times. Last week’s “document dump” by the Federal Reserve, occasioned by the Dodd-Frank financial reform act and a lawsuit by Bloomberg L.P., revealed that Fed efforts to rescue the financial system from autumn 2008 through spring 2009 were broader “and far riskier to taxpayers” than the public knew. All told, the Fed lent $3.3 trillion to U.S. and foreign banks, hedge funds, and even motorcycle maker Harley-Davidson “without a congressional say-so.” In rushing loans out the door, the Fed violated the cardinal rule of central banking, which is to lend freely in emergencies—but only against top-notch collateral and at punitive interest rates. Instead, the Fed accepted toxic assets as collateral and charged “palliative” rates. That the Fed could take such massive risks with the public’s money—and bitterly resist disclosing those risks—underscores “the might of unelected central bankers.”

Those central bankers continue to withhold crucial information, said The Wall Street Journal in an editorial. The documents give “a fuller picture of how the Fed intervened in the panic,” but we still don’t know why. Above all, we don’t know why Fed Chairman Ben Bernanke insisted on bailing out insurer AIG, “despite apparent resistance within the Fed.” The central bank refuses to release a memo to Bernanke from staffers that reportedly argues “that an AIG bankruptcy was not a systemic risk.”

Sad to say, bankers don’t always tell the whole, unvarnished truth, said Aaron Elstein in CrainsNewYork.com. Last April, JPMorgan Chase CEO Jamie Dimon told shareholders that the bank hadn’t actually needed the Fed’s help—but “the program did save us money.” Last week we learned that JPMorgan Chase had hit up the Fed for secret loans on seven different occasions, utilizing a program created to spare banks from having to “embarrassingly make their needs known to the public.” Goldman Sachs President Gary Cohn told the “whopper” that his firm could have survived the crisis without the Fed’s help. In reality, the firm “turned to the Fed every single day during the darkest weeks of the crisis,” for a total of 84 loans. So what else don’t we know about the “murky, shadow banking world” of hedge funds and the like, where much of the globe’s financial business is conducted? asked Gillian Tett in the Financial Times. It’s not just the Fed that must come clean. In return for its $3.3 trillion rescue, the Fed has “every right” to demand that players in this hidden world reveal the risks they’re taking—because the rest of us might someday have to pay for them.