Here are the headlines from last week:
Bloomberg: Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress
Slate: A Secret Scandal: The government and the big banks deceived the public about their $7 trillion secret loan program. They should be punished. by Elliot Spitzer
The Daily Caller: Congress was unaware of $7.77 trillion in secret Fed loans ahead of TARP vote
Fool: The Fed’s Secret Loans: The Reason for Banking’s Losing Streak
I am not picking on these publications, google ANY SINGLE one and they all ran the story. Huff Post, NY Times, LA Times etc…..ALL of them.
Problem? The story is wrong and just about every single level. Not even marginally……wrong like saying “Paris Hilton is a virgin” wrong.
Today the Fed Responded…
Federal Reserve Emergency Lending During the Financial Crisis
Recent press reports contain numerous errors and misrepresentations about Federal
Reserve emergency lending during the financial crisis.First, these articles have made repeated claims that the Federal Reserve conducted
“secret” lending that was not disclosed either to the public or the Congress. No lending program
was ever kept secret from the Congress or the public. All of the programs were publicly
announced when they were initiated, and information about all lending under the programs was
publicly releasedboth on a Weekly basis through the Federal Reserve’s public balance sheet
release and through detailed monthly reports to the Congress, both of which were also posted on
the Federal Reserve’s Website.It is true that, generally, the names of the counterparties and borrowers from the
emergency facilities were not immediately disclosed, consistent with general central banking
practice. Releasing the names of these institutions in real-time, in the midst ofthe financial
crisis, would have seriously undermined the effectiveness of the emergency lending and the
conñdence of investors and borrowers. These matters were discussed extensively at the time in
the press, and the Chairman and other members ofthe Board discussed them numerous times in
hearings before the Congress.In point of fact, the Federal Reserve took great care to ensure that Congress was well-
informed of the magnitude and manner of its lending. As required by the Emergency Economic
Stabilization Act, passed in late 2008, the Federal Reserve reported regularly on the outstanding
balances in its Sec. 13(3) lending facilities as well as on collateral (by type and quality) for the
loans. Beginning in June 2009, the Federal Reserve went well beyond these legal requirements
in the information it made available in its monthly public reports to the Congress, which were
also posted on the Federal Reserve’s website.Moreover, Congress was well informed of the volume of borrowing by large banks. For
instance, the monthly reports showed the daily average borrowing during the month in the
aggregate for the five largest discount window borrowers, the next five, and the rest. Similar
information was also provided for lending at the emergency facilities.In addition, the issue of counterparty disclosure was well known to the Congress and was
addressed as part ofthe Dodd-Frank Act. Under provisions of the Sanders Amendment, the
names of all counterparties and borrowers from the emergency lending facilities and the Term
Auction Facility (TAF) were disclosed on December 1, 2010. Data provided included the names
of the borrowers, the date that credit was extended, the interest rate, infomation about the
collateral, and other relevant terms. Similar information is supplied for swap line draws and
repayments. Details for each agency MBS purchase included the counterparty to the transaction,
the date of the transaction, the amount of the transaction, and the price at which each transaction
was conducted. Additional disclosures of discount Window borrowers and transactions
infomation were made on March 31, 2011.Second, one article asserted that the Federal Reserve lent or guaranteed more than
$7.7 trillion during the ñnancial crisis. Others have estimated the amounts to be $16 trillion or
even $24 trillion. All of these numbers are wildly inaccurate. As disclosed on the Federal
Reserve’s balance sheet, published weekly and audited annually by independent auditors, total
credit outstanding under the liquidity programs was never more than about $1.5 trillion; that was
the peak reached in December 2008.To be sure, that is a very large amount, but it was a necessary response to ensure that the
crucial mistake made during the Great Depression–failing to prevent the collapse ofthe financial
system–was not repeated. Importantly, such lending helped support the continued flow of credit
to American families and businesses.The inaccurate and misleading estimates could be based on several errors, including
double-counting~for example, including a series of loans, paid and then reissued, as separate
loans. Because much of the lending was on a revolving basis and made either overnight or for
short durations (30, 60, or 90 days, or even overnight), such double counting could lead to a
gross overestimate ofthe actual amount of lending.Lending is not spending and thus it is misleading to add up a succession of loans that
were paid off on a revolving basis. A good analogy might be a family’s mortgage: if a family
received a $200,000 mortgage loan, then refinanced two years later to take advantage of lower
rates, again borrowing $200,000, it would be misleading to say it had borrowed $400,000.
Likewise, ifa bank lends $1,000 for a year at a time, $1,000 a month at a time for a year, and
$1,000 a day at a time for a year–repaying the loans at the end of each period–the economic
result is that the borrower has borrowed just a total of $1,000 in each case, and it would be
incorrect to say that the borrower would have borrowed $12,000 in the second instance, and
$365,000 in the third instance.Other inaccuracies may occur if total potential lending is counted as actual lending. For
instance, the TALF program was authorized at $200 billion, but its total lending never exceeded
$70 billion. The same mistake would also apply in reference to other lending programs, like the
commercial paper funding facility, which were authorized at far higher amounts than were ever
provided.Although the articles do not stress this point, it is important to note that nearly all ofthe
emergency assistance has, in fact, been fully repaid or is on track to be fully repaid. This fact has
been verified both by the Board’s independent auditors and the Government Accountability
Office (GAO).Importantly, Federal Reserve lending should in no way be compared with government
spending. Federal Reserve lending is repaid, with interest, and the Federal Reserve has never
suffered a credit loss. As provided in the Dodd-Frank Act, the GAG conducted a review of all of
the emergency lending facilities and confirmed in its report on July 21, 2011, that not only were
there no material issues with respect to the design, implementation and operation ofthe facilities,
but that all loans to the facilities were fully repaid or expected to be fully repaid.Third, the articles make no mention that the emergency loans and other assistance have
generated considerable income for the American taxpayers. As reported in the Annual Report of
the Board of Governors, alongside the Board’s audited financial statements, the emergency
lending programs have generated an estimated $20 billion in interest income for the Treasury.
Moreover, in 2009 and 2010, the Federal Reserve returned to the taxpayers over $125 billion in
excess earnings on its operations, including emergency lending. These amounts have been
publicly announced and are reflected in the Ofñce of Management and Budgefs financial
statements for the government and have been verified by the Federal Reserve’s independent
outside auditors. The Federal Reserve is on track to return a comparable amount to taxpayers
this year as well.Fourth, the articles discuss the lending made to large banks but never note that Federal
Reserve lending programs Went far beyond such institutions–all in furtherance of supporting the
provision of credit to U.S. households and businesses. Literally hundreds of institutions
borrowed from the Federal Reserve-«not just large banks. The TAF had some 400 borrowers and
the discount window some 2,100 borrowers. The TALF made more than 2,000 loans, while the
commercial paper funding facility provided direct assistance to some 120 American businesses.The articles also fail to note that the lending directly helped support American businesses
by providing emergency funding so that they could meet weekly payrolls and on-going expenses.
The commercial paper funding facility, for example, provided support to businesses as diverse as
HarleyDa\/idson and National Rural Utilities, when the usual market mechanism for their day-
funding completely dried up.And the articles fail to mention altogether that one facility, the TALF, supported nearly
3 million auto loans, more than l million student loans, nearly 900,000 loans to small businesses,
150,000 other business loans, and millions of credit card loans. Auto lenders that funded their
operations in part with assetbacked securities supported by the TALF told us that the program
allowed them to provide more credit to consumers and at lower rates than they would have been
able to do otherwise. The TALF also facilitated the first issuance of a commercial mortgage-
backed security following a year-and-a-half drought, a security that provided an important
benchmark for pricing and helped establish the higher credit standards now seen inthe market.Fifth, the articles rnisleadingly depict financial institutions receiving liquidity assistance
as insolvent and in “deep trouble.” During a financial panic, otherwise solvent banks and other
financial institutions can be forced to sell assets at prices in order to meet the demands
of depositors and other sources of funding. Central bank liquidity lending is designed to stem
the panic by giving financial institutions a source of financing that permits them to refrain from
selling assets during the panic, Again, unmentioned in these a central point–all
discount window loans extended during the crisis were fully repaid with interest, indicating that,
with rare exceptions, recipients of these loans generally suffered from temporary liquidity
problems rather than being fundamentally insolvent. In the handful of instances when discount
Window loans were extended to troubled institutions, it was in consultation with the Federal
Deposit Insurance Corporation to facilitate a leastcost resolution; in these instances also, the
Federal Reserve Was fully repaid.Finally, one article incorrectly asserted that banks “reaped an estimated $13 billion of
income by taking advantage ofthe Fed’s below-market rates.” Most ofthe Federal Reserve’s
lending facilities were priced at a penalty over normal market rates so that borrowers had
economic incentives to exit the facilities as market conditions normalized, and the rates that the
Federal Reserve charged on its lending programs did not provide a subsidy to borrowers.
Banking and the Fed’s operation are incredibly complex. VERY few people can 100% get their hands around them. Because of that, any story that deals with “secrets” will get traction because, hey, it might be true. This is the whole reason site like zerohedge flourish. It is essentially a rumor mill that has banked on the end of the world as we know it since 2009. It matters not that they have been spectacularly wrong the last two year. Rumors always get eyeballs
The point here is most of what is written out there is simply to generate page views. That means the more melodramatic, the better. It also means that accuracy will suffer. You will also notice today a dearth of mea culpas from the media. It won’t get eyeballs. Saying the EU will now end the world as we know it will though.
This brings me to $BAC. The drumbeat of negative news just continues to flow yet, results are running counter to those views. Here is a presentation from today. Look at the direction of the information. Everything is moving in the right direction. At the end of Q4 I expect them to have a Tier 1 Capital Ratio of over 9%. Historic levels……yet, everyday it looks as thought they are going under from the news out there.
Bank of America Goldman Sachs Presentation (click to open pdf)
Now, I’m not saying I am right on the banks (with no chance of error) and those who disagree are wrong. I may be wrong at the end of the day and only time will tell. What I can say is that anything you read here is not designed for max eyeballs. It is a honest assessment of thoughts and views. Is that better or worse? I don’t know…..IMO it is more honest. It also means we need to discount heavily what we read from those sources who publish solely to attract an audience. There are plenty of other sites out there doing the same thing I am. Focus on them and put the “eyeball sites” in their proper context by recognizing when you read them (assuming you do) their goal.
Also, don’t assume those writing for a publication have a background in what they write. Most I know have degrees in History, Journalism, English etc….not Finance or Economics. Just because they write it, don’t assume it to be accurate….the above ought to be a stark reminder of that.