$16 Trillion in “Secret” Bailouts!

Senator Bernie Sanders (I-VT)

Should the Federal Reserve Bank (The Fed) be eliminated? It is frequently targeted by both the Occupy Movement and The Tea Party Movement.

Both believe it exists only to profit the rich and powerful through government fiscal policy at the expense of the little guy. Is this true?

That charge is made in a press release by Senator Bernie Sanders found on his official government web site.

Sanders says The Fed made an astounding $16 trillion in “secret” bailout loans to American and foreign banks and to private corporations during the Great Recession between 2007 and 2011.

They got the bailouts and we got the shaft!

Sanders’ claim is based on a July 2011 Government Accountability Office (GAO) report mandated by the Dodd-Frank Wall Street Reform Act of 2010.

Just the Facts, Ma’am… Nothing but the Facts!

For those who prefer to get their info strait from the horse’s mouth and have that data handy for thrashing the author for not knowing their head from a hole in the ground, then here are the relevant documents ( 🙂 ):

The Fed Audit
– U.S. Senator Bernie Sanders (I-VT), Press Release, 07/21/2011

FEDERAL RESERVE SYSTEM – Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance
– Government Accountability Office (GAO) Report, July 2011

The Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173)
– Public Law #111-203 (Text only), Signed by President Barack Obama, 7/21/2010

Politicians and Press Releases

Shock of shocks! What you read in politician press releases doesn’t always jive with unbiased, objective truth. Politician press releases, as is true in the Sanders one, are often a mixture of fact and false implication crafted toward a political agenda.

It is not casual reading but ya gotta study the small print of the GAO’s very complex 253 page report that Sanders based his press release on to get to fundamental truths:

  1. The $16 trillion in “secret” Fed loans are not loans. They are MOSTLY innocuous financial services transactions provided by The Fed for which it was paid banking fees.
  2. There is nothing “secret” about the loans. According to the GAO Report all information it includes is in existing publicly available annual financial statements of the 12 federal reserve banks.
  3. The GAO audit isn’t “The first top-to-bottom audit of the Federal Reserve” as Sanders’ claims.  It isn’t even remotely close to that. Such an audit was proposed by Congressman Ron Paul and others but, as often happens in Congress, it got watered down in Dodd-Frank.
  4. The GAO audit is very limited in scope. It covers only temporary emergency loan programs between December 1, 2007 and July 21, 2010.

The main outcome of The Fed audit was to make recommendations on how The Fed can protect itself against exposure as the “lender of last resort” in emergencies.

Almost all the $16 trillion in transactions by The Fed are money swaps or very short-term 82 day or less collateralize loans to banks.

Where Sanders is Right

Senator Sanders correctly reports that two CEOs were involved in conflict of interest situations. JP Morgan CEO, Jamie Dimon, and NY Fed Bank President, William Dudley, were both in positions of conflict of interest during the crisis.

What is not reported by Sanders is that all this was known during the crisis. The Fed did not have any existing emergency procedures to handle their unique situations. The Fed’s choice was either operating in emergency mode with their expertise or without it. There literally was no time to do anything else.

The Fed made a prudent decision that they needed all the help they could get. They had to make correct decisions fast, often within days, and finding qualified replacements would take to long.  No one, including Sanders, has suggested both men acted in any way but in the best interests of the country during the crisis.

Sanders conclusion that “No one who works for a firm receiving direct financial assistance from the Fed should be allowed…” is both obvious and correct. The GAO Report included recommended corrections.

What is the Purpose of The Fed?

To fully understand the $16 trillion error in Sander’s allegations you have to understand the purpose of The Fed.

The primary function of The Fed is to stabilize the monetary system to prevent financial “panics” that were common in the U.S. before The Fed was created in 1907.

That is what the emergency programs and documented transactions in the GAO report were specifically designed to do.

The Fed has other functions, but only this one is relevant to this article.

The Devil is in the Details!

So how was all this $16 trillion in “secret loans” doled out as bailouts by The Fed?

By far, the biggest chunk – $10 trillion of the “secret loans” – were in 569 simple currency transactions called dollar swaps of foreign currencies into U.S. dollars made to foreign central banks. Most often these swaps back and forth were overnight transactions completed before the start of business the next day.

80% of those transactions were with the European Central Bank (ECB).

10% went through the Bank of England and the remaining 10% were through eight other foreign central banks.

Foreign central banks don’t normally have a lot of U.S. currency on hand. They used the U.S. dollars they exchanged for their own currencies in short term loans to entities within their jurisdictions that operate using U.S. currency.

At the end of each transaction the foreign central banks paid The Fed back in U.S. dollars in exchange for their original currency back again.

For that The Fed was paid banking fees by the foreign banks.

There is nothing sinister about that at all.

Though it isn’t done often, this is a practice authorized since 1913 and has been used by The Fed and foreign central banks in the past to help keep money markets stable.

Not all, but most of the other documented transactions by The Fed are just as innocuous.

Companies like AIG, Bear-Stearns, JP Morgan and Citigroup are American-owned multinational companies who do business overseas through foreign banks and were involved in dollar swaps.

Real Bailouts

Those companies, however, were indeed bailed out.

JP Morgan was assisted in purchasing Bear-Stearns through three programs called Maiden Lane I, II and III to the tune of $73 billion.  The others were bailed out in bridge loans and other programs where they got $147 billion.

That is a big chunk of change but a far cry from $16 trillion!

There are not trillions in “secret” bailouts as Senator Sanders alleges! Not even remotely close.

How Much Money are ‘Real’ Loans?

$10 trillion in dollar swaps hardly qualify as bailouts.

What Sanders and other Fed critics fail to point out is that there are two separate tables, one right after the other, documenting the exact same monetary transactions made by The Fed. One is term adjusted and the other is not.

The first table, not term adjusted, has Sanders’ $16 trillion in “secret” bailouts. It includes the sum of all the dollar swaps and overnight money transfers used mostly to facilitate The Fed’s mandate to stabilize money markets.

For example, the first table lists $2.5 trillion given to Citigroup alone. That is over 1,000 times more than the total worth of Citigroup! It is about the same as the entire U.S. tax collections in 2008 when many of the “loans” occurred. Clearly, that amount is not a real dollar loan.

The second term adjusted table of the same transactions inches closer to reality. The total of all term adjusted loans in it is $1.1 trillion… 1/16th of the total in the first table.

The GAO explains this vast discrepancy like this:

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 days. In contrast, a TAF loan of $10 billion extended over a 1-month period would appear as $10 billion.

But that is still way over the real loan amounts. The real amount once you subtract out all the transfers of the same money over and over again then boils down to amounts miniscule compared to Sanders’ claim.

It should be noted that the taxpayers haven’t been left in the lurch for a single penny of Sanders’ $16 trillion.

According to the GAO report The Fed was paid $158.4 billion in bank fees from 2008 through 2010. Probably half of those profits were made from these transactions.

The Fed made about $70 billion off those transactions and all but $43 billion of the original $16 trillion has long since been paid off.

The Real Scandal Bernie Sanders Missed!

The vast majority of actual dollars spent by The Fed was in the “Agency Mortgage-Backed Securities Purchase Program“.

That isn’t even a loan program at all.

That program was created “to support the housing market and the broader economy”. It bought up all the toxic home mortgage loans approved by and backed up by Fannie Mae and Freddie Mac, the home mortgage lending giants.

The Fed had to buy all of Freddie and Fannie’s bad debt because it was required by law. Both companies are government sponsored enterprises (GSEs) created by the government. Those companies went into government receivership in September of 2008.

The total real dollar net purchases in that program was $1.25 trillion. Some of those assets have since been sold. There is still a $909 billion debt balance outstanding.

The Fed paid out about $80 billion in investment management fees to outside vendors, all of them American companies.


There are many unknowns that need to be known about The Fed.

For example, how much risk and exposure are U.S. taxpayers being subjected to by The Fed? How much in total assets and debt does The Fed hold? How much of the debt that The Fed is holding is bad debt?

The Fed is very, VERY different from a regular bank. It has dual public mandates to stabilize the monetary system and promote economic growth.

But that only intensifies the need for it to have accountability and oversight that only regular full auditing can provide. The U.S. taxpayers are its ultimate customers and they must be protected.

Just like GSEs Fannie Mae and Freddie Mac, taxpayers will be stuck with the bill for mistakes made by The Fed. That cannot be allowed.

If the “lender of last resort” gets in trouble there is no bailing it out.

The Fed got saddled with $909 billion in bad debt from just one program alone. That one wasn’t even a loan program and was not mentioned by Senator Sanders.  Yet it cost taxpayers about 10 times more than everything else combined. How much more Fed debt is out there that we don’t know about that was not covered in the GAO report?

The claims made by Senator Sanders in his PR are misinterpreted, exaggerated and misleading.

Senator Sanders’ profoundly over-exaggerates the truth by claiming The Fed made $16 trillion in “secret” bailouts to corporations and foreign banks.  It didn’t. It only facilitated its primary mandate to stabilize the economy.

Senator Sanders correctly points out several deficiencies but does not tell us they were addressed in the GAO report.

Unbeknownst to Senator Sanders, serious problems yet remain and The Fed’s acquisition of toxic mortgage debt is very distressing. A full audit is desperately needed and overdo.

In the final analysis, though, the GAO Report clearly documents the extraordinary courage exhibited by The Fed in crafting creative solutions under extreme duress that, without out a doubt, averted a full scale depression.

Should The Fed be eliminated? The Occupiers and Tea Partiers will have to decide that for themselves.

About azleader

Learning to see life more clearly... one image at a time!

Posted on Nov 10, 2011, in bailouts, Bernie Sanders, Debt, Debt crisis, economics, Economy, Politics, The Fed, World Economy. Bookmark the permalink. 6 Comments.

  1. AZ, thanks for doing all the heavy lifting on this one. You answered a lot of my questions. I still favor, as I think you do, that there should be more detailed audits of the Fed done so that the cloak of mystery can be removed.

  2. If we don’t lift the cloak of mystery we will regret it in the morning. 🙂

  3. Excellent, balanced, informative. the 16 trillion seemed too big to not be picked up by the news in a major way, so I knew there had to be more to it. Thank you very much for your approach on this and all the details. Very refreshing.
    …and definitely need that audit RP tried to push.

    • We blasted through 15 trillion with nary a peep from anyone.

      It’ll only make the news if Republicans (Paul Ryan) make it so… and then you can expect the mainstream media to blow it off as Republican extremism.

  4. I’ve never ever thought about guest posts on my site before, but will consider it.

    Could you identify and link to some examples of your work that you consider exemplary? I will review them and we can talk offblog about it. OK?

  1. Pingback: More on The Fed Audit, “Secret Loans”, and Conflicts of Interest « EconProph

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