We thought we knew about the bailout ... but what you’ve heard before is just the beginning. Last week, as the result of an amendment to the financial reform bill, the Federal Reserve was required to disclose details of lending activity (to the tune of $3.3 trillion) that was kept quiet during the financial crisis. And the facts lead to one conclusion ... we didn’t even know one-fifth of it.
The disclosure has major implications, according to Senate Budget Committee member Bernie Sanders: “After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed's multi-trillion-dollar bailout of Wall Street and corporate America. As a result of this disclosure, other members of Congress and I will be taking a very extensive look at all aspects of how the Federal Reserve functions and how we can make our financial institutions more responsive to the needs of ordinary Americans and small businesses.”
The obvious: Banks were bailed out. The government even bailed out GM (NYSE:GM) (and will not likely recover the entire $50 billion). That’s old news. What’s new is that the Federal Reserve also lent to companies other than banks, and the list of names might surprise you.
Here’s what happened. Companies need access to loans, and when companies want to borrow, they issue commercial paper. Commercial paper is short-term, unsecured corporate debt. And in the fall of 2008, the commercial paper market dried up. Companies couldn’t issue paper to get the funding they needed to function. That’s where the Fed came in.
The Fed created several programs to provide liquidity to the market. Among the programs was the Commercial Paper Funding Facility (CPFF). The facility was opened on October 27, 2008.
There’s more, according to a statement by Senator Sanders on Fed transparency:
“We have learned that the $700 billion Wall Street bailout signed into law by President George W. Bush turned out to be pocket change compared to the trillions and trillions of dollars in near-zero interest loans and other financial arrangements the Federal Reserve doled out to every major financial institution in this country. Among those are Goldman Sachs (NYSE:GS), which received nearly $600 billion; Morgan Stanley (NYSE:MS), which received nearly $2 trillion; Citigroup (NYSE:C), which received $1.8 trillion; Bear Stearns, which received nearly $1 trillion, and Merrill Lynch (MER), which received some $1.5 trillion in short term loans from the Fed.”
And the Fed didn’t only lend to U.S.-based institutions: Bank of Montreal (NYSE:BMO), Royal Bank of Canada (NYSE:RY), Allied Irish Bank (AIB) and Royal Bank of Scotland Group (NYSE:RBS) are on the list. Beyond the CPFF, the Fed bailed out Credit Suisse (NYSE:CS) and Deutsche Bank (NYSE:DB) through the Agency Mortgage-Backed Securities Purchase Program.
And on the list of non-financial companies that turned to the CPFF for relief: GE (NYSE:GE), Toyota (NYSE:TM), Caterpillar (NYSE:CAT), McDonald's (NYSE:MCD) and Harley-Davidson (NYSE:HOG). This is troubling.
This is troubling not only from the perspective of taxpayers, but investors. These are big-name companies. Some are Dow components. These are companies investors buy into with confidence. And these are companies that would have been in big trouble had the Fed not come along to rescue them.
Now, there was a silver lining here. When the CPFF closed on February 1, 2010, all loans were repaid in full ... and the Fed collected $849 million in fees.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.