The Negative Implications Of The Fed's Secret $7.7 Trillion Bank Bailout

 |  Includes: BAC, C, GS, JPM, MS, WFC
by: Harold Fredrick

Bloomberg recently published a powerful exposé on the Fed’s secret $7.7 trillion bank bailout. The bailout was held so secretive that Bloomberg was only able to divulge it by beating the Clearing House Association (i.e. the “banking cartel”) in protracted litigation that went all the way up to the Supreme Court. Finally legally cleared to release the information to the public, Bloomberg has unleashed a bombshell that has fanned the flames of anti-Fed sentiment from the Tea Party to Occupy Wall Street. Commentators as divergent as Rush Limbaugh and Rachel Maddow have been angrily talking about it.

If the latest “better-than-expected” unemployment report didn’t convince the Fed to take additional rounds of QE off the table, the Bloomberg report certainly has. Public and legislative pressure against the Fed is now so great that an announcement of another round of “money printing” would almost certainly lead to a call for the resignations of Bernanke and the board. Those in equities or commodities who were expecting a price boost from the Fed should therefore reevaluate their positions.

The no-strings-attached $7.7 trillion cash infusion encouraged the banking cartel to make risky investments and hedges that could endanger the financial system should the European crisis spread to the United States. Fitch Ratings recently qualified the six largest U.S. banks’ (BAC, JPM, C, GS, MS, WFC) multi-trillion dollar exposure in the Eurozone as an “unwarranted” and “serious” risk that was made, in large part, with secret bailout funds. It’s abundantly clear that the cartel was acutely aware of the danger when it undertook the risks. Indeed, despite the advent of Frank-Dodd, the “Big 6” have been defiant about disclosing their debt exposure in the Eurozone.

In addition to draining the Fed of political capital, the secret bailout has likely drained the Fed of options should the Eurozone crisis spread here. As far back as the beginning of QE2, some of my fellow Seeking Alpha contributors were suggesting that the Fed had run out of “bullets”. The disclosure of the $7.7 trillion bailout should eliminate any doubts as to whether the Fed has shot its last bullet, at least domestically. Having “printed” an amount of money greater than 50% of GDP and maintained 3 years of ZIRP, the Fed has done everything but throw the kitchen sink at the flailing economy. If the Fed’s actions haven’t helped the U.S. recover from one financial crisis, they're certainly not going to help it recover from a second.

Bloomberg’s stunning report on the Fed’s massive secret bank bailout revealed that Bernanke and company have already thrown their game-ending hail mary. This revelation should spur caution from equity and commodity investors who betted on QE, hold financial sector stock, or are positioned long.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.