Bloomberg after many years of legal wrangling to force the Federal Reserve to disclose its secret financial crisis loans to Wall Street's big banks came out with a breathtaking look at the extent that Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), and Bank of America (NYSE:BAC) depended on the central bank to stay in business. Morgan Stanley even borrowed more than a $100 billion from the Fed in one day! While the controversial $700 billion Troubled Asset Relief Program (TARP) has received the greatest scrutiny, many of the Fed's emergency lending programs, which were extended to investment banks, foreign firms, and non-financial firms, have gone largely unnoticed.
As Bloomberg points out, the Federal Reserve's emergency lending programs were much bigger at $1.2 trillion than both the amount of money authorized or spent by TARP, $700 billion and $475 billion, respectively. While TARP was debated in the halls of Congress long after the bill was defeated and then passed, very little scrutiny of these emergency lending programs has made it into the political or public discourse. My new joint work “Does Receiving TARP Funds Make it Easier to Roll Your Commercial Paper Onto the Fed?” written with Yan Wendy Wu of Wilfrid Laurier University indicates that TARP recipients were more likely to partipate in one of the Fed's largest emergency lending programs. (To download the paper, click on the "One-click download" link above the abstract.) The work shows that TARP recipients were twice as likely to sell their commercial paper to the Fed though its $738 billion program to buy company’s short-term debt.
On Table 7, there is a list of the 81 different firms that sold their short-term debt to the Fed. Most of those firms were based outside the U.S., 45 firms out of 81. The biggest seller of commercial paper was the Swiss investment bank UBS. Many firms like BMW were not even financial firms. 15 firms from the TARP sold their commercial paper to the Fed. The TARP recipients that did participate in the Fed program had weaker capital ratios and profitability ratios in 2008 than the TARP recipients that did not sell their commercial paper to the Fed.
According to Hank Paulson’s memoir, Ben Bernanke, the Federal Reserve Chairman, and Secretary Paulson debated housing the Commercial Paper Funding Facility (CPFF) in the TARP, but Paulson favored the program being run by the Fed because he thought it would take up too much of the TARP’s purchasing power. It appears that Secretary Paulson was right. At its peak, the U.S. Treasury was only authorized to spend up to $700 billion. The $738 billion spent on the commercial paper funding facility exceeds the maximum Congressional authorization for the TARP program.
The Fed programs are much less controversial than the TARP, but the Federal Reserve’s emergency lending programs were a bigger bailout than the TARP turned out to be. Unfortunately, the world's financial sector now believes that it does not have to worry about its liquidity or solvency because the Fed has become the lender of first and last resort to all comers. That role may be tested if the European sovereign debt crisis worsens.
Disclosure: I only own these stocks in broad-based index funds.