TOPICS > Economy

Fed Disclosure Sheds Light on Scope, Risk of $3 Trillion Safety Net

December 2, 2010 at 4:55 PM EDT
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The Federal Reserve has released documents detailing $3.3 trillion worth of emergency efforts to prop up failing banks, Wall Street firms and large companies during the height of the financial crisis. Jeffrey Brown breaks down the new disclosures with Neil Irwin of The Washington Post.


JIM LEHRER: Now: new details on the Federal Reserve’s emergency measures during the financial crisis.

Jeffrey Brown has that story.

JEFFREY BROWN: The word unprecedented was heard often here and elsewhere in discussing the actions by the Fed back in 2008, as financial markets threatened to seize up and panic spread.

Yesterday, we learned a great deal more about the breadth of those moves, as the Fed released new data on its emergency programs that, combined, exceeded $3 trillion. Among the many new disclosures, the extent to which emergency aid went not just to Wall Street firms, but to foreign banks in the form of short-term loans and to many non-bank companies, and the number of instances when major firms like Goldman Sachs, Morgan Stanley and Citigroup borrowed from the Fed, in some cases more than 200 times.

Neil Irwin has been covering the Fed for The Washington Post, and he joins us now. Welcome back.

NEIL IRWIN, business reporter, The Washington Post: Thanks, Jeff.

JEFFREY BROWN: The first thing that jumps out is — is just, we knew this was big, but we didn’t quite know how big, right?

NEIL IRWIN: Exactly. We knew that there were many billions of dollars lent during the dark days of the financial crisis in 2008-2009.

The question was, who was getting the money? And now we know the answer. It was almost everybody. If you name a big bank, a big firm, it’s on this list.

JEFFREY BROWN: And the Fed was just compelled to act? I mean, nobody was lending, right? So, the Fed was doing what?

NEIL IRWIN: Right. What happened, the financial markets had shut down. The financial system was really in disarray and at risk of complete collapse.

And the Fed said, you know, we’re going to step in and be the lender of last resort. We’re going to lend, not just to banks, who are their normal counterparties, but we’re going to deal with anybody who needs money, whether it’s the commercial paper market, which is a form of short-term lending, money market mutual funds, large industrial companies.

General Electric is on the list. So, it was a full-scale effort to try and pump money into the economy.

JEFFREY BROWN: All right, so, when you start — just as an example, you start with the financial institutions, the banks, Wall Street. We knew they were getting money, of course, but what we see here is going back and back and back and back and back.

Now, does that suggest that some banks were closer to the brink than we thought at the time?

NEIL IRWIN: I think it does. What you see is some of the large investment banks, Morgan Stanley, Goldman Sachs, especially right after the failure of Lehman Brothers, they were borrowing just billions and billions of dollars from the Federal Reserve. They were rolling over these loans every night.

And that’s clearly them concluding that that was their best access to cash. And it’s unclear what would have happened if they had not had that backstop.

JEFFREY BROWN: And the wide range of American businesses you just mentioned, now, fill in that picture a little bit, because it is — it goes way beyond what I think we knew at the time.

NEIL IRWIN: It does. The Fed created this program to support the commercial paper market. That’s these short-term IOUs that companies use to pay for inventory and pay for their payrolls, that sort of thing.

JEFFREY BROWN: You mean the basic stuff, to pay their employees, right?

NEIL IRWIN: Yes, exactly.


NEIL IRWIN: And so you see names on that list that are household-name companies. You see General Electric. You see Harley-Davidson. You see Toyota, Verizon. Name a large company, there’s a good chance they accessed one or more of these facilities.

JEFFREY BROWN: And then there’s the foreign banks, foreign institutions.

NEIL IRWIN: Right. A lot of the big global banks have U.S. subsidiaries and affiliates that were able to access this Fed money. Now, that’s controversial. If you see UBS, the Swiss bank, or Barclays, the British bank, taking advantage of U.S. taxpayer resources, that’s controversial. But there was a lot of that borrowing by European and Asian banks.

JEFFREY BROWN: And a lot of it controversial, you say, but not known at the time.

NEIL IRWIN: Yes, I think it was known that they were eligible, but the extent of that lending and the degree to which major European banks were depending on the Federal Reserve in the fall of 2008, I think that’s a surprise.

JEFFREY BROWN: Now, all of this was released against the will, I think we can say, of the Fed, right, under the new — under new regulations.

And there was an immediate response. Tell us about what — why did they not want this out? And what happened when it came out?

NEIL IRWIN: Well, what they fear is that, if they release too much information about who’s getting their emergency loans, that people in another — in a future crisis won’t take advantage of those programs.

The idea is to try and pump money into the economy. If people are afraid there will be a stigma attached, they might not participate. That said, this was, as you say, part of the Dodd-Frank legislation that was passed over the summer, part of regulatory reform. Bernie Sanders, the senator from Vermont, had it inserted. And…

JEFFREY BROWN: And he was one of the ones who spoke out quickly.

NEIL IRWIN: Very much so. And he points out the international issues of international banks benefiting, and just the sheer scope of this lending that happened without a lot of oversight at the time.

We now have a great deal of insight into what this lending was. At the time, it was kind of a black box and kind of a mystery.

JEFFREY BROWN: Now, $3.3 trillion or so, when you put it all together, the emergency bailout funds. Where do things stand now? The Fed says that it’s not going to lose any of that money?

NEIL IRWIN: That’s right. All of these programs were break-even, and most of them actually made money. So, the taxpayer didn’t end up losing money on these things. We’re not on the hook, you and me.

That said, it was exposing the taxpayer to a lot of risk. They were taking — they were propping up companies that many of which might have failed otherwise. And so the taxpayer definitely put money at risk in order to make that happen.

JEFFREY BROWN: And, of course, it comes at this time when the Fed is again under the spotlight, right, with this new attempt to pump up the economy.

So, there’s a lot of — there are a lot of people looking carefully at what is traditionally a very secretive institution.

NEIL IRWIN: That’s right. You know, they made this move just — just last month to try and pump up the economy through buying $600 billion worth of bonds. They have come under fire for that.

This was a different era during the crisis. This was lender-of-last-resort stuff, as opposed to ordinary monetary policy. That said, they’re definitely under scrutiny.

JEFFREY BROWN: All right, Neil Irwin of The Washington Post, thanks very much.

NEIL IRWIN: Thanks, Jeff.