Fed's Money Tree

by John M. Curtis
(310) 204-8700

Copyright April 18, 2010
All Rights Reserved.                                

             Federal Reserve Board Chairman Ben S. Bernanke was told March 21 by the U.S. Court of Appeals in Lower Manhattan that it must disclose the names of financial institutions receiving taxpayer “bailout” money.  Bernanke claimed that financial institutions enjoyed the same “confidential and privileged” protections as individuals, preventing the Fed from naming recipients of government bailout cash.  Bernanke and Treasury Secretary Tim Geithner argued that open disclosure would jeopardize the credibility of individual banks and the U.S. banking system.  When banks ran out of cash in fall 2008, former President George W. Bush and his Treasury Secretary Hank Paulson requested emergency bailout funds, Congress responded promptly passing the Oct. 3, 2008 Emergency Economic Stabilization Act—a $687 billion bailout known as the Troubled Asset Relief Program [TARP].

            When Wall Street kingpin Lehman Bros. declared bankruptcy Sept. 15, 2008, the shockwaves destabilized America’s most prestigious banks and brokerage houses.  Only six months earlier, the Fed bailed out brokerage giant Bear Steans.  Throwing Lehman Bros. under the bus paralyzed the nation’s financial system.  To stem further damage, Bush and Paulson asked Congress and the Fed to implement the $687 billion TARP to supply banks with the emergency liquidity needed to stay in business.  Former Fed Chairman Alan Greenspan called the meltdown “a once in a hundred years event,” comparable to the historic financial panics that eventually created the Fed in 1913.  With U.S. financial institutions in chaos, the Fed stepped in to bailout mortgage giants Freddie Mac, Fannie Mae, AIG Insurance, and numerous commercial banks and financial institutions that ran out of cash.

            Wall Street’s financial stocks fell like a rock in late ‘08, taking Bank of America, once the nation’s largest bank, share prices down to around three dollars a share.  Wells Fargo, the nation’s second larges bank behind J.P. Morgan Chase, plummeted to around eight dollars.  To preserve the integrity of the U.S. banking system, the Fed had to supply emergency amounts of cash to the nation’s biggest banks.  While the Fed was authorized $687 billion by Bush and another $787 billion by President Barack Obama early in his first term, it had to spend trillions more to keep the banking industry from going under.  Bernanke, knowing the extreme weakness of the nation’s banking system, insisted on confidentiality for all institutions receiving bailout funds.  He’s feared a credit downgrade to U.S. treasuries, driving foreign investors, especially China, to pull the plug on U.S. treasury investments.

            Despite only two bailouts approved by Congress totaling less that $1.5 tillion, the Fed has spent nearly $15 trillion.  Cash ordered by Bernanke from the Treasury’s Office of Printing and Engraving, doesn’t appear on either the Fed’s or the Treasury’s balance sheets.  U.S. Circuit Court Chief Judge Dennis Jacobs agreed with requests by various newspapers sought under the Freedom of Information Act to disclose the names and amounts of bailout money paid to the nation’s biggest financial institutions.  “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute,” said Jacobs, ruling that the Fed must disclose names and amounts of cash given to the nation’s insolvent financial institutions.  Calling the ruling “catastrophic,” Oppenheimer & Co. bank analyst Chris Kotowski saw the ruling as a “death sentence” to banks.

            Goldman Sachs’ recent civil suit for fraud in connection with “derivatives” or collateralized debt obligations [CDOs] give Wall Street another fat black eye, still reeling from Bernard Madoff’s $60 billion Ponzi scheme.  Madoff’s larceny is small potatoes compared to trillions worth of phony CDOs sold to banks domestically and around the globe.  Bernanke’s reluctance to come clear with which institutions got what with the government’s bailout cash attempts to save Wall Street’s badly tarnished image.  Bernanke doesn’t want to expose the U.S. and foreign press to the precarious state of the economy, fearing a downgrade of U.S. debt.  “This money does not belong to the Federal Reserve,” said Sen. Bernie Sanders (I-Vt.).  “It belongs to the American people, and the American people have a aright to know where the more than $2 trillion of the money has gone,” underestimating by at least $10 trillion.

            Fed’s secrecy regarding bailouts goes to the heart of credibility on the U.S. banking system.  Bernanke’s reluctance to fess up says more about the Fed than protecting the sullied reputations of insolvent U.S. financial institutions.  If the U.S. Appellate Court ruling in Lower Manhattan stands, Bernanke will be forced to expose the world to the true story about U.S. bailouts and indebtedness.  Like one’s personal finances, toxic levels of U.S. debt damage foreign perceptions of the U.S. economy.  Generally speaking, the greater the debt, the weaker the economy.  Fed officials can’t have it both ways:  Maintaining secrecy to protect its image, while, at the same time, coughing up trillions to save cash-strapped banks.  However bad the PR, the Fed must come clean, take its lumps and openly admit the amount of tax dollars used to rescue various insolvent banks.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.