naked capitalism

Bloomberg has a new story on its continuing efforts to pry more information out of the Fed via Freedom of Information Act requests on who borrowed what when in the runup to the financial crisis. The central bank had refused to provide details of what various needy financial firms had gotten under its single tranche open markets operations program, which was launched in March 2008. Lehman received a peak amount of $18 billion out of a total program size of $80 billion.

Now why does all this matter? Perry Merhling, in an earlier post about the single tranche open market operations, underscored that the real significance of this program, along with two others, the Primary Dealer Credit Facility and the Term Asset Backed Securities Lending Facility: the Fed had crossed the Rubicon and had decided to prop up dealers, not just banks. And as the Lehman case illustrates, it was doing so indiscriminately. Lehman was a bigger version of Bear: a subscale player that had placed virtually all of its chips on real estate in an effort to catch up with its bigger peers. Yours truly and other commentators saw that Lehman’s accounting was dubious. The Fed was supporting it without bothering to understand what was going on. The Valukas report revealed that the Fed had two people on site, while the SEC, the supposed primary regulator, had one person who was a less than full time presence. But the risk management operations of major dealers have thousands of people in them. The idea that two people from the Fed could do much that was meaningful was delusional. And even then, the Fed staffers withheld some of what they did learn from the SEC.

You can argue, as some defenders have, that these loans were collateralized and there were no losses, but that is not a sound basis for evaluating this action (if someone lent a 14 year old a car and he turned it back in undamaged, would you say that was a good decision?). The Fed, though lack of interest and unwarranted confidence that primary dealers could manage themselves, abandoned its exams of them in the 1990s. And the fact, as the Wall Street Journal mentions, foreign banks also fed at this trough:

Goldman’s loan of $15 billion at an interest rate of 1.16% on Dec. 9, 2008 , was the largest 28-day loan from the Fed. Interest rates on loans to Goldman were as low as 0.01% for $200 million on Dec. 30, 2008…

Though Goldman got the biggest single loan, its total borrowings of $53.4 billion were less than for some other financial institutions.

Credit Suisse tapped the Fed a total of 57 times for $259.3 billion, while Deutsche Bank AG got $101 billion by going to the U.S. central bank 37 times.

The good news is the FDIC is taking examination of these firms much more seriously and says it plans to have staff on site all the time (and that means more than two people). The bad news is that regulatory reform has given the Fed far more influence, and there is little evidence that it has undergone a change of heart in the wake of the crisis that its neglect helped create.