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A Raging Case of Bailout Fatigue

Politics / Credit Crisis Bailouts Sep 08, 2011 - 02:25 AM GMT

By: Doug_Horning

Politics

Best Financial Markets Analysis ArticleDoug Hornig, Casey Research writes: I’ve used the term outrage fatigue on numerous occasions in this forum as a way of trying to explain why there has been such a muted outcry from the general population as the tally of financial atrocities committed against American citizens has exploded.

August 22 was just another average day with another average headline that could easily have been ripped from some radical economic watchdog website (liberal or conservative, either one): Wall Street Aristocracy Got $1.2 Trillion from Fed.


But the line wasn’t the work of someone out there on the anti-capitalist or anti-government fringe. It was attached to an article from the very mainstream Bloomberg News.

Bloomberg has been engaged in a long, frustrating FOIA litigation battle with the Federal Reserve over that entity’s reluctance publicly to reveal what it has been doing with our money. Slowly, the stone wall has been coming down. And looking at what’s behind it, it’s pretty obvious why the Fed would have preferred to keep its deeds locked away from all prying eyes.

Thus the above headline. And here’s an ugly truth that goes along with it: It’s a near certainty that the vast majority of those who saw it – probably not too many in number, since the story got scant coverage on the network news – said to themselves, Yeah, we already knew that. Ho hum.

Call it bailout fatigue.

Because, guess what? This is not a recycled story from last year. This is news that we didn’t know before the 22nd.

This money is not a part of the $16.1 trillion in emergency loans the Fed handed to US and foreign financial institutions between Dec. 1, 2007 and July 21, 2010, according to figures produced by the first-ever, one-time-only GAO audit of the central bank ordered by Dodd-Frank. Nor is it part of the $2 trillion quantitative easing program. Nor is TARP’s $700 billion in there, either.

Read that again. This $1.2 trillion – and perhaps we also have trillion fatigue, because that’s a lot of money – is separate from all that other stuff. It’s another hitherto secret funding program that we never would have heard of if Bloomberg hadn’t torn it from the Fed’s mouth like a rotten tooth.

The list of who got the bucks is a basic guide to the American banking industry. $107 billion to Morgan Stanley. $99 billion to Citigroup. $91 billion to Bank of America. Over $75 billion to State Street and just under that to Goldman Sachs and JPMorgan Chase. And the list goes on. And on. And on. Even the disgraced Countrywide Financial got in on the act, claiming about $12.5 billion.

In addition, as the Fed was bailing the leaky American boat, it must have asked itself, Why stop here? There are foreigners out there who need our help just as much.

So, almost half of the Fed’s top 30 borrowers were European firms. They included the Royal Bank of Scotland, which was propped up to the tune of $84.5 billion, the most of any non-US lender, and Zurich-based UBS, which got $77.2 billion. The big foreign borrowers also included Dexia, Belgium’s biggest bank by assets, the French Société Générale, Deutsche Bank, Barclays, and Crédit Suisse.

“These are all whopping numbers,” says Robert Litan, a former Justice Department official who investigated the savings and loan crisis in the 1990s. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.” 

So much for the free market, where failed business ventures … well, fail. But not to worry, the Fed did it all for us.

“We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the US taxpayer,” says James Clouse, deputy director of the Fed’s division of monetary affairs in Washington.

Furthermore, the Fed’s official line now is that “nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.” In fact, $13 billion in interest income was supposedly realized.

That works out to an average of, yes, one percent.

Now that’s a pretty nice loan rate if you can get it. They could, and they did. Citigroup, for example, was the most frequent US borrower, in hock to the Fed on seven out of every 10 days from August 2007 through April 2010. On average, the bank had a daily balance at the Fed of almost $20 billion.

And the ability to raise truckloads of money for almost no interest raises another disturbing question: Did the banks really need this cash to stay afloat?

University of Pennsylvania finance professor Richard Herring, an authority on financial crises, is suspicious, saying that some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”

But regardless of whether banks needed the Fed’s money for survival or used it because it offered the opportunity to turn a quick, easy buck, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks, Herring notes.

Access to Fed backup support “leads you to subject yourself to greater risks,” Herring says. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”

All of this might conceivably make citizens revolt against an entity that uses their money to secretly fund the “Wall Street aristocracy.” It might make them vote for a Gary Johnson or a Ron Paul, someone who favors dismantling the Fed.

Or not. When a story as big as this one generates a bare minimum of media coverage, you know it’s probably headed for that huge waste bin in the corner of the parking lot. The one marked Bailout Fatigue.

[No one can afford bailout fatigue, since the question regarding US debt is no longer “if,” but rather “when” the financial collapse will come. Truth be told, the process is already under way… but there’s still time to prepare. You can protect yourself, your family, and your investments – and even profit. Learn how big the problem is and how you can prepare by attending a free, online event. The American Debt Crisis will be held on September 14 at 2 p.m. EDT. Register today!]

© 2011 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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