Federal Reserve Chairman Ben S. Bernanke said in a letter to four senior lawmakers today that recent news articles about the central bank’s emergency lending programs contained “egregious errors.” While Bernanke’s letter and an accompanying four-page staff memo posted on the Fed’s website didn’t mention any news organizations by name, Bloomberg News has published a series of articles this year examining the bailout. The latest, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress,” appeared Nov. 28.
“Bloomberg stands by its reporting,” said Matthew Winkler, editor-in-chief of Bloomberg News.
Here is a point-by-point response to the Fed staff memo.
From Fed memo: “These articles have made repeated claims that the Federal Reserve conducted ‘secret’ lending that was not disclosed either to the public or the Congress. No lending program was ever kept secret from the Congress or the public. All of the programs were publicly announced when they were initiated, and information about all lending under the programs was publicly released — both on a weekly basis through the Federal Reserve’s public balance sheet release and through detailed monthly reports to Congress, both of which were also posted on the Federal Reserve’s website.”
Response: Bloomberg’s Nov. 28 story about Fed lending reported that the central bank published regular reports on the scope of borrowings from the discount window and other emergency or temporary programs. The loans were described as “secret” because the amounts, names of borrowers, dates and, often, interest rates weren’t disclosed. The stories reported that the Fed’s rationale for keeping the loans secret was to prevent bank runs.
From Fed memo: “The Federal Reserve took great care to ensure that Congress was well-informed of the magnitude and manner of its lending.”
Response: Bloomberg’s story said Congress wasn’t fully apprised of the details of the Fed’s efforts. “We were aware emergency efforts were going on,” U.S. Representative Barney Frank, who served as chairman of the House Financial Services Committee, said in the Nov. 28 story. “We didn’t know the specifics.” Other members of Congress on both sides of the aisle also said they weren’t aware of the details.
From Fed memo: “Congress was well informed of the volume of borrowing by large banks. For instance, the monthly reports showed the daily average borrowing during the month in the aggregate for the five largest discount window borrowers, the next five, and the rest. Similar information was also provided for lending at the emergency facilities.”
Response: Because the Fed didn’t provide the names of borrowers, it was impossible to add up how much each bank received across all the programs. Nor did the Fed release these figures in aggregate form for each institution when it released data under the Dodd-Frank Act or Bloomberg’s Freedom of Information Act requests.
In fact, the Fed released separate databases on each of the programs, and several of the databases identified borrowers by the name of the subsidiary that got the loan. None of the releases showed how much money each borrower was in debt to the Fed on specific dates.
Bloomberg built a database to combine subsidiaries with their parent companies and to add the total loans outstanding by each institution across all programs. Bloomberg undertook this project in the belief that a full accounting of the Fed’s lending efforts was possible only by tallying what each company borrowed across all programs.
From Fed memo: “One article asserted that the Federal Reserve lent or guaranteed more than $7.7 trillion during the financial crisis. Others have estimated the amounts to be $16 trillion or even $24 trillion. All of these numbers are wildly inaccurate.
“The inaccurate and misleading estimates could be based on several errors, including double-counting.”
Response: Bloomberg News reported that Fed lending peaked at $1.2 trillion, a figure that didn’t include any double- counting. Instead of adding all the outstanding Fed loans to get a large number, Bloomberg used peak loan amounts that were outstanding on a single day. On the day after the Nov. 28 story, the Fed published that $1.2 trillion figure, affirming Bloomberg’s calculation.
The $16 trillion number cited by the Fed may refer to a Government Accountability Office report of July 21, 2011, that used a different methodology. Bloomberg built its database to show amounts outstanding, while the GAO tallied cumulative loans. For example, if a bank borrowed $1 billion overnight for 100 nights, Bloomberg would say the bank had a $1 billion balance at the Fed for 100 days; the GAO would say the bank borrowed $100 billion. The former is a more useful economic measurement.
The programs included in Bloomberg’s examination of Fed lending were: the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, discount window, Primary Dealer Credit Facility, Term Auction Facility, Term Securities Lending Facility and single- tranche open market operations.
From Fed memo: “Other inaccuracies may occur if total potential lending is counted as actual lending.”
Response: In a March 31, 2009, story, Bloomberg News tallied the potential commitments of the Fed using as sources statements the central bank made and its weekly balance sheet. The amount, $7.77 trillion, was never characterized by Bloomberg as money lent by the Fed, though other commentators have mistakenly used it in that context. Rather, Bloomberg has said that that amount represents what the Fed “lent, spent or committed” or the total of all “guarantees and lending limits.” Bloomberg has been careful to characterize this number as total commitments, not loans that went out the door.
From Fed memo: “The articles make no mention that the emergency loans and other assistance have generated considerable income for the American taxpayers. As reported in the Annual Report of the Board of Governors, alongside the Board’s audited financial statements, the emergency lending programs have generated an estimated $20 billion in interest income for the Treasury. Moreover, in 2009 and 2010, the Federal Reserve returned to the taxpayers over $125 billion in excess earnings on its operations, including emergency lending. These amounts have been publicly announced and are reflected in the Office of Management and Budget’s financial statements for the government and have been verified by the Federal Reserve’s independent outside auditors.”
Response: In an Aug. 22 story, “Wall Street Aristocracy Got $1.2 Trillion in Fed’s Secret Loans,” Bloomberg wrote: “The Fed has said it had ‘no credit losses’ on any of the emergency programs, and a report by the Federal Reserve Bank of New York staffers in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 through December 2009.”
The Nov. 28 story quoted Fed officials saying almost all of the loans were repaid that there had been no credit losses.
From Fed memo: “The articles discuss lending made to large banks but never note that Federal Reserve lending programs went far beyond such institutions — all in furtherance of supporting the provision of credit to U.S. households and businesses. Literally hundreds of institutions borrowed from the Federal Reserve — not just large banks. The TAF had some 400 borrowers and the discount window some 2,100 borrowers. The TALF made more than 2,000 loans, while the commercial paper funding facility provided direct assistance to some 120 American businesses.”
Response: Bloomberg reported in Aug. 22 and Nov. 28 stories that the Fed programs extended beyond large banks. The Aug. 22 story mentioned borrowings by Plano, Texas-based Beal Financial Corp. and Jacksonville, Florida-based EverBank Financial Corp.
Bloomberg reported in the Nov. 28 story that the six largest U.S. banks accounted for 63 percent of the average borrowings by all U.S. financial institutions from the Fed, even though these firms only represented half of industry assets. Bloomberg also created an interactive website that allows users to chart Fed borrowings by more than 400 firms. The smallest detailed there is Wood & Huston Bancorporation Inc., which had $5 million outstanding on Feb. 12, 2009. The graphic can be found here.
From Fed memo: “The articles also fail to note that the lending directly helped support American businesses by providing emergency funding so that they could meet weekly payrolls and on-going expenses. The Commercial Paper Funding Facility, for example, provided support to businesses as diverse as Harley- Davidson and National Rural Utilities, when the usual market mechanism for their day-to-day funding completely dried up.”
Response: Bloomberg’s interactive graphic details Commercial Paper Funding Facility borrowings by non-bank borrowers, including Harley-Davidson Inc. and National Rural Utilities Cooperative Finance Corp. A Dec. 2, 2010, story, “Fed May Be ‘Central Bank of the World’ After UBS, Barclays Aid,” mentioned Harley-Davidson and General Electric Co., the largest non-bank borrower from the commercial-paper program.
From Fed memo: “The articles fail to mention altogether that one facility, the TALF, supported nearly 3 million auto loans, more than 1 million student loans, nearly 900,000 loans to small businesses, 150,000 other business loans and millions of credit card loans.”
Response: Bloomberg didn’t include TALF in its examination of the Fed’s rescue of the banking system because that program didn’t cater primarily to banks.
From Fed memo: “The articles misleadingly depict financial institutions receiving liquidity assistance as insolvent and in ‘deep trouble.’”
Response: Bloomberg never described any of the financial institutions mentioned in its bailout stories as insolvent.
The New York Fed’s report on Jan. 14, 2009, called Citigroup Inc.’s financial strength “marginal” and dependent on $45 billion in TARP funding. Citigroup’s Fed borrowing peaked six days later at $99 billion. Other numbers tell a similar story. Morgan Stanley’s borrowing totaled $107 billion on a single day. Royal Bank of Scotland got $84.5 billion from the Fed at about the same time it was taken over by the U.K. government.
The largest banks later had to raise billions of dollars of capital to assuage investor concerns that they might not be solvent, and they took capital injections from the Treasury Department. Former Treasury Secretary Henry Paulson wrote in his book, “On the Brink,” that “our banking system was massively undercapitalized.”
Under the terms of the Fed’s lending programs, the determination of whether a bank is “solvent” is based on the opinions of bank supervisors. These examinations are confidential.
From Fed memo: “Finally, one article incorrectly asserted that banks ‘reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.’ Most of the Federal Reserve’s lending facilities were priced at a penalty over normal market rates so that borrowers had economic incentive to exit the facilities as market conditions normalized, and the rates that the Federal Reserve charged on its lending facilities did not provide a subsidy to borrowers.”
Response: As noted in the Nov. 28 Bloomberg article, the $13 billion figure was based on a metric banks regularly report called the net interest margin — the difference between what they earn on loans and investments and their borrowing expenses. Those expenses include interest paid to the Fed for their loans.
To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during reporting periods in which they took emergency loans. The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, according to data compiled by Bloomberg. The calculation by Bloomberg excluded loans from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility because that cash was passed along to money-market funds.
The Fed says it charges a “penalty rate” that would be above rates typically seen in a normal market. That rate became cheaper when borrowing costs surged during the financial crisis.
Bloomberg’s Nov. 28 story contained the following paragraph: “The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.”