< The Fed's Lending During the Crisis Revealed

Transcript

Friday, December 02, 2011

BROOKE GLADSTONE:

This week on Bloomberg.com some blockbuster revelations. For the past three years Bloomberg News has been battling the Federal Reserve in court to find out crucial details about the Fed's lending during the financial crisis.

Though the Fed did regularly release aggregates of overall lending, it didn't disclose which institutions were borrowing or how much.

Bloomberg finally won that case, and now we do know which institutions the Fed promised 7.77 trillion dollars to, apparently with no strings attached and, in fact, earned some 13 billion dollars on the deal, thanks to the low interest rates.

Bloomberg News’ Bob Ivry is the first to say that Ben Bernanke's Fed is a more transparent fed, but there's a difference between transparency and disclosure. True, the 2010 Dodd-Frank bill now sets a two-year limit on how long the Fed can hide these details, but when lawmakers were discussing regulating the banks during the last crisis, they were almost entirely in the dark.

BOB IVRY:

None of the senators or Congress members that we spoke to knew any of the details. So when we told them, for instance, that Morgan Stanley had borrowed a 107 billion dollars on a single day in 2008 or that Bank of America had borrowed 99 billion dollars in a single day, or Citigroup had borrowed more than 90 billion dollars, they were just shocked as everybody else was.

BROOKE GLADSTONE:

Legislators misunderstood the depth of the problem and so didn't find the courage to actually deal with it. Now, I mean, it seems to me that that's the most serious fallout from the secrecy.

BOB IVRY:

What the Fed secrecy did was it allowed the biggest banks to get even bigger. One of our sources was former Senator Ted Kaufman of Delaware. He really pushed for legislation, along with Sherrod Brown, the senator from Ohio. The two of them - it was called the Brown-Kaufman Amendment. And it would limit the size of financial institutions. This was directly confronting what many people believe is the main problem in the financial industry that has survived the crisis and gotten even worse.

One of the arguments against the Brown-Kaufman Amendment was that it would be punishing success, meaning that these big banks got big because they're so good at what they do. And they turned around and spent money on lobbying Congress to defeat the Brown-Kaufman Amendment. Well, the numbers that we uncovered show that it is not success that made them big.

BROOKE GLADSTONE:

What were the Fed's motivations for withholding this information, to begin with?

BOB IVRY:

One of the functions of the Central Bank, Brooke, is to make loans to banks that can't get loans anywhere else. They’re the lender of last resort. And in the lawsuit the Fed, along with a group of the biggest U.S. banks called the Clearing House Association, said that if this data was made public that banks would think twice about going to the Federal Reserve to get loans in an emergency.

BROOKE GLADSTONE:

The banks were worried that there would be a stigma.

BOB IVRY:

That's right. If counter parties knew about their weakness, that they’d start pulling their money and there'd be a run on the bank.

What the court said, however, was that the public interest in finding out about this data outweighed any embarrassment or possible bad effects that disclosing the information would, would bring.

BROOKE GLADSTONE:

But if we cast our minds back to 2008, there was a sense, and not a totally unfounded one, it turns out, that a depression was possible,  maybe even imminent. So your article isn't an anti-Fed screed, is it?

BOB IVRY:

I, just like everybody else, like to get my money out of the ATM when I put my card in. And the fact that I was able to do that uninterrupted through the worst of the financial crisis is in no small part due to the Fed's actions.

I want to say a couple of things about that though, and that is that one of the Fed's jobs is to supervise the biggest banks. And, apparently, based on the evidence that we saw in 2008, they didn't do such a good job of that. And the other thing is that in a democracy it's very important to have accountability, especially when you're talking about money with a capital T-R-I-L-L-I-O-N. It's really important to know where the money's going and it's important to know how it's being spent, how it's being lent, where it's being guaranteed.

And on that front, we had to battle for three years through the courts, all the way to the Supreme Court, to get this information.

BROOKE GLADSTONE:

I know that when we mention the FCC, we fear that people's eyes will immediately glaze over. And I wonder whether the Federal Reserve does that for the [LAUGHS] long-time Federal Reserve reporter.

BOB IVRY:

What's gratifying to somebody who can talk about the Fed at a cocktail party and watch the seas part –

[BROOKE LAUGHS]

- is that more and more people are becoming aware of what's going on. One thing that's, that's really interesting for me is that this issue brings together the Occupy Wall Street people and the Tea Party folks. We received two tweets. One was from Congressman Dennis Kucinich, who is probably the most progressive congressman in Washington, and a tweet from Senator Rand Paul, who is a libertarian and it wants to abolish the Fed.

So you have on both sides of the political spectrum we’re getting tweets in support of the facts that, that we have uncovered.

BROOKE GLADSTONE:

This secrecy may have hampered lawmakers, and now these disclosures may be bringing the nation together in mutual hatred of the Federal Reserve.

[BOB LAUGHS]

What, ultimately, do you think is the most serious consequence of the lack of disclosure from the Federal Reserve?

BOB IVRY:

Well, I think the legacy of the secrecy is that we have basically the same financial system we had in 2006. And the fact that we did not change things in the financial industry since the crisis makes it more likely that we will have a crisis in the future.

BROOKE GLADSTONE:

Bob, thank you very much.

BOB IVRY:

It's been a pleasure, Brooke really.

BROOKE GLADSTONE:

Bob Ivry is a reporter for Bloomberg News.

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