Quelle Surprise! Banks Lied About Bailout Funds and Got $13 Billion in Profit from Them

Yves Smith

Bloomberg News is continuing with the tankless task of pushing forward with FOIA requests relative to the Fed’s lending programs, and once it eventually gets its troves of documents, having to slog through them to see what they reveal.
Bloomberg has a long article up on its site about its latest findings. And the bottom line is everybody close to the process lied like crazy. For instance:

Banks lied during the crisis. The big banks said they were in really good shape even as they were sucking tons of credit from the Fed. The ones that arguably were healthier, like JP Morgan, tried the “they threw me in the br’er patch, I really didn’t want all that money,” in fact stayed in the program well beyond the acute phase of the crisis because it liked getting all that cheap funding.
Now this sort of misrepresentation is a securities law violation, but since the regulators presumably winked and nodded and it would be hard to prove damages, no bank executive will be held to account.
Bloomberg also performs the useful task of trying to ascertain how much benefit the banks derived from the cheap funding. They come up with $13 billion, or roughly 23% of profit (they assume typical margins, when it would take a good deal of internal data to make more refined estimates). This is actually a very narrow definition of profit impact. The Fed stepping into the markets to shore up the banks by design stabilized and boosted asset prices, which surely had a significant profit impact.
Regulators lied to Congress. The article does a good job of marshaling details:

Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.”….
Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.
“We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.
“We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”…
Lawmakers knew none of this.
They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible…
Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

Regulators continue to lie. I get really offended by the bogus accounting, such as the “banks paid back the TARP” or “the Fed lost no money on its lending facilities,” which this story annoyingly has to repeat out of adherence to journalistic convention. This is all three card Monte. So what if the banks paid back loans when the central bank has goosed asset prices vis super low interest rates? That’s a massive tax on savers. And we have the hidden subsidy of underpriced bank rescue insurance. Ed Kane estimates that’s worth $300 billion a year for US banks; Andrew Haldane of the Bank of England has pencilled the annual cost as exceeding the market cap of big banks (and that was in 2010, when their stock prices were higher than now).
The Fed is most assuredly going to have losses. It hoovered up a ton of Treasuries and MBS to shore up asset prices at time when interest rates were already low. The central bank intends to sell them when interest rates rise, to soak up liquidity. Buying when interest rates are low and selling when rates are high guarantees losses. As an old Wall Street saying goes, it’s easy to manipulate markets, but hard to make money from it.

The story contains other juicy tidbits, like bank lobbying on behalf of big banks to help them get bigger, and how Geithner told Congressmen they were too stupid to be able to shrink banks, and they should leave those questions to the Basel Committee (which has no interest in making big banks smaller). Go read it here.