Banks to taxpayers: Get over it
Commentary: Moral hazard is the payoff of Fed’s emergency lending
By David Weidner, MarketWatch
NEW YORK (MarketWatch) — In the throes of an investor panic in the fall of 2008, U.S. financial institutions stuck to their story: We’re fine, trust us.
Last week, more than two years later, the Federal Reserve unveiled how those same financial institutions tapped emergency lending programs to survive. The final tally — $3.3 trillion in loans — exceeded even the most skeptical analyst expectations.
The Fed had been hesitant to release the data for fear it could rattle the markets. But the markets actually rose on Wednesday, the day of the release. I have a theory why, which we’ll get into later.
The disclosure tells us a lot about how dire the situation was in the darkest days of the credit crisis, but it also tells us some important things about today’s banking landscape: It’s fragile, it’s built on faith — and a lot of extraordinary backing.
The phrase “zombie” banks comes to mind when the numbers are laid bare: Morgan Stanley borrowed $61 billion in one overnight loan. Goldman Sachs Group Inc. hit up the Fed 81 times for a combined $600 billion. Citigroup Inc. and Bank of America Corp. borrowed a combined $2.6 trillion under the Fed’s primary dealer facility.
Even J.P. Morgan Chase & Co. used the central bank’s term auction facility seven times.
Oh, and the banks’ way of saying thanks for all of this: Get over it.
$1.9 trillion for Morgan Stanley
Most banking institutions aren’t only downplaying the drastic measures they took to keep the doors open day to day by suggesting it’s all ancient history. They’re arguing that what happened then has no bearing on what’s happening now.
In other words, just because they were hiding their wounds then, doesn’t mean they’re hiding anything now.
Well, consider that in the fourth quarter of 2008 Goldman reported a loss of $2.12 billion. During that period, the bank borrowed $589 billion from the Fed in overnight loans. Yet, look at the press release announcing the fourth-quarter and annual results. Goldman makes no mention of its desperate borrowing. Instead it touts the fact it was profitable for the year. That loss? Well, it was just a tough quarter. See Goldman’s fourth-quarter 2008 earnings release (pdf).
And when Morgan Stanley’s John Mack was arguing in September 2008 that his firm had more than $100 billion in assets to ride out a potential run on the investment bank, he didn’t mention that the bank was borrowing tens of billions from the Fed each night, ultimately tapping the central bank for more than $1.9 trillion, including the brokerage’s foreign units. See story on Mack statements.
Today, the banks are giving us more positive statements. On Monday, B. of A. announced it has nearly met all of the obligations to exit the government’s bank bailout program. Nineteen banks, including J.P. Morgan, will undergo another stress test so they can pay out more dividends to shareholders. Read related commentary on stress-tests and dividends. See story on B. of A. bailout.
The lesson: disclosure
If’s difficult to tell if the banks’ swagger today is justified. Many have raised capital requirements, and in the case of brokerages such as Morgan Stanley and Goldman, we’ve been told risk is diminishing and proprietary trading desks are being reined in or sold off.
Moreover, the Fed’s disclosure covers only the emergency programs it launched as the credit markets froze. It doesn’t cover today’s lending. We’re told leverage is falling at these banks, but the Fed’s lending rates are still near zero. Cash is cheap.
If there’s a lesson to be learned from the Fed’s bombshell, it’s that a lack of disclosure usually means there’s something to hide. In this case, we found out Barclays PLC and UBS AG also borrowed, a disclosure that irked Sen. Bernie Sanders, a Vermont Independent, who called the aid “astounding,” and bristled at the notion banks weren’t asked by the Fed to rebuild the economy.
“How many Americans could have remained in their homes,” asked Sanders, in The Progressive. “if the Fed required these bailed-out banks to reduce mortgage payments as a condition of receiving these secret loans?” Read Sanders’ comments on Fed aid.
It would have been a better question had it been asked at the time. Unfortunately that gravy train has long since left the station.
The only reason the Fed even released the information was because Sanders inserted language into the Dodd-Frank bill that required the Fed to come clean. And now it’s pretty clear Fed officials were reluctant about going public.
So, back to that earlier question about why the markets didn’t flinch. Two reasons: first, it was just too late. The program shut down in early 2009. The market has been rallying. Emergency lending? Ancient history. Second, I think the numbers were so eye-popping they just didn’t sound real. It’s one thing to rattle the markets, but another to go shock and awe.
That’s too bad, because if anything, the disclosure underscores how easily the banks can talk as if there’s a little rain and wind as the hurricane crashes ashore.
“We’re fine, trust us,” just isn’t good enough anymore.