U.S. Federal Reserve (Fed) has granted loans to banks and companies from the state budget of $1,200 billion up to the end of 2008 in an effort to prevent the economy falling into a deep recession, according to a Bloomberg analysis, which warns that the data were so far secret. The amount is nearly three times the U.S. federal deficit in 2008 and exceeds total earnings in the decade ending in 2010 of all state warranted banks.
Citigroup and Bank of America were by far the world champions in the U.S. financial 2006, the height of the housing market. That was the best year in history for the ten largest banks and brokerage firms in the U.S., bringing them profits of 104 billion dollars. That ended in 2008, when the housing market collapsed, forcing companies to seek emergency loans of $669 billion from the Fed. The volume of these loans is enormous, compared to $160 billion public support received by the ten companies from the U.S. Treasury.
The champion of Fed loans is Morgan Stanley (NYSE:MS), with $107.3 billion. Citigroup (NYSE:C) has received $99.5 billion, and Bank of America (NYSE:BAC) $91.4 billion.
“These are astounding figures. We are talking about American financial aristocracy that would have led collapsed without federal funds”, said Robert Litan, a former Justice Department official. In 1990 he was part of a commission that investigated the causes of financial crisis at that time.
Two weeks after the collapse of Lehman Brothers in September 2008, Morgan Stanley tried to calm market concerns that it could be the next credit institution going bankrupt. The Bank announced that “it has a strong capital position and liquidity”.
The amount of $1,200 billion is equivalent to what present U.S. house owners owe for 6.5 million in delinquent mortgages and foreclosure.
European credit companies and banks have benefited, too
Almost half of the 30 largest debtors of the Fed were European companies. Among these, British Royal Bank of Scotland, with loans of $84.5 billion – the highest amount received by a debtor outside the U.S., Swiss bank UBS, with credit of $77.2 billion, and German bank Hypo Real Estate, with $28.7 billion (on average 21 million dollars for each of the 1,366 employees of credit institution).
The list of European borrowers include Dexia, Belgium’s largest bank in terms of assets, and the French group Société Générale, whose costs of insurance against debt default went up last month amid investor speculation that the chances of default have increased because of increasing debt crisis.
Fed didn’t have losses from emergency loans
Fed said that it didn’t have credit losses for the emergency program. A New York Fed report shows that the central bank has received a net gain from commissions and interest of $13 billion from programs run from August 2007 to December 2008.
“We designed our emergency programs to combat the crisis and to minimize financial risk for taxpayers. Almost all emergency loan programs have been closed. We did not record and do not expect losses”, said James Clou , a Fed official.
Why the loans were secret
Fed officials have argued for more than two years that the publication of corporate identities and conditions of loans would stigmatize banks, thus hitting their share price or, possibly causing withdrawal of deposits by customers.
“The recent financial crisis provides a clear picture of how quickly the confidence can erode and problems can spread”, said U.S. Financial Stability Council.
Any saving made by the U.S. central bank will be governed by laws that ensure transparency, adopted in 2010. These laws require the Fed to publish the identity of borrowers after two years.
U.S. came in June 2009 out of a recession that lasted 18 months and the economy contracted by 5.1%. The decrease is overshadowed by a decline of 27% of GDP recorded between August 1929 and March 1933, during the Great Depression. However, bank and economic challenges remain.