Debunking the myths about the Fed’s “secret loans”
It was a staggering claim that quickly made the rounds in Washington last week: that the Federal Reserve had handed out $7.77 trillion to big banks at the height of the financial crisis. “The Fed fought to keep the details of the loans, which totaled $7.77 trillion, secret long after,” proclaimed ABC News. “There was no debate over the $7.7 trillion the Fed gave the banks,” thundered Rep. Dennis Kucinich (D-Ohio). It all followed a Nov. 27 Bloomberg story showing how individual banks had profited after receiving support from the Fed.
Problem is, the Fed never actually doled out $7.7 trillion to banks: Much of that $7.7 trillion figure doesn’t reflect loans made, but loan guarantees — the amount the Fed would be responsible for in case of default — and loan limits. Certainly, the Fed positioned itself to take on considerable risk if need be, but the central bank was not handing out $7.7 trillion in cold, hard cash to banks. Politicians and the news media alike have erroneously conflated the two, using “loan guarantees” and “loans” interchangeably. The Fed would have given out $7.7 trillion to banks only in the unlikely scenario that the banks asked for the maximum possible loans and that every one of them subsequently defaulted.
The Fed itself pushed back against such claims in a four-page memo released yesterday, as my colleague Neil Irwin reports. “Inaccuracies may occur if total potential lending is counted as actual lending,” the Fed memo says. What’s more, the central bank adds, the largest single emergency loan that the Fed ended up making during the financial crisis was $1.5 trillion in December 2008, and nearly all the loans made at the time have been paid back or are on track to be paid back.
Bloomberg, in fact, got all this right in its in original story, though it’s also possible to see how its reporting was mischaracterized by others. “Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year,” Bloomberg wrote last week. (The story also explains that the largest sum total of actual loans made on a single day was $1.2 trillion in December 2008.) So Bloomberg makes it clear that the $7.7 trillion was in terms of loan amounts “committed” — that is, potential and not actual lending — but then compares it to a concrete sum, the GDP, which could have misled some readers into conflating the two.
It’s also worth noting that Bloomberg had originally reported the $7.77 trillion in Fed loan commitments way back in March 2009. The Fed’s emergency lending information in aggregate was then, as now, publicly available. What the Fed refused to do — and what Bloomberg discovered only via the Freedom of Information Act — was to specify how those loans were parceled out to individual banks.
That’s not to say this absolves all concerns and questions about the Fed’s emergency lending to banks. The Fed disputes Bloomberg’s claim that it made loans at below-market rates, but it doesn’t specify what its lending rates actually were. Without such information, it’s hard to corroborate Bloomberg’s estimate that firms made $13 billion in profit from the loans, as Felix Salmon explains. But it’s worth taking a closer look at the facts that are generating such breathless anti-Fed outrage.