Scandalicious. Few other words could describe the Fed's secret loans to American institutions, outlined in 29,000 pages of Fed documents obtained under the Freedom of Information Act.
The short story: The Fed secretly lent or guaranteed $7.77 trillion to banks in need, a magnitude that dwarfs the $700 billion outlined in TARP. "And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed's below-market rates," writes Bloomberg.
The Fed proudly claims that all loans have been paid back, but "details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger."
The information and size of the bailout came to light after Bloomberg, LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association to force lending details into the open.
For the juicy details on the report, click here.
Fed helped make big banks bigger
The Fed is increasingly facing pressure to make their activities more transparent. Few know exactly what they are doing and how they truly affect the open market-information that is highly capable of shifting investor reactions.
But if transparency were the case, surely a lot of information would come out that would be damaging for a lot of companies and people. Still, does the Fed have the right to coddle America's biggest financial firms to foster the notion that they are "too big to fail?"
Consider that despite borrowing trillions from the Fed, the total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data. What's more, employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data (via Bloomberg).
The power in big banks has become a danger to the public, many analysts note. "The big banks have incentives to take risks they wouldn't take if they didn't have government support. It's a serious burden on the rest of the economy," says Nobel Prize-winning economist Oliver E. Williamson.
For so few banks to hold so many assets is "un-American," adds Richard W. Fisher, president of the Federal Reserve Bank of Dallas. "All of these gargantuan institutions are too big to regulate. I'm in favor of breaking them up and slimming them down."
Lobbyists for the big banks made the winning case that forcing them to break up was "punishing success," says Sherrod Brown, a Democratic Senator from Ohio. Now that they can see how much the banks were borrowing from the Fed, senators might think differently. (via Bloomberg)
One thing should be clear: The recent financial crisis has dramatically increased the size and systemic importance of big banks. Do these developments make them more vulnerable to another credit crisis?
Based on a few quick calculations, we managed to identify a few mega banks that have been on long losing streaks over the last month (based on their performance relative to the S&P 500 index).
Investors have been rushing to dump these mega banks over recent weeks -- do you think this pessimism is justified?
List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. JPMorgan Chase
2. Banco Santander
3. Bank of America
4. Goldman Sachs
5. Deutsche Bank
6. Morgan Stanley
7. Credit Suisse
8. Lloyds Banking Group
9. ICICI Bank
10. Banco Santander-Chile
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Price data sourced from Yahoo! Finance.
The Motley Fool owns shares of Bank of America and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.