Money Morning staff: The Eurozone debt crisis has replaced the U.S. financial crisis as the disaster du jour. But make no mistake: U.S. taxpayers will be paying the tab for the U.S. crisis for years.
That’s evidently not true of the banking sector (NYSEARCA:XLF), however, whose massive financial-crisis windfall is just now coming to light.
In its January issue, Bloomberg Markets magazine reveals that – at the March 9, 2009 nadir of the financial crisis – the U.S. Federal Reserve had committed $7.77 trillion to rescuing the American financial system. That total was more than half the value of all that was produced in the U.S. economy for that entire year.
While this was going on however, it was a deep, dark secret. The Fed never let on, for instance, that American banks were in such deep trouble that they required a combined $1.2 trillion on Dec. 8, 2008 – “their neediest day,” Bloomberg said.
But here’s the best part: Many of the biggest banks have ended up doing great as a result of the central bank’s largesse.
Here’s why: Because these “emergency” Fed loans gave banks access to ultra-low (well-below-market) interest rates between August 2007 and April 2010, banks worldwide were able to earn an estimated $13 billion.
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, told Bloomberg that banks seemed to have it both ways.
Banks “were either in bad shape or taking advantage of the Fed giving them a good deal,” he said. “The former contradicts their public statements. The latter – getting loans at below-market rates during a financial crisis – is quite a gift.”
Shah Gilani, a financial-crisis expert and Money Morning columnist who edits the free Wall Street Insights & Indictments newsletter, put it more simply: “The average American has no idea how protected the big banks in this country really are. Maybe that’s because the biggest bank in the world is the U.S. Federal Reserve. And it happens to be a creation of – and 100% beholden to – the banks that it is a master shill for. It also lies to us and covers up Wall Street’s misdeeds.”
What follows is a “power ranking” of the 20 banks that saw their outstanding loans peak at more than $25 billion – and some insight on how this Fed lending enabled Wall Street to profit, even as Main Street suffered.
1. Morgan Stanley (NYSE:MS)
Borrowing at the Peak (Date): $107 billion, Sept. 29, 2008.
With worldwide financial markets in a meltdown mode, Morgan’s apex of loans from U.S. Federal Reserve offerings came just two weeks after Lehman Brothers, its erstwhile competitor, had filed for the biggest corporate bankruptcy in U.S. history (more on that in a moment).
2. Citigroup Inc. (NYSE:C)
Borrowing at the Peak (Date): $99.5 billion, Jan. 20, 2009.
Talk about being money hungry. The first installment of money from the better-known Troubled Asset Relief Program (TARP) wasn’t nearly enough to stop Citi’s bleeding – which is why, in January 2009, Citi required a second infusion of bailout money. No surprise here … that’s also when Citi’s Fed-facilities borrowing reached its apex.
3. Bank of America Corp. (NYSE:BAC)
Borrowing at the Peak (Date): $91.4 billion, Feb. 26, 2009.
Like Citi, Bank of America was a TARP double-dipper. It also snapped up two companies – Merrill Lynch and Countrywide Financial Corp. – that, too, were borrowing billions from the U.S. central bank.
4. Royal Bank of Scotland Group PLC (NYSE:RBS)
Borrowing at the Peak (Date): $84.5 billion, Oct. 10, 2008.
At No. 4, the highest-ranking foreign bank on this list, RBS also got a hefty bit of support from its native United Kingdom government.
5. State Street Bank (NYSE:STT)
Borrowing at the Peak (Date): $77.8 billion, Oct. 1, 2008.
The old business adage tells us to cut out the middleman. But not State Street. In fact, Bloomberg News reports that State Street initially served as a middleman, tapping into the central bank’s liquidity facilities to help money-market funds meet soaring redemption demands (collecting a fee for its trouble, of course) – but finally turned to the Fed for help, too.
6. UBS AG (NYSE:UBS)
Borrowing at the Peak (Date): $77.2 billion, Nov. 28, 2008.
A double-dipper of sorts, too, European banking heavyweight UBS achieved this distinction by getting help from the Fed and also receiving a substantive aid package from the Swiss government.
7. Goldman Sachs Group Inc. (NYSE:GS)
Borrowing at the Peak (Date): $69 billion, Dec. 31, 2008.
Goldman Sachs execs may not have been celebrating on New Year’s Eve, when its Fed loans hit their apex. That was also the close of the month that saw Goldman report its first quarterly loss since its 1999 IPO.
8. JPMorgan Chase & Co. (NYSE:JPM)
Borrowing at the Peak (Date): $68.6 billion, Oct. 1, 2008.
Like BofA, JPMorgan used the crisis as a cover for a shopping spree. And like BofA, JPMorgan snapped up two other substantive central bank borrowers – Bear Stearns (which it had rescued a bit before this) and Washington Mutual (acquired after a Federal Deposit Insurance Corp. (FDIC) seizure in September 2008).
9. Deutsche Bank AG (NYSE:DB)
Borrowing at the Peak (Date): $66 billion, Nov. 6, 2008.
It may have been Germany’s biggest bank, but it was one of the U.S. central bank’s biggest debtors: During the 439 days it held Fed liquidity money, Deutsche Bank maintained one of the largest average daily balances at $12.5 billion, according to Bloomberg News.
10. Barclays PLC (NYSE:BCS)
Borrowing at the Peak (Date): $64.9 billion, Dec. 4, 2008.
Borrowing by the London-based Barclays topped out only a couple of months after a failed first attempt to buy out Lehman Brothers. No matter. That led to a killer deal that enabled Barclays to snap up some of the failed U.S. brokerage firm’s sweetest assets.
11. Merrill Lynch
Borrowing at the Peak (Date): $62.1 billion, Sept. 26, 2008.
By the time Merrill Lynch maxed out its central-bank borrowing, the “bullish-on-America” broker had given the nod to a buyout deal from Bank of America. Just a couple months later, the double-whammy of a gargantuan fourth-quarter loss coupled with the revelation of 11th-hour bonus payments to top execs ended the regime of then-CEO John Thain.
12. Credit Suisse Group (NYSE:CS)
Borrowing at the Peak (Date): $60.8 billion, Aug. 27, 2008.
Another example of U.S. taxpayer money at work as this Swiss bank got a big boost from central-bank bucks. As Forbes magazine most delicately stated: “Swiss bank … was helped out by U.S. dollars. Credit Suisse had a sizable average daily balance of $13.3 billion – for the 386 days it was in hock to the Fed.”
13. Dexia SA
Borrowing at the Peak (Date): $58.5 billion, Dec. 31, 2008.
Another foreign bank that required U.S. rescue, this French-Belgium-Luxembourg bank didn’t seem to learn its lesson: Dexia is once again under pressure – this time over its exposure to the European financial crisis.
14. Wachovia Corp.
Borrowing at the Peak (Date): $50 billion, Oct. 9, 2008.
By the time Wachovia’s central-bank borrowing hit its apex, it was the rope in a takeover tug of war that pitted Citi against Wells Fargo. Wells ultimately prevailed, and snapped up Wachovia.
15. Lehman Brothers Holdings (PINK: LEHMQ)
Borrowing at the Peak (Date): $46 billion, Sept. 15, 2008.
Lehman’s borrowing peaked on the same day that it filed for the biggest corporate bankruptcy in U.S. history. The company, with more than $690 billion in assets, “became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets,” Manhattan Bankruptcy Judge James Peck said after a seven-hour bankruptcy hearing that was held exactly one week later.
16. Wells Fargo & Co. (NYSE:WFC)
Borrowing at the Peak (Date): $45 billion Feb. 26, 2009.
Not surprisingly, Wells Fargo’s borrowing apex was reached a couple of months after the already referenced buyout of Wachovia. Because it had to absorb the trashed assets of a stumbling Wachovia, Wells Fargo had to take a big hit to its earnings for the final quarter of that year.
17. Bear Stearns
Borrowing at the Peak (Date): $30 billion, March 28, 2008.
The Fed couldn’t do enough for a Bear Stearns: Not only did the central bank lend money from its still-new liquidity program, it also helped broker the sale to JPMorgan at a bargain price. All the Fed had to do was assume $29 billion in lousy mortgage-backed assets in a facility dubbed “Maiden Lane” (because of the street that runs beside the New York Federal Reserve in Manhattan).
18. BNP Paribas SA
Borrowing at the Peak (Date): $29.3 billion, April 18, 2008.
Yet another foreign bank – this one France’s largest – BNP Paribas was in hock to the U.S. central bank for two years – a relationship that started in December 2007. And like Dexia, another foreign bank that required central bank rescue, BNP also failed to learn its lesson: Data from Barclay’s Capital says BNP has the largest exposure to Greek debt of any French bank.
19. Hypo Real Estate Bank International AG
Borrowing at the Peak (Date): $28.7 billion, Nov. 4, 2008.
Bloomberg News reports show that this German commercial lender was yet another “double-dipper:” It tapped into U.S. Fed loans through the New York-based unit of a banking subsidiary. Hypo also reaped billions in guarantees and emergency credit from its home government.
20. Fortis Bank
Borrowing at the Peak (Date): $26.3 billion, Feb. 26, 2009.
Until it was broken into pieces, nationalized and pieces of it sold to … of all institutions … BNP Paribas, the banking arm of Fortis also snagged billions from the governments of Belgium and Luxembourg.
Related: Financial Select Sector SPDR ETF (NYSEARCA:XLF)