Banks used free Fed money in financial crisis to profit, not lend

vault at a bank

Free money from the Fed intended to boost lending was used to pad bank profits with sweetheart bond deals instead. Image: Flickr/DoGoLaCa CC-BY-SA

The Federal Reserve loaned billions to big banks at near-zero interest to bail them out during the financial crisis. Those billions were intended to maintain the flow of credit and prop up the economy. Instead of loaning the money to individuals and small businesses, the banks reaped outrageous returns with the money by investing it in government bonds, a new study has found.

Free money, no strings attached

It was no secret that banks gorged on easy money provided by the Fed during the financial crisis and used the cash to buy Treasuries. A new study released Tuesday by the Congressional Research Service reveals the degree to which banks abused the privilege. The Fed lent more than $3 trillion to banks at interest rates as low as 0.0078 percent with no strings attached, according to the report. The banks pledged junk-rated securities as collateral for the the taxpayer-backed loans. Instead of reinvesting the money in the economy, the banks parked the money in Treasuries and took an easy profit–effectively borrowing money from one branch of the government and loaning it back to another at a much higher rate. Sen. Bernie Sanders, I-Vt., who commissioned the study, called it “direct corporate welfare to big banks.”

Abusing U.S. taxpayers for profit

Some of the taxpayer-financed arbitrage outlined in the CRS report includes a Fed loan of more than $48 billion to Bank of America at rates from 0.25 to 0.5 percent during a three-month period of 2009. In the same period B of A, the largest U.S. lender, tripled its holdings of Treasuries yielding 3.5 percent to nearly $15 billion. In the third quarter of 2009 B of A took $2.9 billion from the Fed at 0.25 percent and bought $12 billion in Treasuries paying 3.2 percent. Also in 2009, J.P. Morgan Chase, the second-largest U.S. bank, borrowed $29 billion from the Fed at 0.3 percent and bought $20 billion in taxpayer-backed U.S. debt yielding 2.1 percent. In 2008, Citigroup took $15.8 billion from the Fed at 1.2 percent; $11.6 billion at 1.1 percent and $4.9 billion at 2.7 percent. At the same time it held $24 billion in Treasuries with an average yield of 3.1 percent.

While banks count cash, credit dries up

While the big banks were adding hundreds of millions of taxpayer dollars to their balance sheets using free money from the Fed, lending decreased. According to Fed and Federal Deposit Insurance Corporation data, credit contracted at nearly the most rapid rate ever recorded. In 2009, outstanding credit to U.S. households declined by $234.5 billion. For non-corporate businesses, credit dropped by $296.1 billion. Small businesses closed. Foreclosures skyrocketed. Millions of Americans lost their jobs. For banks, it was business as usual.



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