The Federal Reserve’s gargantuan emergency lending programs transfused dozens of global financial heavyweights in the banking world with hundred of billions of dollars during the great financial crisis 2008-2012.
A look back: Matt Taibbi, Rolling Stone Feb 17, 2010
Excerpts:
“At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities — often toxic crap of the no-money-down, no-identification-needed variety of home loan — to various institutional suckers like pensions and insurance companies, who frequently thought they were buying investment-grade instruments. At the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities — a practice that one government investigator compared to “selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.”
Goldman hedged its massive blind bet by purchasing from AIG a “virtually unregulated form of pseudo-insurance called credit-default swaps” Goldman did not apparently concern itself with the fact that “AIG wasn’t required to [and didn’t] actually have the capital to pay off the deals.”
AIG had sold $440 billion of this ‘worthless crap’ to various banks (like Goldman and the French multinational investment bank, Société Générale)… a large portion of which the “taxpayer ended up having to eat.”
AIG was taken over by the government in September 2008, and instead of the normal course of bankruptcy-arbitration, the government saw to it that “Goldman was paid 100 cents on the dollar on an additional $12.9 billion it was owed by AIG…”
Less than one week after the massive AIG bailout, Goldman Sachs and Morgan Stanley were granted permission to become bank holding companies – will full access to borrowing funds, at very low interest rates, at the Fed Discount Window.
“Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve.”
“You’re borrowing at zero, putting it out there at two or three percent, with hundreds of billions of dollars — man, you can make a lot of money that way,” according to one prominent hedge fund manager.
Goldman then tapped into “a new federal operation called the Temporary Liquidity Guarantee Program [which] let insolvent and near-insolvent banks dispense with their deservedly ruined credit profiles and borrow on a clean slate, with FDIC backing. Goldman borrowed $29 billion on the government’s good name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. “TLGP,” says Prins, the former Goldman manager, “was a big one.”
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Bloomberg Nov 28, 2011: “On Sept. 21, 2008, a week after Lehman Brothers Holdings Inc. went bankrupt, Goldman Sachs Group Inc. converted to a bank holding company, gaining access to the Federal Reserve’s last-resort lending program for banks, the discount window. While it took only $50 million from the window, New York-based Goldman Sachs had been borrowing from the central bank for six months from two temporary programs for broker-dealers: the Term Securities Lending Facility and the single-tranche open market operations, or ST OMO. On Dec. 31, 2008, Goldman Sachs had $34.5 billion of loans from ST OMO, some of it at an interest rate of 0.01 percent.”
Peak Amount of debt as of 12-31-2008: $69 billion
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That hardly tells the full story, however.
Epilogue: Goldman had also received a $10 billion TARP loan, but quickly paid it back, proudly exclaiming that “the firm does not require further capital” and the $10 billion can now be “used by the government to revitalize the economy, a priority in which we all have a common stake.”
“During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman.”
“In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment,” according to a Dec 15, 2010 Business Insider report.
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