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Congress Kept in the Dark About Massive Fed Bailouts

November 28, 2011 - by Donny Shaw

A major new report from Bloomberg, drawn from nearly 30,000 pages of Fed documents obtained via FOIA, sheds some new light on why Congress’ response to the too-big-to-fail problem in financial markets was legislation that allowed the biggest banks to grow even bigger. According to the report, the Federal Reserve and big banks worked in concert throughout the financial crisis to manipulate investors, regulators, and lawmakers by covering up trillions of dollars in Fed loans and guarantees while simultaneously lying about being healthy. As Bloomberg puts it: “While Fed officials say that almost all of the loans were repaid and there have been no losses, 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.”

So when Senator Sherrod Brown [D, OH] and former Senator Ted Kaufman [D, DE] forced a vote in May 2010 on breaking up the five biggest banks by placing strict caps on deposits and non-deposit liabilities, only 33 senators voted in favor. The question was, essentially, should status-quo bank growth be allowed to continue even though regulators had determined they were already too big to let regular market forces take them down, or should they be reined in so that market forces can be allowed to play out without government interference? A supermajority of the Senate voted for the status quo, and as a result the big banks are bigger today than when they were revealed to be too big to fail.

Some bits from the Bloomberg report:

“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.” […]

Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks. […]

Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking.

“Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse,” says Dorgan, who retired in January. […]

Lobbyists for the big banks made the winning case that forcing them to break up was “punishing success,” Brown says. Now that they can see how much the banks were borrowing from the Fed, senators might think differently, he says.

From a market perspective, the core problem with too-big-to-fail is that it creates a competitive advantage for the corporations that are known to have an implicit government backstop. What the Bloomberg reports shows us is that this advantage also extends to public policy. Our financial regulatory institutions, led by the quasi-government Federal Reserve and a Treasury Department that is basically a revolving door between D.C. and Wall Street, are colluding with the big banks to ensure they are protected from any restrictions that our representatives may want to put in place if they were told the truth about the financial crisis. The regulators have essentially done to Congress what Congress does to the public — lying and misleading in order to avoid the accountability that might be enforced if the truth was made clear.

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