Fed News Friday: $80B in secret loans exposed

May 27th, 2011


What goes on inside that building? Nobody knows.

The Federal Reserve has been known to loan billions, even trillions, out to private banks and the government without congressional oversight, but recently attained balance sheets show that between March and December 2008, the Fed gave out over $80 billion in loans at 0.01% interest to mostly foreign banks. Normally, the Fed loans money at 0.5% interest, but this time held a secret auction, called ST OMO (single-tranche open-market operations) to stimulate the buying of mortgage securities backed by Fannie Mae and Freddie Mac, one of the leading causes of the global downturn. The biggest recipients of these loans were foreign banks like Credit Suisse ($45 billion), Barclay’s ($30 billion), and UBS ($15 billion), who came to the Fed looking for a low-cost cash infusion to keep themselves afloat.

At a time when the world’s financial markets were in free fall, the Fed was busy handing out billions to foreign banks at unacceptably low interest rates in complete secret, while charging US banks more. These loans were not known to the banks’ shareholders, nor known by Congress because Fed officials believed that if it became known that some of the most powerful banks in the world were engaging in these kinds of loans, it would rattle stockholders. In the end, what probably rattled shareholders was when banks that appeared to be stable, like Lehman Brothers, suddenly collapsed due to these kinds of borrowing and investment practices that were a complete secret.

Even more worrying was that, had it not been for the court case Bloomberg v. Federal Reserve over the acquisition of the information under the rules of the Freedom of Information Act, this would’ve remained a secret. This can be prevented in the future if Congress would follow through in auditing the Fed, a cause championed by Rep. Ron Paul and one that is gaining more support with each passing day. With regular audits, the Feds would be held accountable for these transgressions, and more people will know about what is happening with our precious currency, which they are entitled to know.

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