Federal Reserve secretly bailed out large companies, including foreign ones | Hacker News Reader

Federal Reserve secretly bailed out large companies, including foreign ones

washingtonpost.com

38 pointsgasull25 comments

If most of these private sector bailouts took the form of purchasing commercial paper, doesn't that imply that the Fed got paid back? None of those companies have defaulted.

The article explicitly says that the Fed made money on every one of the commercial paper loans it gave out.

Keep the world economy fluid and be profitable in doing so, hard to complain about that one (though someone surely will).

It's pretty easy to complain. When a group which operates with power granted to it by law but is uncontrolled by the public and which operates in great secrecy from the public starts giving special deals to private companies, it brings up a few concerns, including things like equal protection and governmental favors. Would a smaller motorcycle company have been given loans in critical times? Would a motorcycle company that didn't have political ties or which had certain political enemies have been given that loan?

Would a company smaller than Harley Davidson get a "loan"? Maybe not. But if we're talking about commercial paper, we might not be talking about companies coming to the Fed hat-in-hand for a payoff; we may be talking about the Fed stepping in to fulfill a function that would under any ordinary circumstance be handled by the banking system. Remember, commercial paper apparently locked up solid during the crisis.

It's still not clear that another motorcycle company would receive the same deal as Harley Davidson. Surely Harley Davidson wasn't the only motorcycle company affected by the commercial paper freeze. Was it a good idea for the Fed to step in and fulfill that function? Maybe. But that doesn't mean it was ideal and there's nothing to complain about.

Complaints are only valuable insofar as they are constructive.

What should they have done differently? If bank lending really was frozen solid, is the argument that it would have been better for the Fed not to make these loans, and not turn a profit in doing so?

There's some vague hand waving here about competitors who may also have been affected by the credit freeze who may not have received similar details, but I'm not seeing any specifics.

Are you simply complaining that there may be something to complain about?

I'm not certain anything could have been done differently. At least not at the late stage that the Fed had to act. Then again, I'm a programmer and not a central banker. I'm mainly complaining that the situation was allowed to get to the point where the Fed had to take these kinds of drastic and secretive actions and that they did it without any oversight.

The "ordinary banking system" is not meant to be a public utility. Large or small, if the Fed is supporting the market, it is making decisions about resource allocation.

I'm not even always against the government making such decisions.

It's just the bailout involved the government making these decision in the worst possible circumstance, the least democratic, the least open and the most remunerative-to-bad-actors circumstances.

empirical evidence clearly shows that central bank independence is negatively correlated with inflation.

Hard to navigate the possible implied double negative here; are you saying independent central banks tend to reduce inflation or increase it?

nations with more independent central banks tend to experience less inflation.

severe inflation is virtually always conditional on the money supply being controlled by a legislature

Of course, the competitors of those companies that didn't get financing went under, or had far higher financing costs (that is, the rate they had to pay on the loan was far higher). Something to keep in mind.

Correct. The issue to take, uh, issue with here is that while this may have had the positive position of keeping things afloat during such a crisis (however manufactured) - the real outcome is that it just further enforces, and more tightly knits, the oligopolistic system in place.

At the time, Warren Buffet commented on this perverse quality of the bailouts. His profitable companies couldn't get the credit which bankrupt-but-guaranteed companies could.

He recently wrote a NYT op-ed praising it:

http://www.nytimes.com/2010/11/17/opinion/17buffett.html

The article states that "none of the special lending programs has lost money," implying that they were all loans, and are all being paid back.

Bernanke and co deserve huge credit for sticking to their guns throughout the crisis, despite criticism from all sides and the inauguration of a new president.

I disagree. Giving credit is as much a bailout as giving cash.

What Bernanke and company did was breath enough life into the previous bubble to allow it to limp into survival.

The survival of the bubble is huge tax on any ongoing economic activity - essentially it's the same policy that lead to Japan's Lost Decade and indeed has lead to an economy that will be more or less permanently indebted to Wall Street.

I would admit that the bail-out was an inevitable result of the previous ten-twenty years of building too-big-to fail enterprises on who's survival the whole of Wall Street Finance was (correctly-so-far) bet. These bets were naturally helped by the large investment houses having interchangeable personel with the policy makers.

Actually, one of the things that bothers me most about all of the bailouts is that many of them are not being repaid. At least not in the way that some people are intimating.

HD, for instance is actually able to "repay" via the mechanism of a somewhat hastily arranged private sector bailout by Buffet's Berkshire and Davis. The reason everyone is obliged to try to prop HD up is because, through financial instruments of truly byzantine design, HD's customers were given loans for their motorcycles which were used as backing for certain securities. I won't get into the details, but the short story is HD customers won't repay their loans. Worst part...even if they had, it is not clear that the math would have worked out, and there may have been problems in any case.

This is why Buffet cautions us to "Beware geeks bearing formulas".

I'm not saying that what the Fed did was wrong...Rome was burning...I won't second guess them.

I do think people should realize that the problems are still with us however. What has happened is simply some creative juggling of the debts. This stuff takes time to unwind carefully, and even then some party will need to lose. It's just that there is a need to find more creative, and less obvious, methods of making that loser the Government, ie... tax payer. Because, that is the only party with the requisite resources.

And that is where the interesting stuff happens, engineering the repayment of the bailout funds. Sometimes it is repaid with securities of questionable value. Sometimes with hard assets, of dubious utility. They have even done some really brilliant things, like funneling stimulus funds to some of these companies...which were then used to pay back their bailouts. Of course, it looks like these companies paid the money back with revenues from new business.

This whole thing has been fascinating to watch. Again, I think the interesting parts were not the bailouts, but HOW the bailouts were being repaid.

We don't know if they actually did get paid back. If they did, we don't know if it was from even more debt.

My guess is that it is all a ponzi scheme that won't hold up for more than a few years.

Why did the Fed take that risk rather than acquiring those corporations outright in bankruptcy?

I'm not sure that this is really new news. The Washington Post is using a somewhat exaggerated title here.

Personally, I recall, in early September (2008), thinking that it would be great if the Fed let a large financial operator fail. I am fairly stupid, and sometimes I think in terms of simple cause and effect, and this was a clear case of that - I was thinking it would send a clear message that financial firms needed to get their act together. Then Paulson and the Fed allowed Lehman to fail. My first thought was, "This is great, now the other firms will get the message." I was totally innocent about the extent of the leverage in the system and the degree of peril the other firms faced. As the disaster played out in late September, I realized how naive I'd been. I suppose most people, like me, learned only then how weak the system was. The Fed's unusual decisions were well known by the early of October (2008). If you read blogs like CalculatedRisk, one could follow the unorthodox extensions of the Feds programs. They were unusual, but I recall, there was the sense that orthodoxy had been discredited with the collapse of Lehman.

There was a good post on Calculated Risk at one point (early 2009, I think) about the benefits of paying out the full dollar on defaulted financial instruments, even to foreign firms - foreign banks had lent huge sums to finance mortgages in the US, if the foreign banks were to dump those loans, then the prices of US homes would have been driven down even lower and faster than what was already happening.

prices of US homes would have been driven down even lower and faster than what was already happening.

Then we would have affordable housing. Why is that a bad thing?

I think we exchanged the short term pain of some bankruptcies for the long term pain of years of deflation. Outstanding credit will continue contracting for many years, probably for more than a decade. This is deflationary.

Iceland let its banks go bankrupt and now it has a growing economy again.

First of all, Iceland has seen a significant decline in its economy:

http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-po...

Second of all, it is easy for a small country to bounce back by devaluing its currency, but it is harder for a big country to do that. To devalue is to gain via exports (or import substitution), but to grow Iceland by 1% requires less of the world than getting the USA to grow by 1%. This is a simple matter of ratios. The USA represents a greater total of the world economy than Iceland does, therefore its requires more of the world economy to get the USA to grow 1% via exports (or import substitution).

Thirdly, a lot of banks have been allowed to fail:

http://www.calculatedriskblog.com/2010/11/bank-failure-147-g...

Fourthly, no doubt some of the bigger banks should also have been allowed to fail. Nationalization and rehabilitation would have been more fair to the public than simply bailing out the existing management.

Fifthly, please think about what you are writing: "the short term pain of some bankruptcies for the long term pain of years of deflation". There is no trade off there. Bankrupt banks lead to decline in the monetary base which will lead to deflation unless offset by some other factor, such as massive devaluation, as in the case of Iceland.

This title is unnecessarily provocative.

We operate in an integrated, global financial system now. For the last decade, our entire country has been funded by Chinese funds for crying out loud!

Foreign banks such as UBS, CS, some of the reinsurers, as well as the ECB (and by extension the mammoth French banks) all cast such a wide net over the entire world that one of them failing would be enough to jeopardize the U.S. system.

This article forgets that Lehman was (after Bear) the smallest of the global players. If say a bank like Deutsche, or BNP Paribas failed, the effects would be even bigger than Lehman.

To get the benefits of globalization the world must accept the cost of globalization. These types of articles are typically written towards audiences who don't understand this concept.

How many times have the history books flamed the Federal Reserve and the U.S. government for not doing enough to save the nation from the Great Depression? Would they be saying the same if the Fed had not helped the banks?

The HN title needs changing.

The Washington Post title is Fed aid in financial crisis went beyond U.S. banks to industry, foreign firms. Reading the story, it's apparent the Fed lent money to a variety of companies from various countries - presumably to keep markets liquid.

That's very different to a bail out, which implies giving money away.

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