While I realize that this is relatively "old news", with Ben Bernanke winding up his term as head of the Federal Reserve, I thought that the subject was definitely worth a second look since his actions during the Great Emergency of 2008 - 2009 are a key part of his legacy and may well help us predict where he will end up post-Fed.
Back in 2011, the Government Accountability Office released its review of the actions taken by the Federal Reserve Board and, in particular, the Federal Reserve Bank of New York (FRBNY) during its desperate attempts to keep the world economy afloat. Under the Federal Reserve Act of 1913, the Fed invoked its emergency authority to authorize new programs and financial assistance to individual institutions to stabilize financial markets. Loans made under these emergency programs peaked at more than $1 trillion in late 2008. Here is a graph showing the total outstanding loans as a function of time:
Who were the beneficiaries of this generosity? Here is a screen capture from the GAO report that shows the aggregate dollar amounts of all loans made to each financial institution (i.e. $10 billion renewed every day for 30 days would result in an aggregate loan amount of $300 billion):
Total aggregate loans hit $16.115 trillion, more than America's total gross domestic product. The biggest beneficiary was Citigroup coming in at $2.513 trillion, followed by Morgan Stanley at $2.041 trillion and Merrill Lynch at $1.949 trillion. The top four American borrowers accounted for 48.7 percent of all aggregate loans made by the Federal Reserve during the crisis. Keep that in mind when you watch banking executive compensation packages during the 2014 annual report season.
In one prime example, on March 13, 2008, the senior management at Bear Stearns notified the FRBNY that it would likely have to file for bankruptcy the following day unless the Federal Reserve Board provided an emergency loan. The following day, the FRBNY loaned Bear Stearns $12.9 billion, a loan that was paid back on March 17, 2008 along with $4 million in interest. This loan allowed Bear Stearns to avoid bankruptcy and continue to operate for one additional weekend while a potential suitor (JP Morgan) had a chance to look over their books. After a further loan of $28.82 billion from the FRBNY on March 24, 2008, Bear Stearns was sold to JP Morgan for $10 per share in late May 2008.
Here is a timeline showing the alphabet soup of emergency actions taken by the Fed between December 2007 and June 2010:
On top of the emergency funding, between November 25, 2008 and March 31, 2010, the Federal Reserve purchased $1.25 trillion worth of agency mortgage-backed securities to "provide support to mortgage and housing markets and to foster improved conditions in the financial markets more generally.".
Obviously, all of this banking fun and games comes at a cost and we all know in our heart of hears that someone, somewhere got wealthy from this near tragedy. The Fed had to enlist the help of the general banking and legal community; the lucky investment managers were paid a percentage of the portfolio value and the fortunate law firms involved were generally paid an hourly rate. Here is a chart showing the fees paid to certain American financial companies to assist the Federal Reserve Banks in its efforts to bail out the economy:
The Fed paid a total of $659.4 million in fees for 103 contracts to various vendors for their services in helping to establish and administer the Bank's emergency programs. PIMCO's contract accounted for $33.6 million of the total and Bank of America's lending commitment cost the Fed $21.4 million. A whopping eight of the ten largest contracts were awarded non-competitively (i.e the Fed didn't seek other bids for the services required) due to "exigent circumstances". You can just see the bankers rubbing their hands with glee at another's distress, can't you? In total, 79 percent of all vendor compensation was awarded non-competitively and the largest non-competitive contract was valued at more than $108.4 million. The largest competitive contract? A paltry $26.6 million or 4 percent of total fees paid by the Fed.
So, now that you have all of this data in mind, would anyone care to hazard a guess at which industry Ben Bernanke will find himself employed after February 1, 2014?