Cutting Out the BS of Crisis-Era Bailout Activities

Deception, like a mushroom, flourishes in darkness and manure. And the only way to end a deception is to drag it out into the light…and cut out the BS.

Two weeks ago, for the first time ever, the Federal Reserve dragged its crisis-era bailout activities out into the light of day (thank you Senator Bernie Sanders and Congressman Ron Paul!). The resulting revelations exposed a number of shocking truths, like the truth that the big Wall Street banks did not merely receive one $10 billion loan each from the TARP facility; they also received tens of billions of undisclosed loans from other lending facilities. On top of that, many of the big banks raised hundreds of billions dollars by secretly selling mortgage-backed securities directly to the Fed.

These massive undisclosed bailouts contributed greatly to the relatively robust earnings results many big banks produced during 2009 and early 2010 – results that would have been impossible without the hidden assistance. Accordingly, stock market participants came to believe the fiction that the big banks were “healthy,” rather than the truth that they were massively subsidized. As opinions changed, so did share prices, corporate bond prices, credit default swap prices, etc.

Some investors made money from the resulting asset-repricing, some lost money. Neither side reaped the reward it deserved, but only the result that the Fed’s manipulations produced. In an honest and transparent marketplace, the list of winning and losing investors would have been very different than the actual list that emerged from the crisis.

In a truly free market, the financial markets, themselves, pick the investors who win or lose, not the Chairman of the Federal Reserve or the Secretary of the Treasury.

Deceptions flourished during 2009, primarily because the Fed was secretly pumping trillions of dollars into various private companies without ever disclosing the recipients, timing or sums involved. The outside world was left to guess. By so doing, the Fed dramatically “un-leveled” the playing field of American capitalism.

Many undeserving companies benefited from preferential treatment during the crisis, while many deserving investors, savers and taxpayers directly or indirectly subsidized this preferential treatment. That’s not free-market capitalism, dear investor. That’s cheating.

Eric Fry
for The Daily Reckoning