KEY POINTS:
The US Government is prepared to provide more than US$7.76 trillion ($14.23 trillion) on behalf of American taxpayers after guaranteeing US$306 billion of Citigroup debt yesterday.
The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes US$3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg.
The commitment dwarfs the plan approved by lawmakers, the Treasury Department's US$700 billion Troubled Asset Relief Programme (Tarp).
Federal Reserve lending last week was 1900 times the weekly average for the three years before the crisis.
When Congress approved the Tarp on October 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
"Whether it's lending or spending, it's tax dollars that are going out the window and we end up holding collateral we don't know anything about," said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee.
"The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones."
Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the Government's rescue effort.
The bailout includes a Fed programme to buy as much as US$2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun October 27, and US$1.4 trillion from the FDIC to guarantee bank-to-bank loans, started October 14.
William Poole, former president of the Federal Reserve Bank of St Louis, said the two programmes were unlikely to lose money. The bigger risk comes from rescuing companies perceived as "too big to fail", he said.
The Government committed US$29 billion to help engineer the takeover in March of Bear Stearns by New York-based JPMorgan Chase & Co and US$122.8 billion in addition to Tarp allocations to bail out New York-based American International Group, once the world's largest insurer.
Citigroup received US$306 billion of Government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject US$20 billion into the bank after its stock fell 60 per cent last week.
Congressman Darrell Issa, a California Republican on the Oversight and Government Reform Committee, said risk was lurking in the programmes that Poole thought were safe.
"It's not how likely that the exposure becomes a reality, but what if it does?" Issa said. "There's no transparency, so who's to say they're right?"
The worst financial crisis in two generations has erased US$23 trillion, or 38 per cent, of the value of the world's companies and brought down three of the biggest Wall Street firms.
The Dow Jones Industrial Average through to Friday last week is down 38 per cent since the beginning of the year and 43 per cent from its peak on October 9, 2007. The S&P 500 fell 45 per cent from the beginning of the year through Friday and 49 per cent from its peak on October 9, 2007.
The Nikkei 225 Index has fallen 46 per cent from the beginning of the year through Friday and 57 per cent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs is down 78 per cent, to US$53.31, on Friday from its peak of US$247.92 on October 31, 2007, and 75 per cent this year.
Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the US economy.
Most of the spending programmes are run out of the New York Fed, whose president, Timothy Geithner, is said to be Barack Obama's choice to be Treasury Secretary.
The money that's been pledged is equivalent to US$24,000 for every man, woman and child in the country. It's nine times what the US has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country's mortgages.
"It's unprecedented," said Bob Eisenbeis, chief monetary economist at New Jersey-based Cumberland Advisors and an economist for the Atlanta Fed for 10 years until January.
"The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the Tarp big time. There's a lot of supposedly smart people who look totally incompetent and it's going to fall on the taxpayer."
President Franklin D. Roosevelt's New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the Government's present response.
The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of US economic research at Barclays Capital and a former economist at the New York Fed.
US financial firms have taken writedowns and losses of US$666.1 billion since the beginning of 2007, according to Bloomberg data.
"This is the worst capital markets crisis in modern history," Harris said. "So you have the biggest intervention in modern history."
Bloomberg has requested details of Fed lending under the US Freedom of Information Act and filed a federal lawsuit against the central bank on November 7 seeking to force disclosure of borrower banks and their collateral.
Collateral is an asset pledged to a lender in the event a loan payment isn't made.
"Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting," Bernanke said on November 18 to the House Financial Services Committee. "We think that's counterproductive."
The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust and a former research economist at the Federal Reserve Bank of Chicago.
"Given that the Fed is taking on a huge amount of credit risk, now, it would seem to me as a taxpayer there should be more transparency," Kasriel said.
Bernanke's Fed is responsible for US$4.74 trillion of pledges, or 61 per cent of the total commitment of US$7.76 trillion, based on data compiled by Bloomberg concerning US bailout steps started a year ago.
The Fed's rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns's collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.
In the three years before the crisis, such average weekly borrowing by banks was US$48 million, according to the central bank. Last week it was US$91.5 billion.
The failure of a second securities firm, Lehman Brothers Holdings, in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF.
The two programmes, which have pledged US$2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.
"Money markets seized up after Lehman failed," said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. "Lehman failing made a lot of subsequent actions necessary."
The FDIC, chaired by Sheila Bair, is contributing 20 per cent of total rescue commitments. The FDIC's US$1.4 trillion in guarantees will amount to a bank subsidy of as much as US$54 billion over three years, or US$18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.
Congress and the Treasury have ponied up US$892 billion in Tarp and other funding, or 11.5 per cent.
The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee US$300 billion of mortgages, or about 4 per cent of the total commitment, with its Hope for Homeowners programme, designed to keep borrowers from foreclosure.
Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least US$6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.
Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on US$444 billion in mortgages at an expected cost of US$24.4 billion to be paid from the Tarp, according to FDIC spokesman David Barr. The Treasury Department hasn't approved the programme.
Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as US$200 billion to shore up nationalised mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn't been allocated to any agency.
The FDIC arranged for US$139 billion in loan guarantees for General Electric's finance unit.
The tally doesn't include money to General Motors, Ford and Chrysler. Obama has said he favours financial assistance to keep them from collapse.
In his November 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn't lose money.
"We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programmes," he said.
A haircut refers to the practice of lending less money than the collateral's current market value.
Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on September 30 to allow banks to expand the deductions on the losses they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.
Wells Fargo, which is buying North Carolina-based Wachovia, will be able to deduct US$22 billion, Willens said.
House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions. "The only purpose for this money is to lend," said Frank, a Massachusetts Democrat. "It's not for dividends, it's not for purchases of new banks, it's not for bonuses. There better
be a showing of increased lending roughly in the amount of the capital infusions" or Congress may not approve the second half of the Tarp money.
COST OF THE CRUNCH
* The US Government has pledged ,100,100,0US$7.76 trillion to rescue the financial system, according to Bloomberg data.
* This equals US$24,000 every US citizen and nine times what the US has spent so far on wars in Iraq and Afghanistan
* The S&P 500 index has fallen 45 per cent this year. The Dow Jones has fallen 38 per cent.
* The crisis has erased US$23 trillion the value of the world's companies.
- BLOOMBERG
