
Federal Reserve secretly bailed out large companies, including foreign ones - gasull
https://www.washingtonpost.com/wp-dyn/content/article/2010/12/01/AR2010120106870_pf.html
======
tptacek
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.

~~~
GavinB
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.

~~~
bilbo0s
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.

------
lkrubner
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.

~~~
gasull
_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.

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

[http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-
po...](http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-
miracle/)

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...](http://www.calculatedriskblog.com/2010/11/bank-
failure-147-gulf-state-community.html)

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.

------
mrr2
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?

------
nl
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.

