Part of the error in judgment that occurred in all these borrowings is that the government did not ask for something concrete in return for all that money, such as support for financial reform, lending to small businesses, larger interest rates on repayment, for example. In fact to the contrary, after taking that bailout money, GS sent lobbyists to Congress to fight against financial reform. What gratitude! What a sad state of affairs.
If you want to see where the Federal Reserve money went in 2007 and beyond, go here.
Wall Street firms earn high profits while still owing Uncle Sam
WASHINGTON -- Goldman Sachs, Morgan Stanley and other Wall Street giants that played roles in the subprime mortgage debacle are reporting huge profits and awarding hefty bonuses again even as the government remains on the hook for tens of billions of dollars of their debt.
Banking behemoths are among the scores of lenders and insurers that floated as much as $345.8 billion in federally guaranteed bonds under a program that is widely credited with helping to keep money flowing at the height of the financial crisis, when businesses had nowhere to turn for capital.
Now, with the crisis in the rearview mirror, banks that escaped tough federal pay restrictions by retiring more than $200 billion in direct loans from the Treasury Department are still benefiting from the Federal Deposit Insurance Corp.'s less-conspicuous debt guarantee program, which has no such strings attached.
Some of the Wall Street firms that are getting the guarantees are expected to draw criticism from the congressionally appointed Financial Crisis Inquiry Commission this week when the panel issues its final report on the root causes of the subprime mortgage meltdown, which crashed the global economy.
Under the FDIC program, federal guarantees ensured that bonds that dozens of lenders, investment banks and insurers issued - including Goldman, JPMorgan Chase, Bank of America, Morgan Stanley, Citigroup and General Electric - got gold-plated ratings that drew investors and drove down the cost of financing the debt.
The FDIC's bank insurance fund, which backs the bonds, has reaped more than $10 billion in fees from firms using the guarantees, while the outstanding debt declined to $267 billion as of Dec. 31.
The program doesn't expire until the end of 2012, and the agency says that most of the bonds don't expire until next year.
Robert Pozen, the chairman of Boston-based MFS Investment Management, argues that the government shouldn't have released firms from executive pay restrictions until they had paid off the Treasury Department's Troubled Asset Relief Program and the FDIC program.
"Any bank that gets out of TARP, it's basically saying that it's now 'good to go' in the private market," said Pozen, the author of the 2010 book "Too Big to Save?" "They shouldn't be continuing to have this big guaranteed subsidy."
However, the agency put tight restrictions on banks' ability to refinance the bonds. Further hampering refinancing is the fact that the market for unsecured bank debt is just beginning to thaw. Morgan Stanley only recently completed a $5.25 billion bond offering, the largest by a U.S. bank in 20 months.
Banking industry consultant Bert Ely said that the adequacy of the fees in the FDIC program, known as the Temporary Liquidity Guarantee Program, was "the kind of thing that will be debated for years."
"If you don't charge enough, then that's what creates moral hazard" and the presumption that risky behavior won't be penalized, he said. "If you charge too much, you may end up sinking institutions that you need."
On Monday, the FDIC, which had not identified the participants in its program, gave McClatchy Newspapers a list of the institutions involved.