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The New York Times
One of the federal government’s most opaque methods for bailing out the banking system allowed a handful of giant institutions to save up to $25 billion on their borrowing costs, a Congressional panel estimated on Friday.
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Seven companies received about 82 percent of those benefits, the panel estimated. General Electric Capital was able to reduce its borrowing costs by about $1.9 billion, while Goldman Sachs [GS
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] saved an estimated $606 million. The other big beneficiaries were Citigroup [C
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], Bank of America [BAC
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], JPMorgan Chase [JPM
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], Morgan Stanley [MS
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] and Wells Fargo & Company [WFC
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].
The savings came in the form of federal guarantees on more than $300 billion of bonds issued by banks and other financial institutions, and they were merely one component of a $4.3 trillion safety net of guarantees orchestrated last year by the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation.
In one of the first systematic efforts to analyze the maze of guarantees and hidden subsidies, the Congressional panel that oversees the Treasury’s $700 billion rescue program said the guarantees had provided a cheap but risky tactic for fighting the financial crisis last year.
The good news for taxpayers, the panel said, is that the government has actually turned a profit thus far on the guarantees. The government has collected $9 billion in fees for guaranteeing bonds issued by the big financial institutions and a total of $17 billion in fees for all its emergency guarantees. Thus far, it has lost only about $2 million.
At the height of the financial crisis late last year, the government provided guarantees to financial institutions, from money-market funds to expanded deposit-insurance for banks and $300 billion in troubled assets held by Citigroup. By providing guarantees instead of direct loans, the Treasury could avoid spending money upfront.
But Elizabeth Warren, director of the oversight panel, warned that the guarantees also exposed taxpayers to potentially huge costs and had created new risks by encouraging financial institutions to count on future bailouts and take bigger risks.
“The guarantees, when they work, provide big market stability at very low cost,” Ms. Warren said. “But they come with a very high risk to the taxpayer and a powerful distortion of market pricing and moral hazard.”
The panel’s most striking finding was about the size of the effective subsidy that G.E. Capital and Wall Street giants like Goldman reaped in the form of below-market borrowing costs.
The panel estimated that the federal guarantees lowered those firms’ borrowing costs by about 39 percent. Using two different approaches to measure the value of the subsidy, the panel said the savings ranged from $12.8 billion to $25 billion.
The oversight panel said it found “no significant flaws” in how Treasury officials and banking regulators designed the guarantees. But Ms. Warren warned that they were a “dangerous tool,” adding that “next time we may not be so lucky.”
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