The $16 Trillion Secret

On the evening of March 14, 2008, the board of governors of the Federal Reserve convened an emergency telephone conference call. It was a Sunday. The agenda concerned Bear Stearns, the fifth-largest investment bank in the United States, which had run out of cash and would not open on Monday.

By the end of the call, the Fed had authorized $30 billion in emergency credit, routed through JP Morgan Chase, secured against Bear Stearns' mortgage assets. The public announcement stated that JP Morgan was acquiring Bear Stearns. The Federal Reserve's role was not disclosed.

It was the first time the Fed had invoked Section 13(3) emergency lending authority since the Great Depression.

It would not be the last.

Over the following two years, the Federal Reserve extended emergency credit to financial institutions around the world totaling $16.1 trillion. Congress did not vote on it. The public was not informed. The total figure did not appear in any press release, any congressional testimony, or any Fed publication during the crisis.

It was revealed in July 2011, in a Government Accountability Office audit that almost never happened, mandated by a single provision that Senator Bernie Sanders inserted into the Dodd-Frank Act at the last moment.

Here is the full file.

The US GDP in 2008 was $14.7 trillion.

The Federal Reserve secretly lent more than the entire annual economic output of the United States. To private institutions. At interest rates as low as 0.01%. Without a congressional vote. Without public disclosure. While those same institutions were telling their shareholders and the public that their balance sheets were stable.

The loans were not grants. Most were repaid. The Fed has used this fact to argue the program was a success. What that framing omits is that the loans allowed institutions that had made catastrophic decisions to survive those decisions without consequences, using public credit extended at rates unavailable to any other borrower on earth, while the public that ultimately backstopped that credit was told nothing.

The mechanic is worth understanding precisely. The Fed does not use taxpayer money in the conventional sense. It creates credit. When it extends $16 trillion in emergency loans, it creates $16 trillion in new dollars. Those dollars flow into the financial system. Every dollar already in circulation becomes marginally less valuable. The bailout was paid for by every person holding dollars, through inflation, without a single vote.

The GAO report documented the recipients. The figures below are drawn directly from that audit.

Citigroup received $2.5 trillion. Morgan Stanley received $2.04 trillion. Merrill Lynch received $1.9 trillion. Bank of America received $1.3 trillion. Bear Stearns received $960 billion. Goldman Sachs received $814 billion.

These are American institutions. They had lobbied against regulation for a decade. They had packaged and sold the mortgage instruments that produced the crisis. They received public credit at 0.01% interest while that crisis was unfolding.

The foreign institutions are less discussed.

Barclays, the British bank, received $868 billion. Royal Bank of Scotland received $541 billion. Deutsche Bank received $354 billion. UBS received $287 billion. Credit Suisse received $262 billion.

The Federal Reserve, an American institution funded by the American monetary system, extended hundreds of billions in emergency credit to foreign banks during an American financial crisis. No congressional authorization. No public debate. No vote.

The GAO report listed 18 months of transactions that Congress had no knowledge of while they were occurring.

Section 13(3) of the Federal Reserve Act grants the Fed emergency lending authority in "unusual and exigent circumstances." The determination of what qualifies as unusual and exigent is made by the Fed's own board of governors.

No external body approves the decision. No court reviews the terms. No legislature authorizes the credit. The Fed determines that a crisis exists, invokes its own emergency authority, and extends credit on terms it sets itself.

Prior to 2008, Section 13(3) had been used once since the 1930s. The Fed's legal team spent weeks in 2008 constructing the argument that Bear Stearns qualified. Once that argument held, the authority was available for any institution the Fed chose to designate.

The Dodd-Frank Act, passed in 2010 in response to the crisis, modified Section 13(3) to require Treasury approval for emergency lending programs. It did not require congressional approval. It did not mandate real-time public disclosure. It did not cap the total amount the Fed could extend.

The structure that allowed $16 trillion in secret lending remains substantially intact.

Ben Bernanke testified before the Senate Banking Committee on multiple occasions between 2008 and 2011. He described the Fed's emergency programs in general terms. He referenced the Primary Dealer Credit Facility, the Term Securities Lending Facility, and the Commercial Paper Funding Facility. He did not disclose the total volume of transactions conducted under these programs.

In 2009, Senator Sanders asked Bernanke directly which institutions had received emergency Fed assistance and on what terms. Bernanke declined to answer, citing confidentiality concerns about revealing information about specific borrowers.

The GAO audit that eventually produced the $16.1 trillion figure was not a routine oversight mechanism. It was the result of Sanders inserting a one-time audit provision into Dodd-Frank. The provision passed only because it was limited to a single audit of a specific time period. The Fed successfully opposed any permanent audit authority.

The audit was published July 21, 2011. It received two days of news coverage. No institution faced consequences. No official was prosecuted. The Fed's emergency authority remained in place.

Three things the $16 trillion record reveals.

The financial system runs on a credit mechanism that operates without your knowledge or consent. The Fed created more dollars than the entire US economy produces in a year and distributed them to private institutions at 0.01% interest. That credit diluted every dollar you held. You paid for the bailout through purchasing power loss, with no vote, no disclosure, and no recourse. The mechanism that made this possible is still in place.

The institutions that caused the crisis received the largest loans. Citigroup, which had assembled one of the largest portfolios of toxic mortgage instruments in the world, received $2.5 trillion in Fed credit. Morgan Stanley received $2.04 trillion. These were not institutions that had been prudent. They were institutions that were too large to be permitted to fail, which is a different thing entirely. The Fed's emergency authority does not distinguish between the two.

The dollar absorbed a $16 trillion expansion in 2008. It is absorbing US federal debt that now exceeds $36 trillion. The central banks that hold dollars as reserves have been buying gold at record levels for three consecutive years. They have the same public data you do. They also have 90 years of institutional memory about what happens to reserve currencies that fund their own crises through credit creation. They are not waiting to find out how this one ends.

The $16 trillion was secret for three years. The conditions that made it necessary have not been resolved. They have been refinanced.

$16,100,000,000,000. The total emergency credit extended by the Federal Reserve between 2007 and 2010.

$14,700,000,000,000. The US GDP in 2008.

The Fed lent more than the entire annual output of the American economy to private banks, in secret, at 0.01% interest, while those banks told their shareholders their balance sheets were stable.

You found out three years later. From an audit that almost did not happen.

The Dark Money Letter is published every Wednesday. → thedarkmoneyletter.com

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