The Tax-Payers' Tab: a Cool $9 Trillion and Then Some

ilene's picture

The Tax-Payers' Tab: a Cool $9 Trillion and Then Some


Originally published at CounterPunch, The Tax-Payers' Tab: a Cool $9 Trillion and Then Some

In December 1, the Fed was forced to release details of 21,000 funding transactions it made during the financial crisis, naming names and dollar amounts. Disclosure was due to a provision sparked by Senator Bernie Sanders of Vermont. The voluminous data dump from the notoriously secret Fed shows just how deeply the Federal Reserve stepped into the shoes of Wall Street and, as the crisis grew and the normal channels of lending froze, the Fed effectively replaced Wall Street and money centers banks in terms of financing. 

The Fed has thus far reported, without even disclosing specifics of its lending from its discount window, which it continues to draw a dark curtain around, that it supplied, in total, more than $9 trillion to Wall Street firms, commercial banks, foreign banks, corporations and some highly questionable off balance sheet entities. (Much smaller amounts were outstanding at any one time.)

A careful review of these data makes it highly likely the GAO will be releasing some startling findings come next July 2011. That’s when the American people will have a much clearer picture of how the Federal Reserve shoveled taxpayer money to Wall Street by the trillions.  As a result of Senator Sanders’ legislative efforts, the Government Accountability Office (GAO) is to complete an audit by next summer of the Fed’s lending programs during the financial crisis. 

The data starkly show a comatose Wall Street being resuscitated with whatever financial might the Federal Reserve could pump into its tangled web of funding vehicles.  It also points to how the Fed was dispersing sums which dwarfed the U.S. Treasury’s $700 billion TARP (Troubled Asset Relief Program) bailout program while allowing the TARP to take the media heat for obscene funding of Wall Street.

The Fed has made the task of seeing the big picture of what it was up to exceptionally difficult by segregating its multi-prong funding into a dizzying array of spread sheets. Nonetheless, a few things jump off the pages. On the spread sheet for the Primary Dealer Credit Facility (a program to provide overnight loans to key brokerage firms, known as primary dealers because they assist the Fed in open market operations) are astronomical sums that Citigroup, Morgan Stanley and Merrill Lynch were drawing from the Fed on a regular basis from the Spring of 2008 to the Spring of 2009 (and potentially well beyond).  The three firms borrowed almost equal sums which cumulatively totaled over $6 trillion, and that does not include their borrowing from other Fed facilities. In its current release the Fed cut off these data as of May 12, 2009 while the program lasted until February 1, 2010, making the full extent of this funding unknown at present.  Calls to the Fed on this point had not been answered at CounterPunch’s press time.

Citigroup owns one of the largest commercial banks in the country, Citibank.  One could reason that the bank’s solvency had come under serious question at that time and it needed massive liquidity to meet depositor withdrawals from its bank as well as to fund its $2 trillion balance sheet (with another $1 trillion in off-balance-sheet vehicles).  Why Morgan Stanley and Merrill Lynch, which are large investment banks and retail brokerage firms, needed funds of this magnitude raises many questions. 

Runs on banks, which invest depositor funds in illiquid assets like real estate and corporate loans, are typically met with a government liquidity response.  Brokerage firms, on the other hand, hold stocks and bonds which can typically be sold in seconds with the proceeds “settling” (available to pay out) 3 business days later.

Liquidity problems were likely aggravated at Morgan Stanley and Merrill Lynch because they each cater to both institutional clients and retail mom and pop investors.  While the mom and pop accounts should have had little trouble cashing out of most stocks, municipal bonds and well known corporate bonds, less liquid securities in institutional accounts may have found their markets frozen for trading and needed interim financing  -- this may have included problematic commercial paper positions in some money market funds used by the big brokerage firms for both retail and institutional clients.

This mystery is further intensified by one Fed spread sheet showing that the largest Wall Street firms deposited a total of $2.1 trillion in stocks as collateral in order to obtain liquid funds from the Fed. Depositing stocks as collateral began on the day Lehman died and was done in large size by Lehman Brothers, Morgan Stanley, Merrill Lynch, and Citigroup.  Raising additional red flags, tens of billions of dollars in stocks were posted as collateral by the London operations of Morgan, Merrill and Citi. 

Was this publicly traded stock from the firms’ proprietary trading desks, otherwise known as the in-house casino?  Was it illiquid private equity in which the firms had their money tied up?  Was it equity tranches from the dubious Collateralized Debt Obligations (CDOs)? If it was either of the latter, how could it have been properly priced as collateral?  The Fed describes the equity as follows: “Securities representing ownership interest in a private corporation….”  Without knowing the details of these securities, or the other unspecified junk bonds used as collateral, we don’t know the extent of the trash the Fed was swapping for cash with Wall Street. 

Merrill Lynch was rescued in a buyout by Bank of America on September 15, 2008, the same day that Lehman Brothers filed bankruptcy. 

The Fed risking $9 trillion of taxpayer money to bail out positions of dubious worth is highlighted further in the spread sheet for the Commercial Paper Funding Facility, which loaned $38 billion more than TARP, or a total of $738 billion to fund not just U.S. corporations but foreign banks as well, potentially because they were ensnarled in Wall Street’s off-balance-sheet funding schemes.  Most alarming, a significant portion of this went to conduits that hide liabilities of Wall Street firms off their balance sheets, leaving Wall Street short of capital for emergencies just like this one, and shareholders in the dark about the true risk of the company’s balance sheet.

The Commercial Paper Funding Facility was announced by the Fed on October 7, 2008, 3 weeks after Lehman Brothers filed for bankruptcy.  Its first funding day was October 27, 2008 and its last funding day was January 25, 2010.  One of the borrowers on both its first day and last day of funding and many days in between was an entity called Hudson Castle, whose cumulative borrowings were over $50 billion from the Fed for commercial paper it sponsored for three off-balance-sheet conduits: Belmont Funding LLC, Ebbets Funding LLC, and Elysian Funding LLC.

On April 12 of this year, Louise Story and Eric Dash, writing for the New York Times, reported that while Hudson Castle was set up to appear to be an independent business, its board was controlled by Lehman; Lehman owned a quarter of the firm; and it was staffed with former Lehman employees. The reporters had gotten their hands on an internal 2001 Lehman memo indicating that the arrangement would maximize Lehman’s control over Hudson Castle “without jeopardizing the off-balance-sheet accounting treatment.”  The memo noted further that Lehman would serve “as the internal and external ‘gatekeeper’ for all business activities conducted by the firm.” The internal document was authored by Kyle Miller, who worked at Lehman at the time but went over to Hudson Castle to become its president.  According to the article, until 2004, Lehman had an exclusivity agreement with Hudson Castle, but the deal ended in 2004, with Lehman reducing its board seats from five to one.

Lehman was far from alone in having employees leave to set up conduits which conveniently benefited their former Wall Street employer by moving debt off the balance sheet.  It was the norm, not the exception.   

A July 2010 staff report from the Federal Reserve Bank of New York, titled “Shadow Banking,” noted the following about the shadow system in which conduits played a significant role:

“The liquidity facilities of the Federal Reserve and other government agencies’ guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks….

“…this [shadow banking] system of public and private market participants has evolved and grown to a gross size of nearly $20 trillion in March 2008, which was significantly larger than the liabilities of the traditional banking system. However, market participants as well as regulators failed to synthesize the rich detail of otherwise publicly available information on either the scale of the shadow banking system or its interconnectedness with the traditional banking system…At a size of roughly $16 trillion in the first quarter of 2010, the shadow banking system remains an important, albeit shrinking source of credit for the real economy…”

In other words, the leverage in the system was not coming just from mortgage securitizations and esoteric derivatives but from off-balance-sheet debt parking schemes quite similar to that used by Enron.

On May 6 of this year, Viral Acharya, a Professor of Finance at NYU’s Stern School of Business, gave enlightening testimony on conduits to the House Committee on Financial Services’ Subcommittee on Oversight and Investigations.  Professor Acharya reported as follows:

“Our analysis makes it clear that from an economic standpoint conduits are ‘unregulated’ banks that operate in the shadow banking world, but with recourse to regulated entities, mainly commercial banks, that have access to government safety net.  Our results also indicate that when these unregulated banks do not have such recourse (extendible notes and SIVs), they struggle to survive a systemic crisis…In particular, the structure of credit guarantees to asset-backed commercial paper conduits was designed by commercial banks to arbitrage regulatory capital requirements.  Such possibilities – whereby government-insured banks effectively operate at higher leverage by putting assets off-balance sheet but granting them recourse – deserve regulatory scrutiny, especially when they operate at a scale that conduits did.”

Because asset-backed commercial paper is short term in duration with typically long-term assets, commercial banks like Citigroup (which is one of the largest players in the conduit   field) provide liquidity guarantees to make the commercial paper investor whole if the paper can’t be rolled over at maturity. With Citigroup’s solvency in serious doubt at the peak of the financial crisis, its tentacles of backstopping conduits and issuing boatloads of commercial paper itself is likely to have played a pivotal role in seizing up this market.  This might explain why we see corporate names like McDonalds, Caterpillar and Harley-Davidson selling commercial paper directly to the Fed according to the spreadsheets released on December 1.

With Citigroup having such a large presence in the conduit market, it strains the imagination how Citigroup’s former top executives, CEO Chuck Prince and Executive Committee Chair,   Robert Rubin,  could have testified to the Financial Crisis Inquiry Commission on April 8 of this year that they had no idea until months into the crisis that Structured Investment Vehicles (SIVs) created by Citigroup and roosting off its balance sheet had liquidity puts that could, and did, force billions of the toxic assets back onto the bank’s balance sheet.  SIVs are first cousins to conduits but typically have more leverage.  Citigroup’s SIVs were shielding subprime debt instruments from being reflected on its balance sheet but were forced back on when they became impaired, leading to staggering losses for the bank.

It appears that what was essentially taking place in the Commercial Paper Funding Facility at the Fed was that the taxpayer stood in for the liquidity puts the Wall Street banks had no money to backstop. 

Another well kept secret is that much of the commercial paper backed by dubious “assets” and housed in conduits regularly found its way into both retail and institutional money market funds.  Those funds are supposed to be the safest of the safe and available to redeem at any time without a loss (or never breaking a buck in Street parlance). The Fed’s buck shot approach to spewing money at banks, brokerages, corporations, across the pond, and into the hands of questionable entities, may have been as much to save money market funds from a panic run as to save the Wall Street banks.  Let us hope the GAO conducts a thorough investigation in this area.

Whether it was Credit Default Swaps or Collateralized Debt Obligations squared or conduits or SIVs, two words emerge from the hubris: leverage and greed.  By leveraging the balance sheet, upper management could lay claim to massive compensation and bonuses.

This picture is encapsulated by an introductory comment by Phil Angelides, Chair of the Financial Crisis Inquiry Commission, at the outset of a hearing on Citigroup on April 8, 2010:   

Chairman Angelides: Really, for the benefit of people watching today, it appears as though that there are about 51 billion dollars in write-offs related to subprime lending. The institution, as I understand it, is one that went from about 670 billion dollars in assets in about 1998 to 2.2 trillion dollars on balance sheet, another 1.2 trillion dollars off-balance sheet by 2007. By 2008, the tangible common equity-to-assets ratio we estimate at 61 to 1, with off-balance-sheet 97 to 1.

It takes only reading comprehension skills and zero Wall Street experience to read the above paragraph and know that this firm would blow up.  How did Robert Rubin, former co-chair of Goldman Sachs and former U.S. Treasury Secretary, not see this at Citigroup.  Mr. Rubin received over $125 million in compensation at Citigroup.  Sandy Weill, the man who built the behemoth and its far flung network of dysfunctional parts and served as its CEO, received over $1 billion.  The taxpayer received the tab.  


Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article.  She writes on public interest issues from New Hampshire.  She can be reached at

Pic credit: William Banzai7 

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EZYJET PILOT's picture

Christ wasn't a Jew, judaism wasn't even a concept back then it is a modern invention. If anything Jesus more represented the modern day Palestinian, the nation which those loving; God fearing jews seem hell bent on destroying.

zevulon's picture

funny, the guy i replied to either deleted his comment, or zerohedge deleted it. i guess they finally realized that there were too many racists and anti-semites posting venomous messaged on this site. i somehow doubt it was the former.

 i'm an avid zerohedge reader and i don't post much, but i have been getting absolutely sick and tired of the continous and growing stream of racist comments on this site. 


so thanks. 

Kayman's picture


I cannot agree more that the spreading of myopic, infantile neo-Nazi propaganda on ZH takes away and adds nothing to the bankster debate.

These banking criminals should answer for their deeds, not their religion/race/creed.

Once the Nazis could print and borrow no more, they indulged themselves with theft and plunder.   

German citizens received stolen goods from the murder of German Jews (the same German Jews that fought on the side of greater Germany barely a decade earlier), and reaped the harvest of the plunder and murder in the rest of Europe.

Some bloody "miracle". You would have to be observing history through Coke-bottle glasses to believe such Nazi bullshit.  

First they came for my neighbor, and I did nothing.... 

hardcleareye's picture

I am so sick of reading posts about "Jews" being this that or the other....  It is Christmas can't you give it a "rest"...........

If I recall correctly Jesus was a Jew...


ebworthen's picture

So let me get this straight:  the TBTF banks deposited stocks as collateral for taxpayer money from the Government so that the FED, Treasury, and taxpayers or their mutual/pension funds could buy said stocks from the banks?

33 months of consecutive outflows from equities, hmmmm.

But, never fear, the Government will be sure and blow more of our future for us for the sake of a happy banker today.

Kayman's picture

Save the Parasite, Kill the Host. That is U.S. policy.

gwar5's picture

Rubin was rewarded for his economic mayhem, he is current Co-Chair of the CFR. Glass-Seagall and Citi and LTCM were his. Nice work.

He stopped Brooksley Borne from ratting out the derivatives chaos at the CFTC back in 1998. (along with Summers, Greenspan, Geithner in 1998 - "The Warning" PBS online) Greenspan told her "Some fraud is acceptable"

They ganged up on her and used congress's authorityy over her to run her out of Washington. Just 8 weeks later, the $1 Trillion LTCM SHTF. They shit their pants!

Rubin got rid of Glass-Seagall -- then jumped immediately to Citi to plunder. 


Quixotic_Not's picture

Yep, spot on.

And not 1 in a million "Americans" know or can understand such a simple truth.

zevulon's picture

i'm a jew. i'm not a banker. i know some jews like money. but i don't make a lot of money. i also know that i have a knife in my pocket waiting for any of you anti-semites that want to pick up a weapon to back up your senseless anti-semitism. we jews have been rounded up like and animals and slaughtered before. i have a picture of my grandfathers entire clan ( a family of butchers ) in poland. they were all slaughtered and tossed into the graves they were forced to dig for themselves. i'm certain cycles of hatred and violence repeat themselves, just as certainly as do economic cycles. and i'm equally as certain that when this cycle comes for me and my people, all 10 million or so of them, i will make all you anti-semites bleed even as i am trodden under your boots.

I know you anti-semites out there. and i know that not only aren't your more reasonable compatriots unable to disuade you from your baseless hatred, but that most of them are too scared and initimidated by your violence to physically stop you. and so i promise that like sampson before me, i will bring the pillars down upon your entire house as I am crushed beneath it. 


liberal sodomy's picture

"jews" aren't semites.

They're a race cult of nation wrecking sociopaths masquerading as a religion.

Azannoth's picture

"they were all slaughtered and tossed into the graves they were forced to dig for themselves", I bet that was the one time in their lives they did honest work

"and so i promise that like sampson before me, i will bring the pillars down upon your entire house as I am crushed beneath it. " Isn't this what the Financial Crisis is all about, Jews destroying what's left of their system of usury ?

You could paraphrase it like

"and so i promise that like Bernie Madoff(a jew) before me, i will take all your money and burn it in a giant ponzi scheme as I am crushed beneath it. "

Kayman's picture


Jews aren't alone in believing in the one big angry guy in the sky. Muslims and Christians do too.

I think the only penalty that the likes of Madoff understand is when one of their children takes their own life because of the pressure, guilt and shame.

Please let me know when you are ready to do honest work.  I would love to attend your burial.

What a fucking retard.

cmalbatros's picture

I read somewhere that one of the popes forebade Jews from doing regular work so they had to take up another profession. Talk about a huge chip on their shoulders?

sabra1's picture

Christopher Columbus was a jew, Christ was a jew, therefore his father God is a jew. he's gonna kick you little goy butt right to hell where there is no ZH!

RichardP's picture

Jewish identity passes through the mother, not the father.  A child of a Jewish mother and gentile father is automatically considered a Jew.  The child of a Jewish father and gentile mother is not automatically considered a Jew.  Jesus' jewish heritage is  traced through his mother Mary, not his father.

paint it red call it hell's picture

$9T in debt no problem. just watch the public wealth flow into private billionaire and sovereign fund hands once our politicians suddenly feign surprise and acknowledges government debt is actually a problem.

ebworthen's picture

Oh they've started, those dodgey politicians, talking about "Austerity" and how since I'm supposed to live until 78 I can work two more years to get what I've paid into for thirty years even though they promised me five years less when I started.

"Come along Donkey, keep walking and you will get to that carrot."


Quixotic_Not's picture

Socialism for Fraud St./DoC, tax collection at the end of gun for the rest...

Book it!

Silversinner's picture

I swap wortless paper for gold and silver

does I qualify as a Jew.Jews where not

allowed to gildes in middle age europe,

that ment they where not allowed to work

in order to survive They had to trade and

became very good at what??Every

people has it's own talents as long as it

is not misused.Bankingpeople sure abusing

their powers;most of them non Jews fore sure.

Happy hollydays(Jewes people included)

pitz's picture

Meanwhile much of America's engineering workforce is chronically under/unemployed and the physical infrastructure has been allowed to rot into nothing.

Don't see how this ends well.  Rubin and Weill didn't add even a dime of value to the US economy and participated in the destruction of trillions of wealth.  Yet they run off with all the wealth while engineers and producers get to queue up for food stamps.

Ned Zeppelin's picture

"Yet they run off with all the wealth while engineers and producers get to queue up for food stamps."

That's the whole idea.  Once you fully grasp that notion, and then understand the funds stolen by these thugs and hoodlums are used to bribe our CONgress and regulators,  you now understand for whom the system is run, and who it benefits. 

Time for revolution, but not tonight, there's a good show on TV. 

Quixotic_Not's picture

US Treasury motto for 2011:  The Looting will continue until morale improves!

P.S.  Keep voting for DemoRATs and/or GOPhers for that "Change you can bleed in", it's worked out great so far!

liberal sodomy's picture

That's what "jews" do.  They swap worthless paper for labor, savings and assets while undermining the culture and morals of any country unfortunate enough to host them.

Quixotic_Not's picture

Bwarney Fwank resembles that remark!

Azannoth's picture

Right on the money!

.."The Jews have been expelled from every nation in Europe at least once. Spain expelled the Jews in 1492. The Spanish people then enjoyed a Golden Age of exploration and discovery once the Jews were gone. Germany removed the Jews from power in 1933. Germany then enjoyed a great cultural renaissance and was the first White nation to pull itself out of the Great Depression." ..

liberal sodomy's picture

"And it proved sound. It worked. In less than ten years Germany became easily the most powerful state in Europe. It worked so magically and magnificently that it sounded the death knell of the entire (Zionist) Jewish money system. World Jewry knew that they had to destroy Hitler's system, by whatever means might prove necessary, or their own [system of usury] would necessarily die. And if it died, with it must die their dream and their hope of making themselves masters of the world. The primary issue over which World War II was fought was to determine which money system was to survive. At bottom it was not a war between Germany and the so-called allies. Primarily it was war to the death between Germany and the International Money Power."   - William Gayley Simpson

Kayman's picture

lib sod

Your belief in the magic of the Nazi economic "miracle" is akin to Virginia's belief in Santa Claus.

Go read a book on Nazi Finance. First the Nazis put people to work by running deficits and printing money; when the "miracle" started sputtering, they confiscated German Jewish property that the Nazis sold (most non-Jewish buyers got a great "deal") for cash to continue with their economic charade.

In order to finance the growing expectations (full employment and dear leader, etc.) invading their neighbors was impossible to resist.

Financing an economy through murder and plunder isn't something I would be bragging about if I were you.

And, tell me, how is that 1000 year Reich thing going for you ?  Oh yeah, it barely lasted 12 fucking years.

Why don't you take your Jew baiting pea brain and start you own blog.

I hate the criminal bankers but by lumping everyone into the Jew pot is pathetic even for a mental midget like you.

GoldmanSux's picture

The Jews have been expelled from every nation in Europe at least once...

Proving what? Only that there have always been fuckwads like you looking for a scapegoat to make themselves feel better. I will admist Germany did have an economic boom from 1933-1939. The Golden Age? Zeig Heil!

Quixotic_Not's picture

I hear the interview process at Goldman is quite lengthy, don't let that stop you...

pitz's picture

Lets use the word 'bankers' instead of 'jews'.  Even though they are often one in the same.