by Andrew Walden

In June, 2009 readers learned that a telephone call from Sen Inouye’s office immediately preceded a decision by the US Treasury to purchase $135M in stock of Central Pacific Financial as part of a plan to bolster its lagging share value. Those shares were later sold off by the Treasury for an estimated $79.128M—a loss of $55.872M. Inouye owned a substantial amount of CPF stock at the time.

Today, after suing to force disclosure by the Federal Reserve, Bloomberg News has released information about emergency loans granted to hundreds of US and foreign banks by the Federal Reserve. Unlike the stock purchase plan, this information has not been previously made public.

The Fed has granted banks such emergency loans going back to 1913 and Fed officials describe emergency loan making as one of the core functions of the central bank. The Fed also points out that banks have repaid all of the money loaned. But combining the equity and debt programs reveals a different picture.

The akamai reader will note Bloomberg’s chart below which appears to show CPF loans from the Federal Reserve were repaid in early 2008 but then re-started in the Fall of 2008—about the same time as Inouye’s office was “inquiring” about the Treasury stock purchase program. Did pressure from Inouye also affect the Federal Reserve’s decision to make new loans to CPB?

Here is the information:

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After Call From Senator Inouye’s Office, Small Hawaii Bank Got U.S. Aid (June 30, 2009)

Sen. Daniel K. Inouye's staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth.

The bank, Central Pacific Financial [2], was an unlikely candidate for a program designed by the Treasury Department to bolster healthy banks. The firm's losses were depleting its capital reserves. Its primary regulator, the Federal Deposit Insurance Corp., already had decided that it didn't meet the criteria for receiving a favorable recommendation and had forwarded the application to a council that reviewed marginal cases, according to agency documents.

Two weeks after the inquiry from Inouye's office, Central Pacific announced that the Treasury would inject $135 million.

Many lawmakers have worked to help home-state banks get federal money since the Treasury announced in October that it would invest up to $250 billion [3] in healthy financial firms. But the Inouye inquiry stands apart because of the senator's ties to Central Pacific. While at least 33 senators own shares in banks that got federal aid, a review of financial disclosures and records obtained from regulatory agencies shows no other instance of the office of a senator intervening on behalf of a bank in which he owned shares.

read … Treasury Purchased Shares

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After stock craters 64%, Feds to dump 5.6M shares of Inouye’s Central Pacific Bank (June 15, 2011)

Central Pacific Financial Corp. (CPF) said the U.S. Treasury plans to offer all 5.6 million shares of its holdings in the bank, while other shareholders are offering 12.8 million shares.

The Treasury acquired the shares this year as part of the Hawaii-based bank holding company's recapitalization. The stock was trading around $29 a share at the time of the Treasury's investment, taking into account a reverse stock split, and closed Tuesday at $14.13. (math: $5.6M x $14.13 = $79,128,000) (Purchase price of $135M – $79.128M = $55,872,000 loss)

read … Stock Craters 64%

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Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress (November 28, 2011)

Bloomberg: The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger….

The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.

The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma -- investors and counterparties would shun firms that used the central bank as lender of last resort -- and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011….

The Fed has been lending money to banks through its so-called discount window since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.

“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”

The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should“lead to praise of the Fed, that they took this extraordinary step and they got it right,” says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland.

read … Secret Fed Loans Helped Banks Net $13 Billion (Alternate > link)