In a long letter to Congress, the Federal Reserve denies the details of "recent press reports" on its doling out trillions of dollars in secret, emergency loans given to the big banks during the financial crisis, but he doesn't deny giving away a lot of money. Pointing to "a variety of egregious errors and mistakes" in the stories -- Bloomberg's November 28 bombshell isn't specifically mentioned but it's clearly the chief culprit -- Bernanke defends the Fed's lending practices. Not only does the Fed dispute the jaw-dropping $7.8 billion figure that "these articles" (read: Bloomberg's article) claim the government doled out in loans but also the $13 billion in profits the banks supposedly pocketed thanks to the government's free-wheeling ways. There was also nothing "secret" about it, the Fed's letter claims, scare quotes and all. The actual amount, the letter says, was only $1.5 trillion, okay?
Not so fast, Bloomberg's editors wrote on Tuesday evening in a response to Bernanke's letter. "Bloomberg stands by its reporting," said Matthew editor-in-chief of Bloomberg News in the response, assertively taking credit for all of the "recent press reports" vaguely referenced by the Fed. What follows is a good read. Stacked next to blockquoted passages from the Fed's letter, Bloomberg presents a pretty airtight defense of the facts and figures in its several stories on the emergency lending program, including several disclosures about its reporting process. Highlights include:
- The secrecy claim: Bloomberg’s Nov. 28 story about Fed lending reported that the central bank published regular reports on the scope of borrowings from the discount window and other emergency or temporary programs. The loans were described as “secret” because the amounts, names of borrowers, dates and, often, interest rates weren’t disclosed. The stories reported that the Fed’s rationale for keeping the loans secret was to prevent bank runs.
- The jaw-dropping total loan amount: "The $16 trillion number cited by the Fed may refer to a Government Accountability Office report of July 21, 2011, that used a different methodology. Bloomberg built its database to show amounts outstanding, while the GAO tallied cumulative loans. For example, if a bank borrowed $1 billion overnight for 100 nights, Bloomberg would say the bank had a $1 billion balance at the Fed for 100 days; the GAO would say the bank borrowed $100 billion. The former is a more useful economic measurement."
- The jaw-dropping bank profit amount: "As noted in the Nov. 28 Bloomberg article, the $13 billion figure was based on a metric banks regularly report called the net interest margin -- the difference between what they earn on loans and investments and their borrowing expenses. Those expenses include interest paid to the Fed for their loans."
Both the Fed's letter to Congress and Bloomberg's response inevitably make it clear that the math behind all of the figures is more complex. In fact, David Wessel at The Wall Street Journal came to the Fed's defense somewhat with a critique of Bloomberg's sensational-sounding numbers, conceding that "the Fed lent enormous sums" but denying that the reality of the situation was far less extraordinary than Bloomberg's reporting makes it seem -- "Even if Jon Stewart says otherwise." (See the Stewart treatment below.) Wessel continues, "Lending against collateral to solvent, but cash-short, banks during a panic isn't among the Fed's more controversial moves. That's what central banks have done since 19th-century England."
Nevertheless, the Fed and the media are engaged in a pretty heated battle of optics. Reuters blogger Felix Salmon, for one, thinks that Bloomberg is winning:
The Bloomberg article reads like a highly partisan attempt to paint the Fed in the worst possible light, with misleading assertions and extensive quotes from Fed critics. The Fed could, if it wanted to, have spelled this out. But in attempting to be high-handed and refusing so much as to utter Bloomberg’s name, it just seems out of touch and opaque -- which is exactly the impression Bloomberg would love you to have.
So Bloomberg wins -- and the Fed ends up looking even worse. Maybe next time the Fed will be a bit more transparent and heartfelt and honest. It will find itself in a much stronger position if it goes there.
The example of what it looks like to lose the optics battle obviously comes from Jon Stewart, who said on his show last week, "Our government is the world's dumbest loan shark." Even if it is a little misleading, it's very hilarious.
Update(3:00 p.m.): Bloomberg TV offered their own, more sobering take on the matter on Wednesday.