Opinion

Felix Salmon

Smackdown of the day: Bloomberg vs the Fed

By Felix Salmon
December 7, 2011

Historically, it was hard for institutions to reply in any effective manner to press reports which they thought were full of egregious errors and mistakes. They could complain to various editors, and maybe even get a short response on the letters page, but they rarely got the opportunity to reply in their own words and at the length they thought the reply deserved.

The web, of course, has changed all that, and ISDA’s media.comment blog is a great example of a criticized institution taking matters into its own hands. It names and links to the articles it’s criticizing, and I’m pretty sure that it would happily engage in real debate, if those organizations ever deigned to reply. Which they don’t. As a result, ISDA seems — is — more transparent and open than the likes of the New York Times and Bloomberg.

The Federal Reserve, on the other hand? Not so much.

In a six-page letter today addressed to the Senate Banking Committee, Ben Bernanke lashes out at “a series of articles–one just last week–concerning the Federal Reserve’s emergency lending activities”. He says those articles “have contained a variety of egregious errors and mistakes”. And he encloses “a memo prepared by Board staff that addresses some of the most serious errors and claims in those articles”.

Nowhere in those six pages is a single article actually identified. The Fed memo, similarly, has no named author. And the whole thing is available only as one of those PDFs-from-a-copy-machine, which makes it impossible to copy-and-paste or to search. The Fed put the letter up on its website and made sure that various economic journalists, like myself and Binyamin Appelbaum, knew all about it. But the whole thing is an incredibly passive-aggressive way of attacking Bloomberg, which, to reiterate, is never actually named.

Bloomberg did not let the opportunity go to waste. It’s clearly the main object of the Fed’s ire, but because it isn’t named, it can do two rather clever things in its official response. The first is to respond to the Fed’s complaints by citing various different stories it’s written over the years — since the Fed never actually specified which story or stories it had issues with. And the second is to simply deny that it said what the Fed is complaining about at all. When the Fed, for instance, says that “the articles misleadingly depict financial institutions receiving liquidity assistance as insolvent,” Bloomberg simply and effectively replies that it “never described any of the financial institutions mentioned in its bailout stories as insolvent”.

All of which makes the exchange less of an actual debate and more of a case of two powerful institutions talking past each other.

The Fed has various blogs; it could easily have used one to single out specific errors in the Bloomberg article, which Bloomberg would then have had to respond to directly. But instead it just writes a memo talking vaguely about “these articles”, and in doing so plays straight into Bloomberg’s hands.

And of course both the Fed memo and the Bloomberg response perpetuate the myth that Fed officials don’t talk to Bloomberg reporters on a daily basis. There’s lots of back-channel noise, here, which isn’t seeing the light of day; the memo and official response are just the carefully-chosen public face of a debate which is happening primarily in private. (The Fed’s a bit like Goldman Sachs: it loves talking “on background”, but hates saying anything on the record. Which is why a large part of Fed-watching is working out which reporters are getting the coveted phone calls from Fed board members, and then reading between the lines to work out who’s telling them what.)

Bloomberg has won this particular round, just because it’s being very open about what it’s saying, while the Fed memo seems mealy-mouthed and less than fully open about what it’s trying to say. If you’re going to complain about “egregious errors and mistakes”, it behooves you to be specific about exactly where the errors and mistakes lie, and to quote them directly. If you don’t do that, you automatically look as though you have a weak case, and you open yourself up to counterattacks like the one from Bloomberg.

Which is not to say that the Fed is being completely disingenuous here. The Bloomberg article in question ginned up rather more scandal than there really was. “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,” it says, breathlessly — but really they don’t: the details that Bloomberg managed to obtain really don’t tell us anything about the Fed’s lender-of-last-resort operations in aggregate that we didn’t already know. They do give us new information about a few specific banks, none more so than Morgan Stanley.

Or, take this passage, under the sub-head “$7.77 Trillion”:

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

If you read the passage very carefully, there’s nothing actually inaccurate there. But the impression given is that “the amount of money the central bank parceled out” was $7.8 trillion, a sum which “dwarfed” TARP and is more than half of US GDP. And that’s not true — the actual amount that the central bank parceled out never exceeded $1.2 trillion, a fact you won’t find in the Bloomberg article.*

And this, too, is misleading:

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says banks “were either in bad shape or taking advantage of the Fed giving them a good deal. The former contradicts their public statements. The latter — getting loans at below-market rates during a financial crisis — is quite a gift.”

The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.

The 0.01% funding was one loan, to one bank, on New Year’s Eve, as the emergency-lending program was coming to an end: in no way is it indicative of the interest rates charged by the program as a whole. And Baker’s characterization of the Fed loans as being “at below-market rates” is left conveniently undefined, in the context of the fact that the credit market had seized up and that there were no real “market rates” any more in the interbank market. Indeed, the comment makes it into a caption in the article, which says that “banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates”.

The fact of the matter is, as the Fed points out in its letter, that the Fed set the interest rates on the lending at a penalty over normal market rates. And — you really have to work to get this — Bloomberg’s methodology doesn’t actually take into account the interest rates charged by the Fed at all! Bloomberg just takes the amount of money that the banks borrowed from the Fed, and then multiplies it by their net interest margin — the profit they reported on loans. The Fed could have been lending at a penalty rate of 25%, and according to Bloomberg the banks would still have made $13 billion in profits on the loans, so long as their net interest margin didn’t change. Just because the banks had a positive net interest margin does not mean that the Fed was lending them money at below-market rates, as Bloomberg would have you believe.

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.

*Update: You will find the fact that the banks never borrowed more than $1.2 trillion in the article, but it’s subtle enough that I missed it on multiple readings. At the top of the piece, we’re told that the banks”required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day”.

Comments
15 comments so far | RSS Comments RSS

Felix: I’m wondering if you could expand on your comments about Fed watching a bit. As lax (and as criticized) sourcing policies are in other areas, it appears as though they’re even worse in business journalism with all the “background” reporting going on. Experts seem to have some sense of what’s really going on behind the scene–I recall Barry Ritholtz mentioning the Fed used Greg Ip as its main leak–but the public remains largely in the dark. Reporters, presumably, have no incentive to dissect in public this lack of transparency, because they, too, rely on these sources. Is this a major issue in business journalism that rarely gets addressed? Causal readers at least have some chance of cutting through spin when a reporter used named or even anonymous sources. But background reporting leaves readers entirely in the dark.

Posted by AngryKrugman | Report as abusive
 

This is hardly a win for Bloomberg, which was clearly very sloppy. Could Bernanke have been more specific in his memo? Sure. Does it substantively matter all that much? Doubtful.

BTW, Felix reveals himself (and his support staff) to be rather technically underdeveloped by writing, “And the whole thing is available only as one of those PDFs-from-a-copy-machine, which makes it impossible to copy-and-paste or to search.” Doesn’t he know how to deal with this in, e.g., Adobe Acrobat Pro? Click on ‘Tools,’ then ‘Recognize Text,’ then ‘In this File,’ and wait for what you want. This is not a ‘smackdown,’ but isn’t it odd that this self-vaunted practitioner of the new digital media is uninformed about such a simple matter?

Posted by GlibFighter | Report as abusive
 

@GlibFighter, thank you! Next time I find myself with $449 for each of the computers I blog from, I’ll be sure to consider a purchase of Adobe Acrobat Pro. Maybe I’ll even have some money left over to buy a copy for my support staff!

Posted by FelixSalmon | Report as abusive
 

Felix: Reuters doesn’t have a site license for Adobe Acrobat Pro that extends to you & your staff? That’s odd, esp. relative to the large non-profit institutional dump I work at supplying all of us with this at zero marginal cost.

Posted by GlibFighter | Report as abusive
 

Well it wasn’t just Bloomberg that wrote this rubbish. You have mentioned it here, ProPublica mentioned it, NYT mentioned it, host of other people mentioned it, at least one “academic” took that number and multiplied it by 5. In fact, it has been so uncritically regurgitated that it is considered a “fact”, like so many of the lies about the crisis – including John Paulson’s mythical crystal ball that promptly proceeded to fail after GS settled.

There is simply no way that the “journalists” involved at Bloomberg are unaware that what they are saying is factually incorrect and have continued to do so in what you consider to be a “clever” – aka dishonest for the rest of us – response. The reason they have continued to do so is because – like most of the people in their field – they have no integrity and they know that lying sells more than honesty would.

Weird for someone who is on his high horse about banker behaviour – aka picking a handful of people, finding the worst possible interpretation and generalising to everyone – that lying from journalists gets a pass.

Posted by Danny_Black | Report as abusive
 

I would say the issue is: Did the FED bailout banks. I think Waldman nails it:
http://www.interfluidity.com/

“The fact of the matter is, as the Fed points out in its letter, that the Fed set the interest rates on the lending at a penalty over normal market rates”

NORMAL MARKET RATES??? Why should there be normal market rates….or rather, why weren’t there “normal market rates?”
Do people really mean “unlimited liquidity at very low interest rates are normal?”

It seems to me the FED and FED defenders are in an untenable position. The market solution is not allowed – FAILURE and bankruptcy….because these institutions are TOO BIG TO FAIL, so we have the ridiculous specticle of Goldman Sachs awarding its biggest bonuses ever after the financial collapse.
The CEO’s and CFO’s, as well as the board of every bank that “needed” a bailout could have been a condition of the bailout…..But OH NOES – we can’t interfere in the market!!!! And where in the world did the idea that everybody had to get a bailout cause it would “stigmatize” the banks who really needed a bailout?
If this a school lunch program????

Posted by fresnodan | Report as abusive
 

Oh snap.
The FIRING (and I would say at least the investigation for fraud, and subsequent prosecution) of CEO’s and CFO’s, as well as the board of every bank that “needed” a bailout could have been a condition of the bailout

Posted by fresnodan | Report as abusive
 

fresnodan, gotta love those fake analogies that Waldman trots out. Not entirely sure what the inflammable insurance analogy was meant to be but lets look at the meth analogy. Well, lets assume he has a 300,000USD home but he needs the money quickly – a more accurate example – so you take a lien over his home, lend him the money against that collateral as a larger haircut than usual and at a higher interest rate than if he had time to shop around and he goes out, gets a job and then pays the loan back. This is the real analogy. As for the risk the Fed was taking, have a look at the haircuts they were taking for overnight loans. From recollection they were taking something like 20% haircuts on equities – the “sketchiest” collateral – which means the risk they were taking was that in 12 hours time, MS would be out of business AND those equities would be down by more than 20%.

I have only ever read two posts of his. The other one was were he compared John Paulson’s sidekick telling the investment committee at ACA Capital Management about a short position, which happened to also include the exact same people who ran ACA Financial Guaranty Corp, to telling the toilet cleaner. He is, by all accounts, a smart knowledgeable person so one can only assume he knows the analogies he is giving are false.

And of course, nothing he says is relevent to what the Fed has said vs what Bloomberg and the tossers who repeated their “analysis” have claimed.

Posted by Danny_Black | Report as abusive
 

I find it hard to see how you can claim Bloomberg won this round. Their report was deliberately misleading. It is an example of the worst kind of financial reporting; the kind that assumes it can get away with these types of shell games because its audience is not familiar enough with monetary policy and the banking industry to follow the ball. Using NIM to calculate a profit is roundly ridiculous. Bloomberg’s “rebuttal” just continues this tact. I am disappointed that you support this garbage populist journalism.

Oh, and taking the PDF to text took all of ten seconds with Adobe. How do you not know this?

Posted by Slapdash13 | Report as abusive
 

Slapdash13, look at fresnodan, the link he pointed to, other commentary on this and the posts that will come in soon here to see why Bloomberg “won”. Too many people are invested in the narrative that the banks were bailed out by the Fed in some sort of secret plan, probably involving Goldman Sachs.

Weirdly, no one ever seems to worry about Frannie and the creditors there that were actually bailed out.

Posted by Danny_Black | Report as abusive
 

I have to disagree with much of this analysis. Personally, I found the Fed’s letter useful in understanding where the Bloomberg article was misleading and/or flat-out wrong. It’s a complicated subject matter for those of us who don’t make a living in the finance industry…but a subject that’s nonetheless important. Is it too much to ask for an truthful, objective analysis from what’s supposed to be a news organization?

Also, it’s pretty obvious which article Bernanke was talking about…there’s no reason to be coy if one wants to have an honest discussion. Similarly, defending misleading statements with “technically, I never said that” doesn’t exactly constitute “winning” an argument. Sounds more like what politicians do….not journalists.

I read through a fair number of “comments” sections on media websites…and it’s pretty obvious that MANY people have very little understanding of any of the Fed activities under discussion. There was a LOT of obvious misunderstanding throughout the “blogosphere” of what the Fed had done during the crisis….most of which seems to be a result of that particular Bloomberg article. Whether intentional or not, the article assisted in widespread misunderstanding…and, as a result, provided fuel to the flames of “Fed-hating” on the internet for no apparent reason (other than the usual sensationalism aimed at bringing in more “eyeballs” to the Bloomberg website). I find it entirely appropriate that the Fed take the opportunity to point out errors in their reporting…regardless as to how its message was disseminated or whether the author here could conveniently “copy and paste” the document. It might seem like a quaint notion to political columnists, but some of us in the public still expect (or at least hope) to find relatively accurate and unbiased reporting and analysis from respected news organizations.

Posted by NedStark | Report as abusive
 

Of course they were below market rates. Why else would the banks borrow from the Fed if they weren’t below market rates?

>”normal rates” does NOT mean “greater than current market rates”

If they charged greater than current market rates they would clearly never have lent out any money. The fact that they EVER gave a loan at .01% indicates that the rates were way below market.

Posted by McMath | Report as abusive
 

McMath, there a host of possible reasons:

1) The Fed was someone who was guaranteed to be able to lend. A bank could scramble around to shave off some interest and take the risk it didn’t raise all the cash in time or it could pay a penalty rate and guarantee it.

2) The bank could have to raise some emergency cash as clients pulled their accounts and they could get it there and then from the Fed vs telling their clients to hold on in a febrile atmosphere.

3) The choice might be between doing a fire sale and paying a penalty rate for a short time.

You must come from the same brain trust that thinks no one would ever lend at a negative rate, which happened at this time too. After all by your logic, you could get a better rate in cash.

Posted by Danny_Black | Report as abusive
 

Another example of how these Bloomberg “journalists” are liars is the “story” you repeated about how Paulson somehow let his mates in on the top secret idea that Frannie might be put into conservatorship on the 28th July 2008. Of course, one hopes they didn’t pay much for that talk when they could have got the same information for free from the internet two weeks earlier:

http://www.nytimes.com/2008/07/11/busine ss/11fannie.html?_r=1&oref=slogin

http://money.cnn.com/2008/07/10/news/com panies/fannie_freddie/index.htm

Guess it helps when fabricating scandals to have no integrity and be pathological liars and to be in an industry where that is perfectly acceptable.

Posted by Danny_Black | Report as abusive
 

8th attempt at least to spin thr same stale old news as outrage

http://mobile.bloomberg.com/news/2011-12 -11/no-one-says-who-took-586-billion-in- fed-swaps-done-in-anonymity.html

Posted by Danny_Black | Report as abusive
 

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