How would you like a loan at 0.5% interest? How about one which you can back up with worthless crap no one else wants to buy? Even better, a loan with those features that you can effectively take out even for gambling if you want? It’s easy! All you have to do is contact the Federal Reserve (and run an investment firm):
Essentially, the Fed gave Wall Street overnight loans with interest as low as 0.50 percent in order for the firms to have cash that they could then use to buy other securities or make loans. Those firms could trade with that cheap money and profit handsomely.
As collateral for those loans, Wall Street firms gave the Fed securities that were, in essence, junk.
Of the 50 overnight loans with the most speculative-grade securities pledged as collateral, 35 came from Citigroup. 11 of those loans were taken out by Morgan Stanley; two from Bank of America, and one each from defunct investment firm Lehman Brothers and Wall Street powerhouse Goldman Sachs.
The 18 firms, known as “primary dealers” because they’re authorized to directly trade with the Fed, pledged $1,315,863,900,000 in non-investment grade collateral for the loans from March 2008 to May 2009.
Speaking of Goldman Sachs, they ended up taking out their $590,000,000,000 in cheap loans after claiming that they didn’t need help.
Investment firms weren’t alone though. The list of the Fed’s beneficiaries includes even businesses the average person would think had squat to do with high finance: been to a McDonald’s lately?