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chiefsnorth
04-01-2011, 09:11 AM
Foreign Banks Tapped Fed’s Secret Lifeline Most at Crisis Peak
By Bradley Keoun and Craig Torres - Apr 1, 2011 12:19 AM CT

U.S. Federal Reserve Chairman Ben S. Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.

Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed’s "discount window" lending program, according to Fed documents released yesterday in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion.

The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record. The disclosures may stoke a reexamination of the risks posed to U.S. taxpayers by the central bank’s role in global financial markets.

"The caricature of the Fed is that it was shoveling money to big New York banks and a bunch of foreigners, and that is not conducive to its long-run reputation," said Vincent Reinhart, the Fed’s director of monetary affairs from 2001 to 2007.

Separate data disclosed in December on temporary emergency- lending programs set up by the Fed also showed big foreign banks as borrowers. Six European banks were among the top 11 companies that sold the most debt overall -- a combined $274.1 billion -- to the Commercial Paper Funding Facility.

Bank of America

Those programs also loaned tens of billions of dollars to each of the biggest U.S. banks, including JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc. and Morgan Stanley.

The discount window, which began lending in 1914, is the Fed’s primary program for providing cash to banks to help them avert a liquidity squeeze. In an April 2009 speech, Bernanke said that revealing the names of discount-window borrowers "might lead market participants to infer weakness."

The Fed released the documents after court orders upheld FOIA requests filed by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. In all, the Fed was ordered to release more than 29,000 pages of documents, covering the discount window and several Fed emergency-lending programs established during the crisis from August 2007 to March 2010.

Public Outrage

"The American people are going to be outraged when they understand what has been going on," U.S. Representative Ron Paul, a Texas Republican who is chairman of the House subcommittee that oversees the Fed, said in a Bloomberg Television interview.

"What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas?" said Paul, who has advocated abolishing the Fed. "We have problems here at home with people not being able to pay their mortgages, and they’re losing their homes."

The Monetary Control Act of 1980 says that a U.S. branch or agency of a foreign bank that maintains reserves at a Fed bank may receive discount window credit.

David Skidmore, a Fed spokesman, declined to comment.

Wachovia Corp. was the only U.S. bank among the top five discount-window borrowers as the crisis peaked.

The Charlotte, North Carolina-based bank borrowed $29 billion from the discount window on Oct. 6, in the week after it nearly collapsed, the data show. Wachovia agreed in principle to sell itself to Citigroup Inc. on Sept. 29, before announcing a definitive agreement to sell itself to Wells Fargo & Co. (WFC) on Oct. 3. The Wells Fargo deal closed at the end of 2008.

Wells Fargo spokeswoman Mary Eshet declined to comment on Wachovia’s discount-window borrowing.

Bank of Scotland

Bank of Scotland Plc, which had $11 billion outstanding from the discount window on Oct. 29, 2008, was a unit of Edinburgh-based HBOS Plc, which announced its takeover by London-based Lloyds TSB Group Plc in September 2008.

The borrowings in 2008 didn’t involve Lloyds, which hadn’t completed its acquisition of HBOS at the time, said Sara Evans, a spokeswoman for the company, which is now called Lloyds Banking Group Plc. (LLOY)

"This is historic usage and on each occasion the borrowing was repaid at maturity," Evans said. "The discount window has not been accessed by the group since."

Other foreign discount-window borrowers on Oct. 29, 2008, included Societe Generale (GLE) SA, France’s second-biggest bank; and Norinchukin Bank, which finances and provides services to Japanese agricultural, fishing and forestry cooperatives. Paris- based Societe Generale borrowed $5 billion that day, and Tokyo- based Norinchukin borrowed $6 billion.

Bank of China

"We used it in concert with Japanese and U.S. authorities in the purpose of contributing to the stabilization of the market," said Fumiaki Tanaka, a spokesman at Norinchukin.

Bank of China, the country’s oldest bank, was the second- largest borrower from the Fed’s discount window during a nine- day period in August 2007 as subprime-mortgage defaults first roiled broader markets. The Chinese bank’s New York branch borrowed $198 million on Aug. 17 of that month, while two Deutsche Bank AG divisions borrowed $1 billion each, according to a document released yesterday.

Arab Banking Corp., then 29 percent-owned by the Libyan central bank, used its New York branch to borrow at least $1.1 billion from the discount window in October 2008.

The foreign banks took advantage of Fed lending programs even as their host countries moved to prop them up or orchestrate takeovers.

Dexia received billions of euros in capital and funding guarantees from France, Belgium and Luxembourg during the credit crunch.

‘Backward-Looking’

Dexia’s outstanding balance at the Fed has been reduced to zero, Ulrike Pommee, a spokeswoman for the company, said in an e-mail.

"This information is backward-looking," she said. "We experienced a great deal of tension concerning the liquidity of the dollar at the time of the crisis. The Fed played its role as central banker, providing liquidity to banks that needed it."

Depfa was taken over in October 2007 by Hypo Real Estate Holding AG, which in turn was seized by the German government in 2009. Oliver Gruss, a spokesman for Depfa’s parent company, didn’t respond to requests for comment.

Many foreign banks own large pools of dollar assets --bonds, securities and loans -- funded by short-term borrowings in money markets. The system works when markets are calm, said Dino Kos, former executive vice president at the New York Fed in charge of open-market operations. In times of stress, banks can be subject to sudden liquidity squeezes, he said.

‘Playing With Fire’

"They are playing with fire," said Kos, a managing director at Hamiltonian Associates Ltd. in New York, an economic research firm. "When the market dries up, and they can’t roll over their funding -- bingo, you have a liquidity crisis."

The potential for dollar shortages remains. As the Greek fiscal crisis roiled financial markets last year, the Fed had to open swap lines with the European Central Bank, the Swiss National Bank, the Bank of England and two other central banks to make more dollars available around the world. That move was partially the result of U.S. money market funds shrinking their exposure to European bank commercial paper.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

chiefsnorth
04-01-2011, 09:12 AM
I guess we know what "stigma" Bernanke was trying to protect those banks from...

chiefsnorth
04-01-2011, 09:14 AM
I wonder if Our lib friends are fine with this, as our fiscal policy should not be based on what's good for america, but what's good for the world?

Chief Faithful
04-01-2011, 09:49 AM
I wonder if Our lib friends are fine with this, as our fiscal policy should not be based on what's good for america, but what's good for the world?

I am quickly starting to understand the "Open Society" philosophy that Obama, Soros and so many progressive liberals are trying to implement. No boarders, global finance, and UN as the world government.

HonestChieffan
04-01-2011, 09:55 AM
Why was it a giveaway if it was a loan and its been repaid?
Have not banks always used this to manage money flow?

chiefsnorth
04-01-2011, 10:02 AM
Why was it a giveaway if it was a loan and its been repaid?
Have not banks always used this to manage money flow?

Giving away loans without the interest they normally would have charged costs the taxpayers money, both in the interest foregone and in gains that could have been made utilizing that money elsewhere. In addition, taxpayers assumed risk without any return. This a sweetheart deal for these overseas borrowers.

Chief Faithful has it right, a world with global finance, military, no borders, and no leaders but the feckless UN seems to be an appealing idea to them.

HonestChieffan
04-01-2011, 10:15 AM
Giving away loans without the interest they normally would have charged costs the taxpayers money, both in the interest foregone and in gains that could have been made utilizing that money elsewhere. In addition, taxpayers assumed risk without any return. This a sweetheart deal for these overseas borrowers.

Chief Faithful has it right, a world with global finance, military, no borders, and no leaders but the feckless UN seems to be an appealing idea to them.


Was this the norm? Has this been done in the past?

talastan
04-01-2011, 11:16 AM
Anyone else wish this was just a bad April fools day joke. :shake:

FD
04-01-2011, 11:27 AM
Was this the norm? Has this been done in the past?

Banks can always borrow at the Fed's discount rate if they need to. They generally choose not to, though.

FD
04-01-2011, 11:28 AM
Anyone else wish this was just a bad April fools day joke. :shake:

I wish the global financial crisis was a joke, but considering the circumstances I think the Fed acted both prudently and responsibly.

KC Dan
04-01-2011, 11:30 AM
I wish the global financial crisis was a joke, but considering the circumstances I think the Fed acted both prudently and responsibly.For domestic bansk maybe but foreign banks? Really?

Amnorix
04-01-2011, 11:31 AM
I'll say this one thing, and then leap out of this thread, because the hysteria and teeth-gnashing over the Fed is generally the generation's version of William Jennings Bryan and the cross of gold.

Bank/stock market crises are generally one of liquidity. When liquidity dries up, problems cascade across the market and start to threaten otherwise extremely stable institutions.

The Fed exists, in part, to ensure liquidity, and in particular liquidity in American dollars. Foreign banks with large amounts of dollar denominated assets are perfectly free to come ot the Fed, offer up a hunk of assets as collateral, and get dollars.

And yes, they get them at a discount, in part because the Feds' own cost of money is zero (they print it), and in part because the purpose fo the Fed is NOT to make a profit at the cost of the counterparty (i.e. the basic and fundamental purpose behind EVERY commercial business transaction), but rather to (in this instance) -- wait for it ---------------- ensure liqudity in the market. If you're trying to make sure the banks have sufficient liqudity to meet short term needs, you don't rape them on the rate. You're trying to be HELPFUL.

We now return to your regularly scheduled programming of the Fed is eeeeeeeEEEEVIL!!!1!!11

FD
04-01-2011, 11:32 AM
For domestic bansk maybe but foreign banks? Really?

Money doesn't see national borders like you do. The financial system is fundamentally global.

Amnorix
04-01-2011, 11:32 AM
For domestic bansk maybe but foreign banks? Really?

What happens if I tell you that the foreign bank must put up collateral to secure the loan?

http://www.frbdiscountwindow.org/discountmargins.cfm?hdrID=21

KC Dan
04-01-2011, 11:34 AM
What happens if I tell you that the foreign bank must put up collateral to secure the loan?

http://www.frbdiscountwindow.org/discountmargins.cfm?hdrID=21
Better but I would rather have them pay a somewhat slightly more than premium interest rate on the return.

Amnorix
04-01-2011, 11:38 AM
Better but I would rather have them pay a somewhat slightly more than premium interest rate on the return.


:shrug: The Fed is the lender of last resort, really. It's purpose isn't to make a profit in times of financial uncertainty, it's to stabilize the market.

KC Dan
04-01-2011, 11:39 AM
:shrug: The Fed is the lender of last resort, really. It's purpose isn't to make a profit in times of financial uncertainty, it's to stabilize the market.With >$14 Trillion in debt, I don't mind them making a profit.

HonestChieffan
04-01-2011, 11:48 AM
This is an example of people feeling outraged over something that is not unusual, its just new information, misunderstood, and being spun in a way to get people to set their hair on fire.


In other news the sun is on fire.

HonestChieffan
04-01-2011, 06:30 PM
For domestic bansk maybe but foreign banks? Really?

You have issues with foreign banks? They loan money and invest in the US. Is this really an issue? Are we supposed to be upset that banking is a global business? Really?

Pitt Gorilla
04-02-2011, 12:00 AM
If you morons believe this story I will personally eat my hat and 3 or 4 others tonight before bed.A think rub, some applewood, and 12 hours make a tasty hat.