Foreign Borrowers
It wasn’t just American finance. Almost half of the Fed’s
top 30 borrowers, measured by peak balances, were European
firms. They included Edinburgh-based Royal Bank of Scotland
Plc, which took $84.5 billion, the most of any non-U.S.
lender, and Zurich-based UBS
AG (UBSN), which got $77.2 billion. Germany’s
Hypo Real Estate Holding AG borrowed $28.7 billion, an
average of $21 million for each of its 1,366 employees.
The largest borrowers also included Dexia
SA (DEXB), Belgium’s biggest bank by assets,
and Societe Generale SA, based in Paris, whose
bond-insurance prices have surged in the past month as
investors speculated that the spreading sovereign debt
crisis in Europe might increase their chances of default.
The $1.2 trillion peak on Dec. 5, 2008 -- the combined
outstanding balance under the seven programs tallied by
Bloomberg -- was almost three times the size of the U.S.
federal budget deficit that year and more than the total
earnings of all federally insured banks in the U.S. for the
decade through 2010, according to data compiled by
Bloomberg.
Peak Balance
The balance was more than 25 times the Fed’s pre-crisis
lending peak of $46 billion on Sept. 12, 2001, the day after
terrorists attacked the World Trade Center in New York
and the Pentagon. Denominated in $1 bills, the $1.2 trillion
would fill 539 Olympic-size swimming pools.
The Fed has said it had “no credit losses” on any of the
emergency programs, and a report by Federal Reserve Bank of
New York staffers in February said the central bank netted
$13 billion in interest and fee income from the programs
from August 2007 through December 2009.
“We designed our broad-based emergency programs to both
effectively stem the crisis and minimize the financial risks
to the U.S. taxpayer,” said James Clouse, deputy director of
the Fed’s division of monetary affairs in Washington.
“Nearly all of our emergency-lending programs have been
closed. We have incurred no losses and expect no losses.”
While the 18-month U.S. recession that ended in June 2009
after a 5.1 percent contraction in gross domestic product
was nowhere near the four-year, 27 percent decline between
August 1929 and March 1933, banks and the economy remain
stressed.
Odds of Recession
The odds of another recession have climbed during the past
six months, according to five of nine economists on the
Business Cycle Dating Committee of the National Bureau of
Economic Research, an academic panel that dates recessions.
Bank of America’s bond-insurance prices last week surged to
a rate of $342,040 a year for coverage on $10 million of
debt, above where Lehman
Brothers Holdings Inc. (LEHMQ)’s bond
insurance was priced at the start of the week before the
firm collapsed. Citigroup’s shares are trading below the
split-adjusted price of $28 that they hit on the day the
bank’s Fed loans peaked in January 2009. The U.S.
unemployment rate was at 9.1 percent in July, compared with
4.7 percent in November 2007, before the recession began.
Homeowners are more than 30 days past due on their mortgage
payments on 4.38 million properties in the U.S., and 2.16
million more properties are in foreclosure, representing a
combined $1.27 trillion of unpaid principal, estimates
Jacksonville, Florida-based Lender Processing Services Inc.
Liquidity Requirements
“Why in hell does the Federal Reserve seem to be able to
find the way to help these entities that are gigantic?” U.S.
Representative Walter B. Jones, a Republican from North
Carolina, said at a June 1 congressional hearing in
Washington on Fed lending disclosure. “They get help when
the average businessperson down in eastern North Carolina,
and probably across America, they can’t even go to a bank
they’ve been banking with for 15 or 20 years and get a
loan.”
The sheer size of the Fed loans bolsters the case for
minimum liquidity requirements that global regulators last
year agreed to impose on banks for the first time, said
Litan, now a vice president at the Kansas City,
Missouri-based Kauffman Foundation,
which supports entrepreneurship research. Liquidity refers
to the daily funds a bank needs to operate, including cash
to cover depositor withdrawals.
The rules, which mandate that banks keep enough cash and
easily liquidated assets on hand to survive a 30-day crisis,
don’t take effect until 2015. Another proposed requirement
for lenders to keep “stable funding” for a one-year horizon
was postponed until at least 2018 after banks showed they’d
have to raise as much as $6 trillion in new long-term debt
to comply.
‘Stark Illustration’
Regulators are “not going to go far enough to prevent this
from happening again,” said Kenneth Rogoff,
a former chief economist at the International
Monetary Fund and now an economics
professor at Harvard University.
Reforms undertaken since the crisis might not insulate U.S.
markets and financial institutions from the sovereign budget
and debt crises facing Greece, Ireland and Portugal,
according to the U.S. Financial Stability Oversight Council,
a 10-member body created by the Dodd-Frank Act and led by
Treasury Secretary Timothy Geithner.
“The recent financial crisis provides a stark illustration
of how quickly confidence can erode and financial contagion
can spread,” the council said in its July 26 report.
21,000 Transactions
Any new rescues by the U.S. central bank would be governed
by transparency laws adopted in 2010 that require the Fed to
disclose borrowers after two years.
Fed officials argued for more than two years that releasing
the identities of borrowers and the terms of their loans
would stigmatize banks, damaging stock prices or leading to
depositor runs. A group of the biggest commercial banks last
year asked the U.S. Supreme Court to keep at least some Fed
borrowings secret. In March, the high court declined to hear
that appeal, and the central bank made an unprecedented
release of records.
Data gleaned from 29,346 pages of documents obtained under
the Freedom of Information Act and from other Fed databases
of more than 21,000 transactions make clear for the first
time how deeply the world’s largest banks depended on the
U.S. central bank to stave off cash shortfalls. Even as the
firms asserted in news releases or earnings calls that they
had ample cash, they drew Fed funding in secret, avoiding
the stigma of weakness.
Morgan Stanley Borrowing
Two weeks after Lehman’s bankruptcy in September 2008,
Morgan Stanley countered concerns that it might be next to
go by announcing it had “strong capital and liquidity
positions.” The statement, in a Sept. 29, 2008, press
release about a $9 billion investment from Tokyo-based
Mitsubishi UFJ Financial Group Inc., said nothing about
Morgan Stanley’s Fed loans.
That was the same day as the firm’s $107.3 billion peak in
borrowing from the central bank, which was the source of
almost all of Morgan Stanley’s available cash, according to
the lending data and documents released more than two years
later by the Financial Crisis Inquiry Commission. The amount
was almost three times the company’s total profits over the
past decade, data compiled by Bloomberg show.
Mark Lake, a spokesman for New York-based Morgan Stanley,
said the crisis caused the industry to “fundamentally re-
evaluate” the way it manages its cash.
“We have taken the lessons we learned from that period and
applied them to our liquidity-management program to protect
both our franchise and our clients going forward,” Lake
said. He declined to say what changes the bank had made.
Acceptable Collateral
In most cases, the Fed demanded collateral for its loans --
Treasuries or corporate bonds and mortgage bonds that could
be seized and sold if the money wasn’t repaid. That meant
the central bank’s main risk was that collateral pledged by
banks that collapsed would be worth less than the amount
borrowed.
As the crisis deepened, the Fed relaxed its standards for
acceptable collateral. Typically, the central bank accepts
only bonds with the highest credit grades, such as U.S.
Treasuries. By late 2008, it was accepting “junk” bonds,
those rated below investment grade. It even took stocks,
which are first to get wiped out in a liquidation.
Morgan Stanley borrowed $61.3 billion from one Fed program
in September 2008, pledging a total of $66.5 billion of
collateral, according to Fed documents. Securities pledged
included $21.5 billion of stocks, $6.68 billion of bonds
with a junk credit rating and $19.5 billion of assets with
an “unknown rating,” according to the documents. About 25
percent of the collateral was foreign-denominated.
‘Willingness to Lend’
“What you’re looking at is a willingness to lend against
just about anything,” said Robert Eisenbeis, a former
research director at the Federal Reserve Bank of Atlanta and
now chief monetary economist in Atlanta for Sarasota,
Florida-based Cumberland Advisors Inc.
The lack of private-market alternatives for lending shows
how skeptical trading partners and depositors were about the
value of the banks’ capital and collateral, Eisenbeis said.
“The markets were just plain shut,” said Tanya Azarchs,
former head of bank research at Standard & Poor’s and
now an independent consultant in Briarcliff Manor, New York.
“If you needed liquidity, there was only one place to go.”
Even banks that survived the crisis without government
capital injections tapped the Fed through programs that
promised confidentiality. London-based Barclays
Plc (BARC) borrowed $64.9 billion and
Frankfurt-based Deutsche
Bank AG (DBK) got $66 billion. Sarah
MacDonald, a spokeswoman for Barclays, and John Gallagher, a
spokesman for Deutsche Bank, declined to comment.
Below-Market Rates
While the Fed’s last-resort lending programs generally
charge above-market interest rates
to deter routine borrowing, that practice sometimes flipped
during the crisis. On Oct. 20, 2008, for example, the
central bank agreed to make $113.3 billion of 28-day loans
through its Term
Auction Facility at a rate of 1.1 percent,
according to a press
release at the time.
The rate was less than a third of the 3.8 percent that
banks were charging each other to make one-month loans on
that day. Bank of America and Wachovia Corp. each got $15
billion of the 1.1 percent TAF loans, followed by Royal Bank
of Scotland’s RBS Citizens NA unit with $10 billion, Fed
data show.
JPMorgan
Chase & Co. (JPM), the New York-based
lender that touted its “fortress balance sheet” at least 16
times in press releases and conference calls from October
2007 through February 2010, took as much as $48 billion in
February 2009 from TAF. The facility, set up in December
2007, was a temporary alternative to the discount window,
the central bank’s 97-year-old primary lending program to
help banks in a cash squeeze.
‘Larger Than TARP’
Goldman
Sachs Group Inc. (GS), which in 2007 was the
most profitable securities firm in Wall Street history,
borrowed $69 billion from the Fed on Dec. 31, 2008. Among
the programs New York-based Goldman Sachs tapped after the
Lehman bankruptcy was the Primary Dealer Credit Facility, or
PDCF, designed to lend money to brokerage firms ineligible
for the Fed’s bank-lending programs.
Michael Duvally, a spokesman for Goldman Sachs, declined to
comment.
The Fed’s liquidity lifelines may increase the chances that
banks engage in excessive risk-taking with borrowed money,
Rogoff said. Such a phenomenon, known as moral hazard,
occurs if banks assume the Fed will be there when they need
it, he said. The size of bank borrowings “certainly shows
the Fed bailout was in many ways much larger than TARP,”
Rogoff said.
TARP is the Treasury Department’s Troubled Asset Relief
Program, a $700 billion bank-bailout fund that provided
capital injections of $45 billion each to Citigroup and Bank
of America, and $10 billion to Morgan Stanley. Because most
of the Treasury’s investments were made in the form of
preferred stock, they were considered riskier than the Fed’s
loans, a type of senior debt.
Dodd-Frank Requirement
In December, in response to the Dodd-Frank
Act, the Fed released 18 databases detailing
its temporary emergency-lending programs.
Congress required the disclosure after the Fed rejected
requests in 2008 from the late Bloomberg News reporter Mark
Pittman and other media companies that sought details of its
loans under the Freedom of Information Act. After fighting
to keep the data secret, the central bank released
unprecedented information about its discount window and
other programs under court order in March 2011.
Bloomberg News combined Fed databases made available in
December and July with the discount-window records released
in March to produce daily totals for banks across all the
programs, including the Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility, Commercial Paper
Funding Facility, discount window, PDCF, TAF, Term
Securities Lending Facility and
single-tranche open market operations. The programs supplied
loans from August 2007 through April 2010.
Rolling Crisis
The result is a timeline illustrating how the credit crisis
rolled from one bank to another as financial contagion
spread.
Fed borrowings by Societe
Generale (GLE), France’s second-biggest bank,
peaked at $17.4 billion in May 2008, four months after the
Paris-based lender announced a record 4.9 billion-euro ($7.2
billion) loss on unauthorized stock-index futures bets by
former trader Jerome Kerviel.
Morgan Stanley’s top borrowing came four months later,
after Lehman’s bankruptcy. Citigroup crested in January
2009, as did 43 other banks, the largest number of peak
borrowings for any month during the crisis. Bank of
America’s heaviest borrowings came two months after that.
Sixteen banks, including Plano, Texas-based Beal Financial
Corp. and Jacksonville, Florida-based EverBank Financial
Corp., didn’t hit their peaks until February or March 2010.
Using Subsidiaries
“At no point was there a material risk to the Fed or the
taxpayer, as the loan required collateralization,” said
Reshma Fernandes, a spokeswoman for EverBank, which borrowed
as much as $250 million.
Banks maximized their borrowings by using subsidiaries to
tap Fed programs at the same time. In March 2009, Charlotte,
North Carolina-based Bank of America drew $78 billion from
one facility through two banking units and $11.8 billion
more from two other programs through its broker-dealer, Bank
of America Securities LLC.
Banks also shifted balances among Fed programs. Many
preferred the TAF because it carried less of the stigma
associated with the discount window, often seen as the last
resort for lenders in distress, according to a January 2011
paper by researchers at the New York Fed.
After the Lehman bankruptcy, hedge funds began pulling
their cash out of Morgan Stanley, fearing it might be the
next to collapse, the Financial Crisis Inquiry Commission
said in a January report,
citing interviews with former Chief Executive Officer John
Mack and then-Treasurer David Wong.
Borrowings Surge
Morgan Stanley’s borrowings from the PDCF
surged to $61.3 billion on Sept. 29 from zero on Sept. 14.
At the same time, its loans from the Term Securities Lending
Facility, or TSLF, rose to $36 billion from $3.5 billion.
Morgan Stanley treasury reports released by the FCIC show
the firm had $99.8 billion of liquidity on Sept. 29, a
figure that included Fed borrowings.
“The cash flow was all drying up,” said Roger Lister, a
former Fed economist who’s now head of
financial-institutions coverage at credit-rating firm DBRS Inc. in New York. “Did
they have enough resources to cope with it? The answer would
be yes, but they needed the Fed.”
While Morgan Stanley’s Fed demands were the most acute,
Citigroup was the most chronic borrower among the largest
U.S. banks. The New York-based company borrowed $10 million
from the TAF on the program’s first day in December 2007 and
had more than $25 billion outstanding under all programs by
May 2008, according to Bloomberg data.
Tapping Six Programs
By Nov. 21, when Citigroup began talks with the government
to get a $20 billion capital injection on top of the $25
billion received a month earlier, its Fed borrowings had
doubled to about $50 billion.
Over the next two months the amount almost doubled again.
On Jan. 20, as the stock sank below $3 for the first time in
16 years amid investor concerns that the lender’s capital
cushion might be inadequate, Citigroup was tapping six Fed
programs at once. Its total borrowings amounted to more than
twice the federal Department of Education’s 2011 budget.
Citigroup was in debt to the Fed on seven out of every 10
days from August 2007 through April 2010, the most frequent
U.S. borrower among the 100 biggest publicly traded firms by
pre- crisis market valuation. On average, the bank had a
daily balance at the Fed of almost $20 billion.
‘Help Motivate Others’
“Citibank basically was sustained by the Fed for a very
long time,” said Richard Herring, a finance professor at the
University of Pennsylvania in Philadelphia who has studied
financial crises.
Jon Diat, a Citigroup spokesman, said the bank made use of
programs that “achieved the goal of instilling confidence in
the markets.”
JPMorgan CEO Jamie Dimon
said in a letter
to shareholders last year that his bank
avoided many government programs. It did use TAF, Dimon said
in the letter, “but this was done at the request of the
Federal Reserve to help motivate others to use the system.”
The bank, the second-largest in the U.S. by assets, first
tapped the TAF in May 2008, six months after the program
debuted, and then zeroed out its borrowings in September
2008. The next month, it started using TAF again.
On Feb. 26, 2009, more than a year after TAF’s creation,
JPMorgan’s borrowings under the program climbed to $48
billion. On that day, the overall TAF balance for all banks
hit its peak, $493.2 billion. Two weeks later, the figure
began declining.
“Our prior comment is accurate,” said Howard Opinsky,
a spokesman for JPMorgan.
‘The Cheapest Source’
Herring, the University of Pennsylvania professor, said
some banks may have used the program to maximize profits by
borrowing “from the cheapest source, because this was
supposed to be secret and never revealed.”
Whether banks needed the Fed’s money for survival or used
it because it offered advantageous rates, the central bank’s
lender-of-last-resort role amounts to a free insurance
policy for banks guaranteeing the arrival of funds in a
disaster, Herring said.
An IMF report last
October said regulators should consider
charging banks for the right to access central bank funds.
“The extent of official intervention is clear evidence that
systemic liquidity risks were under-recognized and mispriced
by both the private and public sectors,” the IMF said in a separate
report in April.
Access to Fed backup support “leads you to subject yourself
to greater risks,” Herring said. “If it’s not there, you’re
not going to take the risks that would put you in trouble
and require you to have access to that kind of funding.”
