European banks big Fed borrowers in 2008 crisis
A European bank that was later exposed to the Madoff scandal and an Arab company now majority-owned by the Libyan central bank were among an odd assortment of firms that dug deep into the U.S. Federal Reserve's coffers as the financial crisis exploded in 2008.
Two second-tier European financial players -- Dexia and Depfa -- accounted for nearly half of the $111 billion borrowed from the Fed on October 29, 2008, the day that lending through its emergency discount window peaked.
Nine of the 12 largest borrowers on that day were foreign-owned firms, according to Fed lending data released on Thursday to comply with a court order. Wachovia, now part of Wells Fargo, was the biggest U.S. recipient with $15 billion.
Many of the biggest U.S. banks are conspicuously absent from the discount window borrowing list. They opted instead to use other emergency lending programs that the Fed created on the fly in the middle of the crisis.
Topping the list of peak day borrowing were Belgian-French Dexia, which borrowed $26.5 billion, and Dublin-based Depfa, a subsidiary of German property lender Hypo Real Estate Holding, with $24.6 billion.
Dexia disclosed in December 2008 that it could face an after-tax loss of 85 million euros if the value of assets managed by Ponzi schemer Bernard Madoff proved to be worthless. Dexia said it had no direct investments in Madoff funds, but some private banking clients did and Dexia also had indirect exposure to Madoff-linked funds through lending operations.
Arab Banking Corp, No. 11 on the list of peak-day borrowers with a $1.1 billion loan, is now nearly 60 percent owned by the Central Bank of Libya.
The collapse of Lehman Brothers in September 2008 sent the global economy into a tailspin and caused the financial system to seize up. The Fed's documents -- more than 25,000 pages in all -- illustrate how widely the damage spread, forcing banks around the world to seek emergency help.
In the days and weeks following Lehman's bankruptcy, the Fed also made multi-billion-dollar loans to other foreign banks through its discount window, including Austria's Erste Group, Royal Bank of Scotland, Germany's Commerzbank and France's Societe Generale.
STIGMATIZED
The discount window is the Fed's regular facility for providing emergency cash to banks in difficulty. In normal times, it is rarely used, in part because banks fear the stigma of having sought emergency help.
The Fed had resisted releasing the names of banks that tapped the discount window on the grounds that doing so might discourage firms from seeking help in the future. The central bank released the names only after having run out of legal appeals to block publication.
The documents detail lending from the Fed's discount window for period of August 8, 2007, to March 1, 2010.
The Fed, its hand forced by a new law that rewrote U.S. financial rules, disclosed details of other emergency lending.
Some of those programs doled out far more than the traditional discount window. The Term Auction Facility, for example, lent $493 billion on March 11, 2009 -- more than four times the amount of the discount window's peak lending day.
Citigroup, Bank of America and other industry giants that are eligible for discount window loans borrowed heavily from those other programs in the weeks after Lehman failed. So did foreign banks.
As much as the government tried to change the perception of it, there was always a stigma of being at the Fed window, and that never really went away during the crisis, said Jefferson Harralson, a bank analyst with Keefe, Bruyette & Woods Inc.
Analysts said the other lending programs also accepted different types of collateral and offered longer-term loans, which may have made them more attractive to big banks.
A handful of small banks show up on the discount window borrowing list taking loans of $1,000. Chip MacDonald, a banking attorney with Jones Day in Atlanta, said those may have been merely tests to see whether processes for accessing the discount window were up to speed.
COMING INTO THE LIGHT
Bloomberg LP, the parent of Bloomberg News, and News Corp's Fox News Network had sought the bailout details under the federal Freedom of Information law, which requires government agencies to make certain documents public.
The lending facility is an important tool the Fed has at its disposal to ensure banks remain liquid in times of stress.
It should be emphasized that confidentiality is not meant to protect the identities of individual banks per se, but rather to make the discount window more effective in dealing with market disturbances, New York Federal Reserve Bank economists Joao Santos and Stavros Peristiani wrote on the regional central bank's blog on March 30.
(Additional reporting by Rachelle Younglai in Washington, Kristina Cooke in New York and Joe Rauch in Charlotte, N.C.; Editing by Neil Stempleman and Leslie Adler)
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