The Federal Reserve, under orders from Congress, today named the counterparties of about 21,000 transactions from $3.3 trillion in aid provided to stem the worst financial panic since the Great Depression.
Bank of America Corp. and Wells Fargo & Co. were among the biggest borrowers from one program, the Term Auction Facility, with as much as $45 billion apiece. Some aid went to U.S. units of foreign institutions, including Switzerland’s UBS AG, France’s Societe Generale and Germany’s Dresdner Bank AG. The Fed posted the data on its website to comply with a provision in July’s Dodd-Frank law overhauling financial regulation.
“We owe an accounting to the American people of who we have lent money to,” Richmond Fed President Jeffrey Lacker said today in an interview on Bloomberg Radio’s “The Hays Advantage,” with Kathleen Hays. “It is a good step toward broader transparency.”
Even so, the release may heighten political scrutiny of the central bank already at its most intense in three decades. The Fed’s Nov. 3 decision to add $600 billion of monetary stimulus has sparked a backlash from top Republicans in Congress, who said in a Nov. 17 letter to Chairman Ben S. Bernanke that the action risks inflation and asset-price bubbles.
“These disclosures come at a politically inopportune moment for the Fed,” Sarah Binder, a senior fellow at the Brookings Institution in Washington whose research focuses on Congress’s relationship with the Fed, said before the release. “Just when Chairman Bernanke is trying to defend the Fed from Republican critics of its asset purchases, the Fed’s wounds from the financial crisis are reopened.”
The information, which also includes the amounts of transactions and interest rates charged, spans six loan programs as well as currency swaps with other central banks, purchases of mortgage-backed securities and the rescues of Bear Stearns Cos. and American International Group Inc.
The data detail the breadth of central bank support that reached beyond banks to companies such as General Electric Co., which accessed a Fed program 12 times for a total of $16 billion in commercial paper. Lawmakers demanded disclosure, over the Fed’s initial objections, as U.S. central bankers pushed beyond their traditional role of backstopping banks. The Fed bought short-term IOUs from corporations, risky assets from Bear Stearns and more than $1 trillion in U.S. housing debt.
Need for Liquidity
“Consistent with what we said at the time, we participated in the program to support investors’ need for liquidity during the financial crisis and to manage the company’s commercial- paper maturity profile,” said Russell Wilkerson, a GE spokesman.
Companies’ participation in the programs “reflected the severe market disruptions during the financial crisis and generally did not reflect participants’ financial weakness,” the Fed said today in a statement in Washington. “The Federal Reserve followed sound risk-management practices in administering all of these programs” and incurred no credit losses, the statement said.
At Goldman Sachs Group Inc., Wall Street’s most profitable securities firm, borrowing from the Primary Dealer Credit Facility peaked at $24 billion in October 2008. “Without question, direct government support was critical in stabilizing the financial system, and we benefitted from it,” Chief Executive Officer Lloyd Blankfein said in January 2010.
Michael DuVally, a Goldman Sachs spokesman in New York, said today that the Fed’s actions “were very successful.”
The presence of foreign banks in the program underscores the squeeze in dollar liquidity after the collapse of Lehman Brothers Holdings Inc. on Sept. 15, 2008. UBS, Switzerland’s largest bank, was the biggest borrower from the Commercial Paper Funding Facility, tapping the program 11 times for $74.5 billion.
The emergency programs included the Term Asset-Backed Securities Loan Facility, which has supported billions of dollars in credit to small businesses, credit card borrowers, and students, and the Term Auction Facility, which helped banks get cheaper funding.
Bernanke pushed the boundaries of the Fed’s powers, using section 13(3) of the Federal Reserve Act, which allowed the central bank to aid non-banks under “unusual and exigent circumstances.” In some facilities, the Fed engaged in non- recourse lending, meaning it loaned against collateral alone and took a greater risk of loss.
“By moving into the world of non-recourse loans, they started to accept risk exposures that the private sector was no longer capable of maintaining,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “That effectively turned the Fed into an asset warehouse.”
Congress excluded one Fed lending program from disclosure, the discount window, which is the subject of a 2008 lawsuit filed by Bloomberg LP, parent of Bloomberg News, against the central bank. A group of banks is appealing to the Supreme Court over lower-court decisions ordering the Fed to identify loan recipients. The program peaked at $110.7 billion in October 2008.
“We see this not as the end of a process but really a significant step forward in opening the veil of secrecy that exists in one of the most powerful agencies in government,” Senator Bernard Sanders, the Vermont Independent who wrote the provision on Fed disclosure, said to reporters Nov. 17.
Sanders said he was motivated to use legislation to force the Fed to reveal borrowers after Bernanke rebuffed his request to identify the firms.
“Given the size of these commitments, it is incomprehensible that the American people have not received specific details about them,” Sanders said in a letter to Bernanke on Feb. 4, 2009.
“The Federal Reserve does not release specific information regarding the borrowings of individual institutions from our lending facilities,” Bernanke said in a reply to Sanders. “The approach is completely consistent with the long-standing practice of central banks.”
A year after his 2009 correspondence with Sanders, Bernanke said in House Financial Services Committee testimony the Fed would agree to reveal the names of borrowers of emergency facilities with a “sufficiently long” lag. Once again, he said that the confidentiality of the discount window “must be maintained.”
Today’s information relates to aid from Dec. 1, 2007, through July 21, 2010, when President Barack Obama signed Dodd- Frank into law. The act also requires the Fed, after a two-year delay, to identify firms that, following the law’s passage, borrow through its discount window and participate in its purchases or sales of assets such as mortgage-backed securities and Treasuries.
The Dodd-Frank legislation has also limited the Fed’s emergency lending powers from now on to programs with broad- based eligibility, curtailing bailouts of individual institutions.
“You have to balance the different considerations,” said Roberto Perli, managing director at International Strategy & Investment Group in Washington and a former Fed Board staff member. “They crossed a line, but what would have been the alternative? You can’t have a huge run on money funds. The situation was very delicate. The alternative would have been a lot worse.”
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