Fed lifts veil on its actions from height of crisis
The Federal Reserve’s disclosures on Wednesday revealed that Goldman Sachs, whose New York headquarters are seen here, received $620 billion in loans and other aid at the peak of the financial crisis. More News
Fed programs aimed at thawing frozen financial markets, for example, drew Kansas City stalwarts Commerce Bank and American Century Investments.
Other funding programs provided much-needed financing during the crisis to a wide variety of firms, from Wall Street giants Citigroup and Goldman Sachs to corporate mainstays McDonald’s Corp. and Harley Davidson.
Central banks in other nations also relied on the Fed’s pocketbook, including $8 trillion in temporary credit lines for the European Central Bank. Foreign banking companies also were able to tap the Fed’s programs, the reports showed.
Wednesday’s disclosures by the Federal Reserve itemized more than 21,000 transactions the central bank helped bring about from December 2007 to July 2010. The Fed revealed the names of borrowers, the amounts they borrowed and the interest rates they paid.
In total, six programs the disclosures covered funneled $3.3 trillion into bank and corporate coffers at their peaks.
The emergency aid to banks and Wall Street firms rankled many Americans who weren’t getting enough help in their struggles with high unemployment, rising mortgage foreclosures and falling home values.
Meanwhile, profits have returned quickly to the financial industry, with the nation’s largest banks earning $14 billion collectively from July through September.
Wednesday’s disclosures were required under financial reform Congress passed following the crisis.
“The American people are finally learning the incredible and jaw-dropping details of the Fed’s multitrillion-dollar bailout of Wall Street and corporate America,” said Sen. Bernie Sanders, an independent from Vermont and longtime Fed critic who pushed for the disclosures. “Perhaps most surprising is the huge sum that went to bail out foreign private banks and corporations.”
Officials at the central bank said the data prove they acted responsibly during the crisis. They said that most of the loans have been repaid and that taxpayers have suffered no credit losses.
“I think our actions prevented an even more disastrous outcome,” said Donald L. Kohn, who was the Fed’s vice chairman during the crisis.
Many of the Fed’s transactions were short-term loans that borrowers renewed repeatedly.
The documents show total loans and other aid that Citigroup received throughout the life of the Fed programs totaled $2.2 trillion. Merrill Lynch received $2.1 trillion, Morgan Stanley $2 trillion, Bank of America $1.1 trillion, Bear Stearns $960 billion, Goldman Sachs $620 billion, JPMorgan Chase $260 billion and Wells Fargo $150 billion.
The Federal Reserve undertook these unusual efforts in the face of a faltering financial system that refused to do business as usual.
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 in a statement that accompanied the disclosures.
During the crisis, even sound corporate giants were unable to raise badly needed working capital to ensure that payroll checks, vendor payments and other routine transactions did not bounce. Normally, they raised this money by selling short-term IOUs called asset-backed commercial paper. There were no ready buyers during the crisis.
“They would come to the market and there was nobody there,” said Denise Latchford, director of money market funds at American Century.
According to the Fed’s records, Caterpillar, General Electric, Verizon and Toyota were among participants benefiting from the Fed-financed commercial paper purchases.
Most of these purchases were made in the first few weeks after the program opened in October 2008. But it had to buy nearly as much in January 2009 and only slightly less in March 2009. The Fed supported the market for commercial paper into the summer of 2009.
Latchford said one Fed program allowed American Century to sell some asset-backed commercial paper its money market funds held and use the money to buy new commercial paper being issued by the same corporations, which were seeking fresh funding.
In total, two American Century funds sold and reinvested $538 million through the program, the records showed.
Latchford said the circumstances meant that fund investors profited because the new commercial paper paid higher interest rates.
The Fed instituted the money market fund program largely to ensure that funds needing to sell investments to raise cash for investor withdrawals could find buyers. Latchford said American Century never suffered from withdrawals during the crisis.
Another widely used Fed program sought to provide funding to the banking industry when many banks were reluctant to lend to one another.
That program, called Term Auction Facility, allowed banks essentially to bid against each other for short-term loans from the Fed. Banks competed by offering the rate of interest they would pay for funding.
Commerce Bank borrowed 16 times through the Fed auctions between January 2008 and February 2009, the Fed’s disclosures showed. It usually received $100 million or $200 million for about one month and sometimes three months.
Chuck Kim, Commerce’s chief financial officer, said the Fed funding was sometimes the best deal available for routine operations. Like other borrowers in the program, Commerce secured the borrowings with loans on its books.
Other efforts by the Fed aided financial markets by driving down short-term interest rates. The Fed also bought $1.7 trillion in mortgage-related assets and Treasury securities.
In November, the Fed began buying $600 billion of Treasury securities in an effort to lower longer-term interest rates. Its plan has been not been universally welcome.
“These disclosures come at a politically inopportune moment for the Fed,” said Sarah Binder, a Brookings Institution senior fellow. “Just when Chairman (Ben) Bernanke is trying to defend the Fed from Republican critics of its asset purchases, the Fed’s wounds from the financial crisis are reopened.”
Foreign banks using the Fed’s programs included Swiss-based UBS, which borrowed more than $165 billion; Deutsche Bank, which borrowed $97 billion; and the Royal Bank of Scotland, which borrowed $92 billion.
“There’s very much a sense from the data that the Federal Reserve was not just providing liquidity to U.S. banks but was creating stability for the entire world’s financial system,” said Linus Wilson, assistant professor of finance at the University of Louisiana at Lafayette.
source: kansascity.com
