Fed reveals which banks borrowed during crisis

By Dow Jones Newswires
Posted March 31 at 4:39 p.m.

Foreign banks, regional U.S. banks, and banks fighting for their last chance at survival counted among the heaviest users of the Federal Reserve’s emergency discount lending window during the heat of the 2008 financial crisis.

On Thursday, the Fed released thousands of pages of data identifying the institutions that borrowed from the window — the last resort for banks — during the period.

Until now, such borrowing had always been anonymous to protect banks from stigma. The data disclosure, brought about by lawsuits from Bloomberg L.P.’s Bloomberg News and News Corp.’s Fox Business Network, marks the latest step in getting greater disclosure on the government’s controversial rescue efforts during the crisis.

The voluminous data span Aug. 8, 2007 to March 1, 2010, including borrowing around the collapse of Lehman Brothers on Sept. 15. 2008.

Lehman’s collapse transformed Wall Street and ushered in unprecedented federal intervention to prop up financial markets. Discount-window loans hit a peak of $ 111 billion about a month after Lehman’s bankruptcy filing.

The data show the build up of the crisis, which simmered in mid-2007 only to erupt with a fury in late summer 2008.

The discount window has included several types of loans, but the focus of attention in the latest release is what the Fed calls primary and secondary credit. Primary credit is short term funds available to generally sound banks. Secondary credit is short term funds extended to banks that aren’t eligible for primary credit–in essence, banks that are struggling.

For the Fed week that ended Sept. 3, the primary and secondary credit borrowing by banks was $19 billion.

The government seized Fannie Mae and Freddie Mac (FMCC), which owned or backed half of the $12 trillion U.S. mortgage market, on Sept. 7, 2008. During that week, Minneapolis-based U.S. Bancorp (USB) had the single largest borrowing from the discount window, taking a $3.4 billion overnight loan on Sept. 10, according to the data.

A U.S. Bancorp spokeswoman said, “a small number of times during the 2007-2010 time period, including September 10, 2008, U.S. Bank found that borrowing from the Discount Window at day’s end was the best economic alternative, as market volatility unfavorably impacted the rates on other available options.” She said, “throughout the cycle, U.S. Bank’s liquidity position remained strong and, in fact, has continued to grow.”

Sovereign Bank took an overnight loan of $685 million on Sept. 10, the second- largest borrowing that week. The Northeast regional bank sold to Banco Santander a month later.

Other heavy borrowing came from banks in the California Federal Reserve District, one of the hardest-hit by the collapse of residential real estate. Total borrowings were $23.5 billion, up from $19 billion the prior week.

Bank borrowing of primary and secondary credit rose to $23.4 billion on Sept. 10.

September was only starting to get warmed up, however. Rumors about trouble at Lehman permeated the market in the next few days. Facing a run on its funding and collateral calls, Lehman attempted a last-ditch sale to Barclays PLC or a rescue by the Fed but couldn’t get either accomplished. It filed for bankruptcy in the early morning hours of Monday, Sept. 15.

That’s when foreign banks stepped up fast to the Fed’s discount window, becoming the heaviest users at that time. Four foreign banks borrowed about $15 billion, according to the data.

Austria’s Erste Group was the biggest single borrower that week — it went to the Fed three times on Sept. 15 and 17, borrowing a total of $ 5.4 billion, followed by Bank of Scotland — part of Lloyds Banking Group — which took out $5 billion over night on Sept. 17. On Sept. 16, Norinchukin Bank of Japan took out $3 billion for three months; Landesbank Baden-Wü rttemberg borrowed $1.6 billion overnight on Sept. 17.

Lloyds Banking Group declined to comment. The other foreign banks didn’t immediately return a request for comment or couldn’t be reached.

On Sept. 17, primary and secondary borrowing from the discount window rose to $33.4 billion.

Lehman’s bankruptcy sparked a massive credit run in the markets as banks stopped lending, even to each other. In the next few days, coinciding with the near collapse of American International Group Inc. (AIG), Treasury Secretary Henry Paulson would cobble together a $700 billion rescue plan for the financial system.

That same weekend, Goldman Sachs Group Inc. and Morgan Stanley, the last standing of the big traditional Wall Street firms, sought and won Fed approval to convert to bank holding companies, giving them direct access to the Fed’s lifeline.

Morgan Stanley visited the window the first day it could, taking a $1 million overnight loan on Sept. 22. Goldman waited another day before taking a $50 million overnight loan.

Primary credit loans to banks overall continued to soar that week, totaling $ 39.34 billion outstanding as of that Wednesday. On Monday Sept. 22, Barclays took a $1 billion loan that wouldn’t mature for three months.

In the Fed’s week ending Sept. 24, borrowing continued to rise, with primary and secondary credit loans totaling $39.34 billion outstanding as of that Wednesday.

By Sept. 25, Washington Mutual, the nation’s largest thrift, was seized by the Federal Deposit Insurance Corp. and its assets sold to J.P. Morgan Chase & Co. Wamu borrowed heavily from the window in the days leading up to that. On Thursday Sept. 18, it took a $2 billion loan that was due on the following Monday. When that matured on Monday, it started taking $2 billion loans on an overnight basis, the final one on Thursday, the day it failed.

When the Fed lending peaked on Oct. 29, 2008, it was European banks Dexia SA and Depfa that took the biggest loans from the Fed discount window.

The central bank was forced by the Dodd-Frank financial reforms to lift the veil of secrecy on nearly all the $3.3 trillion worth of credit it funneled to different parts of the economy and the financial system.

But banks and regulators had fought the disclosure of discount window borrowing. “I think it will make it harder for people to use the discount window in the future,” J.P. Morgan Chase & Co. Chief Executive Jamie Dimon said in remarks Wednesday.

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