Joshua Roberts/Bloomberg News
The Fed released a complete list Thursday of banks that borrowed during the crisis from its discount window, its oldest and broadest emergency lending program.
By BINYAMIN APPELBAUM and JO CRAVEN McGINTY
Published: March 31, 2011
Multimedia
Hundreds of small banks borrowed modest amounts of cash in 2008 and 2009, ranging from $1,000 to several million dollars, from an emergency loan program known as the discount window.
The Fed also used the discount window to make dozens of loans, often exceeding several billion dollars at a time, to the United States Central Federal Credit Union, helping to prevent a collapse that would have harmed hundreds of smaller credit unions. And the Fed helped to save some of the largest banks in Europe by pumping desperately needed dollars into their American subsidiaries. In fact, the biggest borrower from the Fed program was Dexia, a French-Belgian bank that frequently held more than $30 billion in outstanding loans from the program from late 2008 to early 2009.
The story of the Fed’s efforts to rescue giant banks like Merrill Lynch, Citigroup and Washington Mutual from the consequences of reckless lending and investments is already well known. The central bank released detailed information in December about the emergency programs it created to pump billions of dollars into those banks.
But the Fed fought long and hard to preserve the secrecy of transactions at the discount window, its oldest and most inclusive lending program. The grudging release of the data Thursday, in a format that impeded analysis, came only after a series of federal courts ruled in favor of lawsuits brought by Bloomberg News and Fox News.
The long list of borrowers, provided in the form of a daily loan register, gives a striking impression of a crisis spreading to every last corner of the financial system.
By late October 2008, the volume of outstanding loans topped $100 billion, with several dozen banks borrowing each day.
Some banks borrowed minimal amounts to test the process in case things got worse. For example, First City Bank in Fort Walton Beach, Fla., borrowed just $1,000 in October 2008 and repaid the money the next day.
“Our regulators encouraged us to do it,” the bank’s president, Robert E. Bennett Jr., said.
Other banks were already struggling to survive. Pacific National Bank of San Francisco borrowed 125 times from February 2008 to February 2009. The bank was closed by regulators in October 2009.
Borrowing from the discount window, even on a confidential basis, has long been viewed as a sign of weakness, to be avoided if at all possible. From 2003 to 2006, the Fed lent an average of less than $50 million each week.
By the summer of 2007, however, the Fed was increasingly concerned that banks were shunning necessary help. In August, officials cut the cost of borrowing from the discount window by half a percentage point. Then they arranged for four of the nation’s largest banks — Bank of America, Citigroup, JPMorgan Chase and Wachovia — to take what were described as symbolic loans of $500 million each.
The records released Thursday show that JPMorgan and Wachovia returned most of the money the next day. Bank of America and Citigroup, already showing signs of the problems they still face, kept the money for a month.
Perhaps the most surprising revelation in Thursday’s documents was that foreign banks quickly became the largest and most frequent borrowers. On Sept. 15, 2008, the day that Lehman Brothers filed for bankruptcy, the Austrian bank Erste Group borrowed $4 billion. By the end of that week banks from Spain, France and Japan had also borrowed billions.
An analysis of discount window lending from February 2008 to February 2009 shows that the vast majority of the loan volume went to foreign institutions.
Donald L. Kohn, the Fed’s vice chairman during the crisis, said that many foreign banks needed dollars to meet their financial obligations. The Fed arranged swaps with central banks in other countries to provide dollars, but the flow was insufficient.
“They not only borrowed dollars from their central banks, but they needed to borrow dollars from us as well,” said Mr. Kohn, now a fellow at the Brookings Institution.
Dexia was one of the most frequent and prolific borrowers.
By October 2008, the company’s American subsidiary was regularly visiting the discount window to renew what amounted to a line of credit that eventually reached into the tens of billions. The company continued to borrow from the Fed through November 2009, taking more than 100 short-term loans.
Dexia, which specialized in lending to municipalities, made the nearly fatal mistake of buying an American company that insured bonds — including subprime mortgage bonds. The governments of France, Belgium and Luxembourg invested about $9.2 billion to stabilize the company in 2008.
Ulrike Pommee, a spokeswoman for the company, described the information released Thursday as “backward-looking,” and said the bank had been open about its need for help.
“Dexia was one of the banks most dependent on central banks,” Ms. Pommee said in an e-mail. “The Fed played its role as central banker, providing liquidity to banks that needed it.”
The Arab Banking Corporation, partly owned by the Central Bank of Libya, was another frequent visitor, taking more than two dozen short-term loans of several hundred million dollars each.
“It is incomprehensible to me that while credit-worthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit,” Senator Bernie Sanders, Independent of Vermont, wrote in a letter sent Thursday to the Fed chairman, Ben S. Bernanke, and other government officials.
The data also provided new details on the struggles of the largest banks.
Goldman Sachs, which has said that it borrowed from the window only as a test, took five loans of $1 million to $50 million between September 2008 and January 2010.
JPMorgan Chase, which lately has insisted that it did not need government aid during the crisis, also took discount window loans on several occasions, including a $3.5 billion loan in January 2008 on a day that it announced disappointing earnings.
The records show that several banks that failed or were forced into mergers borrowed heavily as problems deepened, including Wachovia, which is now part of Wells Fargo, and Washington Mutual, which is now part of JPMorgan Chase.
The Fed provided the data to reporters Thursday in the form of thousands of pages of electronic documents, loaded on a compact disc and distributed by hand.
Bankers have expressed concerns about the release of the discount window data, saying that the prospect of publicity will deter future borrowing.
“I think it will make it harder for people to use the discount window in the future,” Jamie Dimon, chief executive of JPMorgan Chase, said Wednesday.
The Fed also used the discount window to make dozens of loans, often exceeding several billion dollars at a time, to the United States Central Federal Credit Union, helping to prevent a collapse that would have harmed hundreds of smaller credit unions. And the Fed helped to save some of the largest banks in Europe by pumping desperately needed dollars into their American subsidiaries. In fact, the biggest borrower from the Fed program was Dexia, a French-Belgian bank that frequently held more than $30 billion in outstanding loans from the program from late 2008 to early 2009.
The story of the Fed’s efforts to rescue giant banks like Merrill Lynch, Citigroup and Washington Mutual from the consequences of reckless lending and investments is already well known. The central bank released detailed information in December about the emergency programs it created to pump billions of dollars into those banks.
But the Fed fought long and hard to preserve the secrecy of transactions at the discount window, its oldest and most inclusive lending program. The grudging release of the data Thursday, in a format that impeded analysis, came only after a series of federal courts ruled in favor of lawsuits brought by Bloomberg News and Fox News.
The long list of borrowers, provided in the form of a daily loan register, gives a striking impression of a crisis spreading to every last corner of the financial system.
By late October 2008, the volume of outstanding loans topped $100 billion, with several dozen banks borrowing each day.
Some banks borrowed minimal amounts to test the process in case things got worse. For example, First City Bank in Fort Walton Beach, Fla., borrowed just $1,000 in October 2008 and repaid the money the next day.
“Our regulators encouraged us to do it,” the bank’s president, Robert E. Bennett Jr., said.
Other banks were already struggling to survive. Pacific National Bank of San Francisco borrowed 125 times from February 2008 to February 2009. The bank was closed by regulators in October 2009.
Borrowing from the discount window, even on a confidential basis, has long been viewed as a sign of weakness, to be avoided if at all possible. From 2003 to 2006, the Fed lent an average of less than $50 million each week.
By the summer of 2007, however, the Fed was increasingly concerned that banks were shunning necessary help. In August, officials cut the cost of borrowing from the discount window by half a percentage point. Then they arranged for four of the nation’s largest banks — Bank of America, Citigroup, JPMorgan Chase and Wachovia — to take what were described as symbolic loans of $500 million each.
The records released Thursday show that JPMorgan and Wachovia returned most of the money the next day. Bank of America and Citigroup, already showing signs of the problems they still face, kept the money for a month.
Perhaps the most surprising revelation in Thursday’s documents was that foreign banks quickly became the largest and most frequent borrowers. On Sept. 15, 2008, the day that Lehman Brothers filed for bankruptcy, the Austrian bank Erste Group borrowed $4 billion. By the end of that week banks from Spain, France and Japan had also borrowed billions.
An analysis of discount window lending from February 2008 to February 2009 shows that the vast majority of the loan volume went to foreign institutions.
Donald L. Kohn, the Fed’s vice chairman during the crisis, said that many foreign banks needed dollars to meet their financial obligations. The Fed arranged swaps with central banks in other countries to provide dollars, but the flow was insufficient.
“They not only borrowed dollars from their central banks, but they needed to borrow dollars from us as well,” said Mr. Kohn, now a fellow at the Brookings Institution.
Dexia was one of the most frequent and prolific borrowers.
By October 2008, the company’s American subsidiary was regularly visiting the discount window to renew what amounted to a line of credit that eventually reached into the tens of billions. The company continued to borrow from the Fed through November 2009, taking more than 100 short-term loans.
Dexia, which specialized in lending to municipalities, made the nearly fatal mistake of buying an American company that insured bonds — including subprime mortgage bonds. The governments of France, Belgium and Luxembourg invested about $9.2 billion to stabilize the company in 2008.
Ulrike Pommee, a spokeswoman for the company, described the information released Thursday as “backward-looking,” and said the bank had been open about its need for help.
“Dexia was one of the banks most dependent on central banks,” Ms. Pommee said in an e-mail. “The Fed played its role as central banker, providing liquidity to banks that needed it.”
The Arab Banking Corporation, partly owned by the Central Bank of Libya, was another frequent visitor, taking more than two dozen short-term loans of several hundred million dollars each.
“It is incomprehensible to me that while credit-worthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit,” Senator Bernie Sanders, Independent of Vermont, wrote in a letter sent Thursday to the Fed chairman, Ben S. Bernanke, and other government officials.
The data also provided new details on the struggles of the largest banks.
Goldman Sachs, which has said that it borrowed from the window only as a test, took five loans of $1 million to $50 million between September 2008 and January 2010.
JPMorgan Chase, which lately has insisted that it did not need government aid during the crisis, also took discount window loans on several occasions, including a $3.5 billion loan in January 2008 on a day that it announced disappointing earnings.
The records show that several banks that failed or were forced into mergers borrowed heavily as problems deepened, including Wachovia, which is now part of Wells Fargo, and Washington Mutual, which is now part of JPMorgan Chase.
The Fed provided the data to reporters Thursday in the form of thousands of pages of electronic documents, loaded on a compact disc and distributed by hand.
Bankers have expressed concerns about the release of the discount window data, saying that the prospect of publicity will deter future borrowing.
“I think it will make it harder for people to use the discount window in the future,” Jamie Dimon, chief executive of JPMorgan Chase, said Wednesday.
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