Secrets Revealed: Fed Unveils Bank Loans Made During the Crisis

By Dunstan Prial

Published March 31, 2011
| FOXBusiness
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A massive cache of documents released by the Federal Reserve Thursday reveals that banks from every corner of the globe, large and small, turned to the U.S. government’s emergency bailout program for help as the credit crisis exploded in late 2008.

In addition to global banking giants such as Bank of New York Mellon (BK: 29.87, +0.20, +0.67%) and Morgan Stanley (MS: 27.32, +0.09, +0.33%), the documents show numerous, small regional banks tapped the Fed’s discount window, especially banks from areas hard hit by collapsing real estate markets, such as California.

Dexia, Erste Group and Depfa, were among the foreign banks that turned to the Fed as credit markets dried up and banks had no other alternative but to seek U.S. government bailout dollars.

Other big foreign borrowers were Norinchukin Bank of Japan, Bank of Scotland, and Germany’s Landesbank Baden-Wurttemberg and France’s Societe Generale.

The Fed released the trove of information after a lengthy court battle initiated by media outlets including FOX Business, which sought the data under the Freedom of Information Act.

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In 2008, as the financial crisis was gaining steam and many banks were bleeding money as a result of vast investments in toxic subprime loans, the U.S. government agreed to a series of emergency measures designed to bail out faltering banks by providing loans through the Fed’s discount window, often referred to as the lender of last resort.

According to the documents released Thursday, the peak for lending was Oct. 29, 2008, with $111 billion in discount-window borrowing. About $50 billion of that day went to Dexia and Depfa.

FOX Business initially sought information on the use of the bailout funds for American International Group (AIG: 35.14, -0.91, -2.52%) and the Bank of New York Mellon, and later sought similar data on the bailout funds for Citigroup Inc (C: 4.42, -0.03, -0.67%).

FOX Business asked the Treasury Department to identify, among other issues, the troubled assets purchased by the government, any collateral extended by the banks, and any restrictions placed on these financial institutions for their participation in this program.

But the Fed refused to name banks that borrowed funds through the discount window or provide any other information related to the emergency programs for fear there would be a run on banks tied to bailouts.

FOX Business and Bloomberg News subsequently argued in lawsuits that the public had a right to know where the money went and how much was borrowed.

Sifting through the documents one broad theme emerges: all the large banks used the discount window to some extent, though the use of this so-called lender of last resort was generally a small part of their total emergency borrowing through other Fed programs. Goldman Sachs, for instance, tapped the window for $50 million, a tiny amount for a firm that size.

In some cases, the documents reveal a bank failure occurring in real time. Washington Mutual, for instance, started borrowing from the discount window on Sept. 18, 2008, with an initial loan of $2 billion. But it then borrowed another $2 billion every night until Sept. 25, when JPMorgan bought it.

Discussing the rationale for withholding the information, Jay Ritter, a finance professor at the University of Florida, said the Fed in late 2008, as it was lending money to desperate banks, feared “a self-fulfilling prophecy.â€