As financial markets shuddered and then nearly imploded in 2008, the Federal Reserve opened its vault to the world on a scope much wider and deeper than previously disclosed. As one example, Citigroup, struggling to stay afloat, sought help from the Fed at least 174 times during a 13-month stretch. Barclays, a British bank, at one point owed nearly $48 billion to the Federal Reserve. Even better-off banks like Goldman Sachs took advantage of Fed loans offered at rock-bottom rates. The Fed’s efforts to stave off a financial crisis reached far beyond Wall Street, touching manufacturers like General Electric, the Detroit automakers and Harley-Davidson; to central banks from Britain to Japan; and insurers and pension funds in Sweden and South Korea.
Under orders from Congress, the Fed on Wednesday released details of more than 21,000 transactions under the array of emergency lending programs and other arrangements it conjured up in response to the crisis. The disclosures, which the Fed had resisted, offer the most detailed portrait of a panicky period in which the Fed lent money to banks, brokers, businesses and investors to keep the financial system functioning.
The documents show that some of the biggest names in American business were either coming to the Fed in need of a bailout, or trying to make money at a time when the Fed was trying to entice investors back into the markets. Among the latter were prominent investors and entrepreneurs like John Paulson and Michael S. Dell, and the pension funds of the Philadelphia Teamsters and Omaha’s teachers, who were betting they could profit if the rescue worked. At its peak at the end of 2008, the Fed had about $1.5 trillion in outstanding credit on its books. The central bank, in essence, pumped liquidity, the lifeblood of credit markets, into the circulatory system of an economy that was experiencing a potentially fatal heart attack. “I think our actions prevented an even more disastrous outcome,” said Donald L. Kohn, who was the Fed’s vice chairman during the crisis. Without the Fed’s help, he said, “liquidity would have dried up even more than it did, asset prices would have fallen even more than they did, and economic activity and employment would have fallen further and faster then they did.”
The Fed, already reeling from attacks from both the right and the left over its quantitative easing policy, the latest effort to spur the economy with a plan to buy $600 billion in Treasury securities, braced itself for more criticism. In a statement accompanying the disclosure, the Fed said it had fully protected taxpayers. “The Federal Reserve followed sound risk-management practices in administering all of these programs, incurred no credit losses on programs that have been wound down, and expects to incur no credit losses on the few remaining programs,” it said. The 21,000 transactions span the period from December 2007 to July 2010.
But American corporations were not the only beneficiaries of taxpayer dollars. From December 2007 to October 2008, the Fed opened swap lines with foreign central banks, allowing them to temporarily trade their currencies for dollars to relieve pressures in their financial markets. The European Central Bank drew the most heavily on these currency arrangements, the records show, but nine other central banks also made use of them: Australia, Denmark, England, Japan, Mexico, Norway, South Korea, Sweden and Switzerland.
At home, from March 2008 to May 2009, the Fed extended a cumulative total of nearly $9 trillion in short-term loans to 18 financial institutions under one of its credit programs. Previously, the Fed had only revealed that four financial firms had tapped the special lending program, and did not reveal their identities or the loan amounts.
The data appeared to confirm that Citigroup, Merrill Lynch and Morgan Stanley were under severe strain after the collapse of Lehman Brothers in September 2008. All three tapped the program on more than 100 occasions. The American subsidiaries of several foreign banks also benefited substantially from the program. Those institutions included UBS of Switzerland; Mizuho Securities of Japan; and BNP Paribas of France. The impaired credit markets quickly stretched well beyond Wall Street, engulfing money-market mutual funds and commercial paper — short-term borrowings that companies rely on for day-to-day operations like meeting payroll and paying vendors.
In short order, the Fed set up programs to prop up both markets and to get credit – the life blood of the economy – flowing again. The new data shows that some of the biggest names in the mutual fund industry sold assets to Fed-financed buyers during the credit crisis, including funds sponsored by Fidelity, BlackRock, Merrill, T. Rowe Price and Oppenheimer. In the first week of the Commercial Paper Funding Facility, the Fed bought more than $225 billion in debt. Companies ranging from Ohio’s Fifth Third Bank to the best-known bank franchises of Europe and Asia, like Royal Bank of Scotland and Sumitomo, were the primary occupants of the new lifeboat, along with the finance arms of the nation’s hard-pressed automakers. But joining them were issuers of commercial paper with ties to Caterpillar, McDonald’s and Verizon. Read more here…
Source: International Herald Tribune (NYTs Global)
