Information just released under the Freedom of Information Act (FOIA), as ordered by the Supreme Court reveals that in the worst days of the banking crisis, the Federal Reserve continued to loan billions to foreign banks during a period known as “discount-window borrowing.” This is the first time the Fed has been forced to release these records.
Given the prominent role the world’s biggest banks played in causing financial losses worldwide, largely because of what investors didn’t know or didn’t understand, some say the loans should be made public at once…
Under the new Dodd-Frank financial reform law, all loans made under the “discount window” must be revealed within two days. We’ll see how that works out. Chris and Barney undoubtedly left a loophole somewhere.
The Federal Reserve says the new law undermines it’s core function of “preserving market confidence by acting as a lender of last restort.”
Publicizing the names of discount-window borrowers could spark bank runs or discourage sick banks from seeking help until they are fatally compromised. “The full monty may not be a good thing,” says Frederic Mishkin, a former Fed governor.
Because borrowing under the “discount program” is seen as a stigma on borrowers, the Fed fixed that problem in 2003 by no longer requiring a bank to prove it’s inability to raise private funds.
The U.S. Supreme Court upheld lower court findings that the Federal Reserve must reveal those feeding at the trough of U.S. lending, however, they are not forced to reveal how each of the loans, which have been repaid, were collateralized. The lack of transparency leads to the next logical thought process: the loans were not “well-collateralized” as the Federal Reserve has claimed.
In September 2008 when the news of the financial crisis came crashing down on unsuspecting Americans, liquidity dried up and there was no money to be had, unless you fit a certain profile, including being a foreign country’s central bank. In one week in October, $110 Billion was loaned. Three-fourths of that went to foreign banks. From MarketPlace American Public Media:
Big mainstream lenders like British banks Barclays and Royal Bank of Scotland, the French bank Societe Generale. But some pretty odd cattle too. A Belgium bank that specializes in lending to local government in Belgium. They borrowed a total of $33.5 billion. Then there’s the Norinchukin Bank which provides financial services to Japanese fishermen. And my particular favorite, the Arab Banking Corporation which is part-owned by the central bank of Libya.
MarketPlace reports that all of the above loan were repaid in full.
The disclosures include loans made by the Fed from August 2007 to March 2010. The period includes the darkest moments of the crisis, including the September 2008 collapse of Lehman Brothers Holdings Inc. Lehman’s weekend tumble into bankruptcy ushered in unprecedented U.S. intervention to prop up the teetering financial markets and deepened the panic already spreading through banks and securities firms around the world.
When discount-window lending peaked at $110 billion on Oct. 29, 2008, European banks DexiaSA and Depfa were the biggest borrowers. Dexia took $26.5 billion that day, while Depfa Bank, a subsidiary of German Hypo Real Estate Group, took out $24.6 billion. In the following weeks, the banks accessed the discount window nearly daily for tens of billions of dollars.
During the time period, the Central Bank of Libya borrowed $10 million in September 2008 and “hundreds of millions of dollars through 2009.” The Memorandum thread is growing.
Federal Reserve Loans to Foreign Banks in Peak Crisis Period (video)