MercoPress. South Atlantic News Agency

Document reveals magnitude and extent of 2007/2008 global financial crisis

The magnitude and extent of the 2007/2008 financial crisis and the liquidity mechanisms put to work, mainly the US Federal Reserve “discount window” has surfaced following disclosure this week in response to a Freedom of Information Act request. The following is a piece from Bloomberg’s which describes some of the surprises of those hectic days when the global financial system was on the edge of the cliff.

Federal Reserve Chairman Ben S Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.

Dexia SA, based in Brussels and Paris, borrowed as much as 33.5 billion through its New York branch from the Fed’s “discount window” lending program, according to Fed documents released this week in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew 24.5 billion US dollars.

The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70% of the 110.7 billion borrowed during the week in October 2008 when use of the program surged to a record. The disclosures may stoke a re-examination of the risks posed to U.S. taxpayers by the central bank’s’s role in global financial markets.

“The caricature of the Fed is that it was shovelling money to big New York banks and a bunch of foreigners, and that is not conducive to its long-run reputation,” said Vincent Reinhart, the Fed’s director of monetary affairs from 2001 to 2007.

Separate data disclosed in December on temporary emergency- lending programs set up by the Fed also showed big foreign banks as borrowers. Six European banks were among the top 11 companies that sold the most debt overall -- a combined 274.1 billion -- to the Commercial Paper Funding Facility.

Those programs also loaned hundreds of billions of dollars to the biggest US banks, including JP Morgan Chase & Co, Bank of America Corp, Citigroup Inc and Morgan Stanley.

The discount window, which began lending in 1914, is the Fed’s primary program for providing cash to banks to help them avert a liquidity squeeze. In an April 2009 speech, Bernanke said that revealing the names of discount-window borrowers “might lead market participants to infer weakness.”

The Fed released the documents after court orders upheld FOIA requests filed by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. In all, the Fed released more than 29,000 pages of documents, covering the discount window and several Fed emergency-lending programs established during the crisis from August 2007 to March 2010.

“The American people are going to be outraged when they understand what has been going on,” U.S. Representative Ron Paul, a Texas Republican who is chairman of the House subcommittee that oversees the Fed, said in a Bloomberg Television interview.

“What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas?” said Paul, who has advocated abolishing the Fed. “We have problems here at home with people not being able to pay their mortgages, and they’re losing their homes.”

David Skidmore, a Fed spokesman, declined to comment. Fed officials have said all the discount window loans made during the worst financial crisis since the 1930s have been repaid with interest.

The Monetary Control Act of 1980 says that a US branch or agency of a foreign bank that maintains reserves at a Fed bank may receive discount-window credit.

“Our job is to provide liquidity to keep the American economy going,” Richard W. Fisher, president of the Federal Reserve’s regional bank in Dallas, told reporters today. “The loans were all paid back and they were well-collateralized.”

Wachovia Corp. was the only U.S. bank among the top five discount-window borrowers as the crisis peaked.

The company, based in Charlotte, North Carolina, borrowed 29 billion from the discount window on Oct. 6, in the week after it almost collapsed, the data show. Wachovia agreed in principle to sell itself to Citigroup Inc. on Sept. 29, before announcing a definitive agreement to sell itself to Wells Fargo & Co on Oct. 3. The Wells Fargo deal closed at the end of 2008.

Wells Fargo spokeswoman Mary Eshet declined to comment on Wachovia’s discount-window borrowing.

Bank of Scotland Plc, which had 11 billion outstanding from the discount window on Oct. 29, 2008, was a unit of Edinburgh-based HBOS Plc, which announced its takeover by London-based Lloyds TSB Group Plc in September 2008.

The borrowings in 2008 didn’t involve Lloyds which hadn’t completed its acquisition of HBOS at the time, said Sara Evans, a spokeswoman for the company, which is now called Lloyds Banking Group Corp Plc.

“This is historic usage and on each occasion the borrowing was repaid at maturity,” Evans said. “The discount window has not been accessed by the group since.”

Other foreign discount-window borrowers on Oct. 29, 2008, included Societe Generale SA, France’s second-biggest bank; and Norinchukin Bank, which finances and provides services to Japanese agricultural, fishing and forestry cooperatives. Paris- based Societe Generale borrowed 5 billion that day, and Tokyo- based Norinchukin borrowed 6 billion.

Jim Galvin, a spokesman for Societe Generale, declined to comment.

“We used it in concert with Japanese and U.S. authorities in the purpose of contributing to the stabilization of the market,” said Fumiaki Tanaka, a spokesman at Norinchukin.

Bank of China, the country’s oldest bank, was the second- largest borrower from the Fed’s discount window during a nine- day period in August 2007 as sub-prime-mortgage defaults first roiled broader markets. The Chinese bank’s New York branch borrowed 198 million US dollars on Aug. 17 of that month.

“It was just routine borrowing,” said Dale Zhu, head of the Bank of China New York branch’s treasury.

Two Deutsche Bank AG divisions borrowed 1 billion USD each, according to a document released this week.

Arab Banking Corp., then 29% owned by the Libyan central bank, used its New York branch to get at least 73 loans from the Fed in the 18 months after Lehman Brothers Holdings Inc. collapsed. The largest single loan amount outstanding was 1.2 billion in July 2009, according to the Fed documents.

The foreign banks took advantage of Fed lending programs even as their host countries moved to prop them up or orchestrate takeovers.

Dexia received billions of euros in capital and funding guarantees from France, Belgium and Luxembourg during the credit crunch.

The Fed loans were “secured by high-quality US dollar municipal securities,” and used only to fund US loans, bonds and other financial assets, Ulrike Pommee, a spokeswoman for the company, said in an e-mail.

“The Fed played its role as central banker, providing liquidity to banks that needed it,” she said, adding that Dexia’s outstanding balance at the Fed has been reduced to zero. “This information is backward-looking.”

Depfa was taken over in October 2007 by Hypo Real Estate Holding AG, which in turn was seized by the German government in 2009.

“Since the end of May 2010, Depfa is not making use of the Federal Reserve Discount Window,” Oliver Gruss, a spokesman for the bank, said in an e-mailed statement. He declined to comment further.

Many foreign banks own large pools of dollar assets -- bonds, securities and loans -- funded by short-term borrowings in money markets. The system works when markets are calm, said Dino Kos, former executive vice president at the New York Fed in charge of open-market operations. In times of stress, banks can be subject to sudden liquidity squeezes, he said.

“They are playing with fire,” said Kos, a managing director at Hamiltonian Associates Ltd. in New York, an economic research firm. “When the market dries up, and they can’t roll over their funding -- bingo, you have a liquidity crisis.”

The potential for dollar shortages remains. As the Greek fiscal crisis roiled financial markets last year, the Fed had to open swap lines with the European Central Bank the Swiss National Bank, the Bank of England and two other central banks to make more dollars available around the world. That move was partially the result of U.S. money market funds shrinking their exposure to European bank commercial paper.