New Records Reveal Extent of Fed’s Reach During Financial Crisis
In the litany of books and hundreds of stories that have been written about the financial crisis, the Federal Reserve’s pivotal role in calming markets and restoring liquidity in the fall and winter of 2008 is well-documented. But what became even clearer Thursday in thousands of pages that were released is just how far and wide the Fed provided emergency assistance during the worst crisis since the Great Depression.
The latest data — nearly 900 files totaling 25,000 pages that were released on a CD — reveal which banks and financial institutions borrowed from the Fed’s “discount window” between August 2007 and March 2010 — and just how much.
The discount window is the oldest mechanism used by the Fed and other central banks for providing emergency loans to banks in need. The Fed itself refers to it as “a safety valve in relieving pressures” and that was certainly true in the weeks after the financial crisis reached its greatest panic. At one point in October 2008, the central bank loaned out more than $110 billion through the discount window.
It’s not the first time the Fed has revealed much of what it did.
In December, it was obligated to reveal how it had spread more than $3 trillion throughout the economy.
But for decades, the Fed has closely guarded the identities of institutions that borrowed from its discount window so as to allow those banks to avoid a stigma in the business world. In this case, the central bank was ordered by the Supreme Court and other federal courts to release data about the discount window. It came following lawsuits in connection with a Freedom of Information Act request filed more than two years ago by Bloomberg News and Fox Business Network.
Financial reporters are still combing through the thousands of pages as we type this — and will be for some time to come. But one picture that emerges is how some financial institutions that were in trouble were dependent on the Fed as a credit freeze locked down markets.
“It’s a reminder of just how much trouble WaMu was in before it got sold to JPMorgan,” says Wall Street Journal Economics Editor David Wessel, who closely follows the Fed and was working with a team of reporters Thursday.
If you browse some of the files (and if you’re brave enough to do so there’s a link in several Bloomberg stories on its website), you also will find that banks of every size approached the Fed for a loan after Lehman Brothers filed for bankruptcy on Sept. 15, 2008.
That day, as emergency lending topped $48 billion, Fed officials provided billions in loans to some big banks, such as $4 billion to the Bank of New York/Mellon — and loans as small as $1,000 to Glen Falls National Bank and Trust, which has 29 offices in upstate New York.
The data also show that the Fed provided emergency loans to European banks as the U.S. financial crisis impacted globally.
A case in point: European banks Dexia and Depfa borrowed more than $50 billion combined, the Journal and others reported.
“We knew somewhat in abstract that the Fed is the lender of last resort for the entire world,” says Wessel. “We see now that some European banks came right to the front door of the Fed….When people get really scared, they look to the U.S. to help them out. A German bank gets in trouble because they don’t have enough dollars and they go to the Fed who can create dollars.”
News organizations also found a multitude of revelations about the financial services sector at the time.
Bloomberg reported that Goldman Sachs tapped the discount window at least five times since September 2008, a seeming contradiction with what Goldman Sachs President Gary Cohn told the Financial Crisis Inquiry Commission this summer.
Bloomberg also reported that Bank of America used the discount window two more times in the summer of 2007 than previously disclosed.
The Wall Street Journal offered a list of some of the banks’ crisis-era borrowings.
- The New York Times documented the wide variety of loans that were made.
This evening, Sen. Bernie Sanders, a frequent critic of the Fed, found a connection to Libya. In a statement, Sanders asked why the Fed lent more than $3 billion during the crisis to the Arab Banking Corp, of which the Central Bank of Libya owns a 59 percent stake.
It was those kinds of revelations that led some to say it would make banks reluctant to approach the Fed. That was a point made Wednesday by Jamie Dimon, CEO of JPMorgan Chase.
But Wessel says it’s not clear cut how that will work. Under the Dodd-Frank financial reform law passed last year, the Fed will now release information about the discount window two years after the loans have been made.
“In an emergency, if you’re a bank, are you going to hesitate to go to the Fed because of what will come out in two years?” says Wessel. “Yet, we saw during the crisis, that they were reluctant to go to the discount window because of stigma associated with it.
“If it’s ordinary times and not a crisis, will it make things worse? If the answer is yes, then you can say there’s a good reason not to disclose it. But are they right? Does it really create a stigma? We need to think about the pluses and minuses of disclosure.”