Banking giants leaned heavily on Fed in crisis

WASHINGTON Wed Dec 1, 2010 6:21pm EST

U.S. Federal Reserve Chairman Ben Bernanke (L) and Treasury Secretary Tim Geithner are pictured during the financial stability oversight council (FSOC) meeting at the Treasury Department in Washington, November 23, 2010. REUTERS/Jason Reed

U.S. Federal Reserve Chairman Ben Bernanke (L) and Treasury Secretary Tim Geithner are pictured during the financial stability oversight council (FSOC) meeting at the Treasury Department in Washington, November 23, 2010.

Credit: Reuters/Jason Reed

WASHINGTON (Reuters) - Goldman Sachs Group (GS.N) Citigroup (C.N) and other big U.S. banks repeatedly sought help from the Federal Reserve during the financial crisis, according to data on Wednesday that showed just how precarious their situation was at the time.

Many of the firms now boasting solid profits had to rely on funding from the U.S. central bank, which essentially acted as the glue holding the financial system together in the tumultuous months that followed the bankruptcy of Lehman Brothers in September 2008.

Citigroup, Morgan Stanley (MS.N) and Merrill Lynch, now part of Bank of America, were the three biggest recipients of the Fed's key emergency lending programs, according to a Reuters analysis of Fed data. Goldman Sachs was sixth on the list, contradicting claims from its top executives that the firm always had plenty of cash on hand.

"It appears the investment banks clearly needed the money," said Lawrence Glazer, managing director at Mayflower Advisors in Boston.

The Fed's disclosure of details of its $3.3 trillion in emergency lending, mandated by the Dodd-Frank financial reform bill enacted in July, showed Citigroup and Bank of America (BAC.N) leaning heavily on the U.S. central bank well into the spring of 2009.

It also indicated foreign financial institutions were big beneficiaries of the Fed's largess.

The U.S. central bank had fought efforts to pull back the veil on its secretive lending, and in the end Congress decided to demand only details of emergency programs, not past loans to commercial banks from the Fed's regular discount window.

Details on the Fed's loans of commercial paper -- short-term lending used to fund day-to-day business operations -- revealed a motley cast of characters: borrowers ranged from Korea and the German state of Bavaria to Verizon Communications (VZ.N) and Harley Davidson (HOG.N).

The results could reignite debate about whether some bailouts, such as the support for insurer AIG (AIG.N) and foreign banks, were appropriate. Still, U.S. stocks, which rallied on Wednesday on U.S. jobs and manufacturing data, greeted the release with a shrug.

"It will serve to remind folks that we were in a bad place and the Fed stepped in to help, but might also reopen some old political wounds," said John Cannally, economist at LPL Financial Boston. "It's interesting historical background but the market has largely moved on."

As the financial crisis that began in the summer of 2007 spread beyond the housing sector to the nation's biggest banks, the Fed, under the leadership of Chairman Ben Bernanke, devised increasingly complex facilities to help restore confidence.

Among these were loans to broker-dealers made outside the Fed's usual discount lending window for troubled institutions, which is reserved for deposit-taking commercial banks.


The Fed made more than 1,300 loans under the Primary Dealer Credit Facility, or PDCF, set up for broker-dealers, with the largest -- $47.9 billion -- going to London-based Barclays (BARC.L), the Fed's data showed. The facility marked the first time since the Great Depression that the Fed had lent to non-depository institutions.

Many banks tapped the facility after it was launched in the wake of investment bank Bear Stearns' collapse in March 2008 but borrowing dried up by late summer.

However, after Lehman Brothers filed for bankruptcy in September 2008, the Fed faced a crush of demand as financial markets froze and banks scrambled for cash. Barclays eventually bought what was left of Lehman.

Borrowing from the PDCF peaked that month at $156 billion, but Citigroup kept borrowing into late April 2009, while Bank of America took out its last loan in May 2009.

On a combined basis, Citigroup, Morgan Stanley, Merrill Lynch and Goldman Sachs accounted for more than a third of the total $14.8 trillion in loans extended, although loans outstanding at any one time were just a fraction of that amount.

Most of the Fed's broad array of loans have been fully repaid, although analysts say the central bank is still exposed to market risk through its purchases of long-term assets and its loans to financial companies Bear Stearns and AIG (AIG.N).

The asset purchases, which the Fed has used to support economic growth as opposed to specific institutions, will total $2.3 trillion when the latest round of bond buying ends.

"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," the central bank said in a statement.

Arguably, the Fed's most contentious and politically costly decision was the rescue of insurance giant American International Group. Criticism of the Fed grew after it emerged that AIG's counterparties were paid off with taxpayer funds.

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Comments (3)
microverses wrote:
Interesting, I don’t see anywhere here about the two trillion “loaned” out to undisclosed parties, outside of the TARP realm.

Bloomberg took the Fed to court over it.

The public should have known to whom and what amount the monopoly money was being distributed then in regard to this whole mess.

Dec 01, 2010 7:18am EST  --  Report as abuse
billyray1976 wrote:
I think the problem was that US investment firms and US rating agencies colluded together and gamed the system and then sold those gamed products to pension and gov’t retirement plans all over the world. When those imploded all these foreign governments would of all gone belly up if the FED did nothing to help them. So essentially they all blame the US for what these companies sold them. Even though the US gov’t never made a penny from any of those deals. Ahh it’s good to be a US taxpayer isn’t it??? You may notice some sarcasm there.

Dec 01, 2010 9:23am EST  --  Report as abuse
PetePleterson wrote:
(The following quote is from the BBC report:)
“Loans included $2.2trillion to Citigroup, $2.1tn to Merrill Lynch, $2tn to Morgan Stanley, and $1.1tn to Bank of America.”

Say there, Uncle Ben, my truck (literally) has over 300,000 miles. Do ya think ya can help me replace it?

Dec 02, 2010 11:07am EST  --  Report as abuse
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