WASHINGTON (Reuters) - European banks Dexia and Depfa made some of the worst possible business decisions, including forays into bond insurance, and were forced to repeatedly ask the Federal Reserve for emergency loans at the height of the financial crisis.
According to Fed data released on Thursday, loans to the two foreign banks accounted for nearly half of all borrowing on October 29, 2008, the day that central bank’s discount window lending peaked at $111 billion.
Franco-Belgian Dexia and Dublin-based Depfa, a subsidiary of German-based Hypo Real Estate, continued to tap the Fed’s emergency facilities for billions of dollars in short-term loans weeks after they were bailed out by the European governments in the fall of 2008.
At the time, Dexia was the world’s largest lender to municipalities and owned a U.S. bond insurance subsidiary, Financial Security Assurance, which guaranteed riskier securities linked to subprime mortgages.
Short-term financing problems at Depfa, which also specialized in government and infrastructure lending, forced its parent, Hypo Real Estate, to seek help from the German government.
Both Dexia and Depfa borrowed at short-term rates to finance long-term lending and ran into problems when credit markets froze.
Dexia even had exposure to Bernard Madoff’s $65 billion investment fraud, though that was indirectly through partially collateralized lending operations to funds that were exposed to Madoff investments.
Dexia has since sold its bond insurer to Assured Guaranty Ltd.
Reporting by Rachelle Younglai; Editing by Padraic Cassidy