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April 5, 2011 > Fed names banks that drew loans during crisis

Fed names banks that drew loans during crisis

By Jeannine Aversa and Derek Kravitz, AP Economics Writers

WASHINGTON (AP), Mar 31 - For the first time in its 98-year history, the Federal Reserve on Thursday identified banks that borrowed from its oldest lending program.

The Fed was compelled to name the banks that drew emergency loans during the financial crisis after the Supreme Court rejected a bid by major banks to keep that information secret. It's the latest sign of how the Fed is becoming more transparent - either by choice or by force.

The central bank lent up to $110 billion through its emergency ``discount window'' at the height of the crisis. After Lehman Brothers collapsed in September 2008, banks turned to the Fed as a lender of last resort because their credit had frozen up. The Fed argued then that naming those banks could have stirred a panic, leading to a run on those banks and defeating the program's purpose.

The documents released Thursday showed that a range of large and small institutions borrowed from the program from August 2007 through March 2010.

Most of the lending took place in the two-month stretch between September and October 2008. The specific program that the banks drew from has been redacted from the documents, but the data points to most of the loans being through the ``discount window.'' In many cases, those loans were paid back the following day.

Some of the biggest loans were drawn by the nation's largest banks. For example, U.S. Bank took out an overnight loan of $3.35 billion on Sept. 10, Wachovia borrowed $29 billion on Oct. 6, and Morgan Stanley drew more than $3 billion on Oct. 9.

But foreign banks also relied heavily on the emergency lending program. On one day in late October, Dexia, a Belgian-based European bank, and Depfa, a German subsidiary headquartered in Dublin, each drew about $25 billion in overnight loans. That represented about half of the money that was borrowed by 44 banks that day.

The documents also show that the Arab Banking Corporation took out loans from the discount window during the financial crisis. The central bank of Libya owns a large stake in that bank, according to the bank's web site.

Smaller institutions also drew from the discount window. The Bank of Yazoo City in Mississippi averaged $11.7 million in borrowing in September 2008, $15.2 million in October, and $11 million in November.

Griffin Norquist, president and CEO of the Bank of Yazoo City, said the figures are comparable with loans drawn in other years. But he acknowledged the climate in 2008 was quite different.

``A collapsed Lehman Brothers is just not something a person with a $250 million bank expects to pick up the paper and read about,'' said Norquist. ``When the big tree falls, it will hurt the little tree.''

The Fed's emergency lending program couldn't help every bank survive. Washington Mutual Bank took out short-term, mostly overnight loans in the week leading up to its failure, the largest of any U.S. bank in history.

One day before collapsing, Washington Mutual took out a $2 billion overnight loan, the documents show. It took out another one-day $2 billion loan the next day. JPMorgan Chase ended up buying the bank.

``It's a huge cultural shock for the Fed to have to make disclosures about its lending,'' said Mark Williams, a former Fed bank examiner, who now teaches at Boston University. ``The Fed needed to step into the 21st Century.''

Few loans are being made now because most banks are in much better health. And both the financial industry and the economy have strengthened.

Bloomberg L.P. had sued the Fed, seeking details about the Fed's discount window lending as well as other Fed loans made during the crisis. A similar lawsuit was later filed by News Corp.'s Fox News Network LLC. Other news organizations, including The Associated Press, filed legal briefs in support.

The Fed had said that some of the information being sought was made public in December. At that time, the Fed revealed details about its crisis lending - except those involving commercial banks that borrowed from the discount window.

Most of the Fed's crisis-era lending - more than $3 trillion - came through those other programs. Fed documents showed it gave trillions in emergency aid to U.S. and foreign banks as well as other companies. The disclosures were required under the financial overhaul law enacted last year.

Under the new law, the Fed beginning in late 2012 must provide information on any commercial banks that draw emergency loans from its discount window. Those details will remain secret, though, for about two years after the borrowing occurs.

A number of lawmakers, led by Vermont Independent Sen. Bernie Sanders, pushed to open up the Fed after complaining that it had operated in secret for most of its history.

Sanders on Thursday called the Fed discount-window lending ``welfare for the rich and powerful.'' He said the disclosures are ``lifting another veil of secrecy at the Fed.

The Fed had earned a reputation for being one of the most mysterious institutions in Washington. It wasn't until 1994 that the Fed started to release a statement when it changed its key interest rate. Federal Reserve Chairman Alan Greenspan, who ran the central bank for 18-plus year, was famous for being inscrutable.

Chairman Ben Bernanke promised changes when he took over in 2006, and he made a few early on. But the criticism intensified two years into his tenure. Many Americans were angered by the Fed's role in bailing out Wall Street. And lawmakers in recent months have questioned Bernanke's decision to launch a second round of Treasury bond buying, worried that it will unleash inflation.

Bernanke and his colleagues appeared to take note. Last fall, they held an unusual videoconference, in part to discuss ways to improve communications with the public.

And last week, the Fed took an unprecedented step toward answering its critics. It announced that Bernanke would start holding news conferences four times a year. Bernanke's first will be April 27.

A news conference gives Bernanke an opportunity to control the Fed's message. But it could also backfire.

There are already disagreements within the Fed about record-low interest rates and its $600 billion Treasury bond-purchase program.

``The laundry is going to be a little more public now. Bernanke runs the risk of creating confusion, especially if the inflation hawks on the Fed become more vocal,'' said Ken Thomas, a lecturer in finance at the University of Pennsylvania's Wharton School.

``The move toward greater openness has got to be painful for the Fed,'' Thomas said. ``This is an institution that has been shrouded in secrecy for decades, and all of a sudden it is having to make disclosures about lending, and Bernanke will be holding press conferences.''

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AP Business Writer Eileen AJ Connelly contributed from New York to this report.

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