Secrets Revealed: Fed Unveils Bank Loans Made During the Crisis

A massive cache of documents released by the Federal Reserve Thursday reveals that banks from every corner of the globe, large and small, turned to the U.S. government’s emergency bailout program for help as the credit crisis exploded in late 2008.

In addition to global banking giants such as Bank of New York Mellon (NYSE:BK) and Morgan Stanley (NYSE:MS), the documents show numerous, small regional banks tapped the Fed’s discount window, especially banks from areas hard hit by collapsing real estate markets, such as California.

Dexia, Erste Group and Depfa, were among the foreign banks that turned to the Fed as credit markets dried up and banks had no other alternative but to seek U.S. government bailout dollars.

Other big foreign borrowers were Norinchukin Bank of Japan, Bank of Scotland, and Germany’s Landesbank Baden-Wurttemberg and France’s Societe Generale.

The Fed released the trove of information after a lengthy court battle initiated by media outlets including FOX Business, which sought the data under the Freedom of Information Act.

In 2008, as the financial crisis was gaining steam and many banks were bleeding money as a result of vast investments in toxic subprime loans, the U.S. government agreed to a series of emergency measures designed to bail out faltering banks by providing loans through the Fed’s discount window, often referred to as the lender of last resort.

According to the documents released Thursday, the peak for lending was Oct. 29, 2008, with $111 billion in discount-window borrowing. About $50 billion of that day went to Dexia and Depfa.

FOX Business initially sought information on the use of the bailout funds for American International Group (NYSE:AIG) and the Bank of New York Mellon, and later sought similar data on the bailout funds for Citigroup Inc (NYSE:C).

FOX Business asked the Treasury Department to identify, among other issues, the troubled assets purchased by the government, any collateral extended by the banks, and any restrictions placed on these financial institutions for their participation in this program.

But the Fed refused to name banks that borrowed funds through the discount window or provide any other information related to the emergency programs for fear there would be a run on banks tied to bailouts.

FOX Business and Bloomberg News subsequently argued in lawsuits that the public had a right to know where the money went and how much was borrowed.

Sifting through the documents one broad theme emerges: all the large banks used the discount window to some extent, though the use of this so-called lender of last resort was generally a small part of their total emergency borrowing through other Fed programs. Goldman Sachs, for instance, tapped the window for $50 million, a tiny amount for a firm that size.

In some cases, the documents reveal a bank failure occurring in real time. Washington Mutual, for instance, started borrowing from the discount window on Sept. 18, 2008, with an initial loan of $2 billion. But it then borrowed another $2 billion every night until Sept. 25, when JPMorgan bought it.

Discussing the rationale for withholding the information, Jay Ritter, a finance professor at the University of Florida, said the Fed in late 2008, as it was lending money to desperate banks, feared “a self-fulfilling prophecy.”

“The Fed was legitimately concerned if it revealed which banks were having trouble it would become a self-fulfilling prophecy and a death-knell for those banks,” he said.

In effect, he said, if investors or depositors think there’s going to be a bank run the chances are good there will be a bank run.

On the other hand, the secrecy surrounding the Fed’s discount window flies in the face of other U.S. securities laws, namely the Securities and Exchange Commission’s “mandate that all material information should be disclosed to investors for publicly traded corporations,” said Ritter.

The FOIA complaint was filed by FOX News Network, LLC, as owner of FOX Business.

Kevin Magee, Executive Vice President of FOX Business Network, said at the time, “The Treasury has repeatedly ignored our requests for information on how the government is allocating money to these troubled institutions. In a critical time like this amidst mounting corruption and an economic crisis, we as a news organization feel it’s more important than ever to hold the government accountable.”

In early 2009, a federal judge ordered the release of some documents from Treasury. Much of the information contained in the documents was redacted, leaving thousands of blank documents, whited-out sentences and page after page of little more than lists of email recipients, senders and subject lines.

Meanwhile, Treasury was still able to file what’s known as a Vaughan index, which allowed it to hold back some information. Citing attorney-client privilege, the government held back a lot. That’s the material now being released.

Courts have repeatedly ruled in favor of FOX Business. In separate rulings, federal judges said Congress rather than the Fed should decide whether withholding the information best serves the national interest.

Despite the court victories, release of the material provided on Thursday had been held up on appeal. Specifically, a trade group called the Clearing House Association [CHA], which represents some of the biggest U.S. banks, had sought recently to have the case heard by the Supreme Court.

The CHA argued in its court filing that the Fed has never revealed the identities of borrowers from its discount window, the lending facility where banks get short-term funding and the source of the 2008 emergency loans.

But the Supreme Court ruled last week that it would not hear the case, forcing the release of the information by the Fed. The Fed, essentially conceding the battle to the media outlets, did not join the appeal by the CHA.

In an unrelated FOIA battle, FOX Business fought successfully last year for the repeal of a measure included in the recent financial reform bill that made it easier for the Securities and Exchange Commission to withhold information from the public. President Obama repealed the controversial provision in October following bi-partisan criticism of its inclusion in the Dodd-Frank Wall Street reform bill.

While that same bill has forced the Fed to increase its transparency, one area had been isolated for continued secrecy – the Fed discount window. Thursday’s release gives the public access to that information.

Steven G. Mintz, who has argued several FOIA cases on behalf of Fox Business, said earlier this week in response to the Fed’s release of the material, “It’s been a long time coming. I am very pleased that the American public will finally be able to learn who borrowed money from the Fed discount window during the financial crisis.”