Foreign banks tapped secret Fed loans

WASHINGTON - Federal Reserve Chairman Ben Bernanke's two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.

Dexia, based in Brussels, Belgium, and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed's "discount window" lending program, according to Fed documents released Thursday in response to a Freedom of Information Act request.

Dublin, Ireland-based Depfa Bank, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion.


The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008, when use of the program surged to a record. The disclosures may stoke a re-examination of the risks posed to U.S. taxpayers by the central bank's role in global financial markets.

"The caricature of the Fed is that it was shoveling money to big New York banks and a bunch of foreigners, and that is not conducive to its long-run reputation," said Vincent Reinhart, the Fed's director of monetary affairs from 2001 to 2007.

Separate data disclosed in December on temporary emergency-lending programs set up by the Fed also showed big foreign banks as borrowers. Six European banks were among the top 11 companies that sold the most debt overall - a combined $274.1 billion - to the Commercial Paper Funding Facility.

Those programs also lent tens of billions of dollars to each of the biggest U.S. banks, including JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley.

The discount window, which began lending in 1914, is the Fed's primary program for providing cash to banks to help them avert a liquidity squeeze. In an April 2009 speech, Bernanke said that revealing the names of discount-window borrowers "might lead market participants to infer weakness."

The Fed released the documents after court orders upheld FOIA requests filed by Bloomberg LP, parent company of Bloomberg News, and News Corp.'s Fox News Network.

In all, the Fed was ordered to release more than 29,000 pages of documents, covering the discount window and several Fed emergency-lending programs established during the crisis from August 2007 to March 2010.

"The American people are going to be outraged when they understand what has been going on," Rep. Ron Paul, a Texas Republican who is chairman of the House subcommittee that oversees the Fed, said in a Bloomberg Television interview.

"What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas?" said Paul, who has advocated abolishing the Fed. "We have problems here at home with people not being able to pay their mortgages, and they're losing their homes."

The Monetary Control Act of 1980 says that a U.S. branch or agency of a foreign bank that maintains reserves at a Fed bank can receive discount-window credit.

David Skidmore, a Fed spokesman, declined to comment.

Wachovia Corp. was the only U.S. bank among the top five discount-window borrowers as the crisis peaked.

The Charlotte, N.C.-based bank borrowed $29 billion from the discount window on Oct. 6, in the week after it nearly collapsed, the data show. Wachovia agreed in principle to sell itself to Citigroup Inc. on Sept. 29, before announcing a definitive agreement to sell itself to Wells Fargo on Oct. 3. The Wells Fargo deal closed at the end of 2008.

Wells Fargo spokeswoman Mary Eshet declined to comment on Wachovia's discount-window borrowing.

Bank of Scotland, which had $11 billion outstanding from the discount window on Oct. 29, 2008, was a unit of Edinburgh-based HBOS, which announced its takeover by London-based Lloyds TSB Group in September 2008.

The borrowings in 2008 didn't involve Lloyds, which hadn't completed its acquisition of HBOS at the time, said Sara Evans, a spokeswoman for the company, which is now called Lloyds Banking Group.

"This is historic usage, and on each occasion, the borrowing was repaid at maturity," Evans said. "The discount window has not been accessed by the group since."

Other foreign discount-window borrowers on Oct. 29, 2008, included Societe Generale, France's second-biggest bank; and Norinchukin Bank, which finances and provides services to Japanese agricultural, fishing and forestry cooperatives. Paris-based Societe Generale borrowed $5 billion that day, and Tokyo-based Norinchukin borrowed $6 billion.

"We used it in concert with Japanese and U.S. authorities in the purpose of contributing to the stabilization of the market," said Fumiaki Tanaka, a spokesman at Norinchukin.

Bank of China, the country's oldest bank, was the second- largest borrower from the Fed's discount window during a nine-day period in August 2007 as subprime-mortgage defaults first roiled broader markets.

The Chinese bank's New York branch borrowed $198 million on Aug. 17 of that month, while two Deutsche Bank divisions borrowed $1 billion each, according to a document released Thursday.

Arab Banking Corp., then 29 percent-owned by the Libyan central bank, used its New York branch to borrow at least $1.1 billion from the discount window in October 2008.

The foreign banks took advantage of Fed lending programs even as their host countries moved to prop them up or orchestrate takeovers.

Dexia received billions of euros in capital and funding guarantees from France, Belgium and Luxembourg during the credit crunch. Dexia's outstanding balance at the Fed has been reduced to zero, Ulrike Pommee, a spokeswoman for the company, said in an e-mail.

"This information is backward-looking," she said.

by Bradley Keoun and Craig Torres Bloomberg News Apr. 2, 2011 12:00 AM





Foreign banks tapped secret Fed loans