by Bradley Keoun and Phil Kuntz
August 22, 2011
To contact the reporters on this story: Bradley Keoun in New York at firstname.lastname@example.org;
Phil Kuntz in New York at Pkuntz1@bloomberg.net.
To contact the editor responsible for this story: David Scheer in New York
Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning
champions of finance in 2006 as home prices peaked, leading the 10 biggest
U.S. banks and brokerage firms to their best year ever with $104 billion of
By 2008, the housing market’s collapse forced those companies to take more
than six times as much, $669 billion, in emergency loans from the U.S.
Federal Reserve. The loans dwarfed the $160 billion in public bailouts the
top 10 got from the U.S. Treasury, yet until now the full amounts have
Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from
plunging into depression included lending banks and other companies as much
as $1.2 trillion of public money, about the same amount U.S. homeowners
currently owe on 6.5 million delinquent and foreclosed mortgages.
largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while
Citigroup took $99.5 billion and Bank of America $91.4 billion, according to
a Bloomberg News compilation of data obtained through Freedom of Information
Act requests, months of litigation and an act of Congress.
“These are all whopping numbers,” said Robert Litan, a former Justice
Department official who in the 1990s served on a commission probing the
causes of the
savings and loan crisis.
“You’re talking about the aristocracy
of American finance going down the tubes without the federal money.”
(View the Bloomberg
interactive graphic to chart the Fed’s financial
It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers,
measured by peak balances, were European firms.
Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the
most of any non-U.S. lender
Zurich-based UBS AG (UBSN), which got $77.2
Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an
average of $21 million for each of its 1,366 employees
The largest borrowers also included Dexia SA (DEXB), Belgium’s biggest bank
by assets, and Societe Generale SA, based in Paris, whose bond-insurance
prices have surged in the past month as investors speculated that the
spreading sovereign debt crisis in Europe might increase their chances of
The $1.2 trillion peak on Dec. 5, 2008 - the combined outstanding balance
under the seven programs tallied by Bloomberg - was almost three times the
size of the U.S. federal budget deficit that year and more than the total
earnings of all federally insured banks in the U.S. for the decade through
2010, according to data compiled by Bloomberg.
The balance was more than 25 times the Fed’s pre-crisis lending peak of $46
billion on Sept. 12, 2001, the day after
terrorists attacked the World Trade
Center in New York and the Pentagon.
Denominated in $1 bills, the $1.2
trillion would fill 539 Olympic-size swimming pools.
The Fed has said it had “no credit losses” on any of the emergency programs,
and a report by Federal Reserve Bank of New York staffers in February said
the central bank netted $13 billion in interest and fee income from the
programs from August 2007 through December 2009.
“We designed our broad-based emergency programs to both effectively stem the
crisis and minimize the financial risks to the U.S. taxpayer,” said James
Clouse, deputy director of the Fed’s division of monetary affairs in
“Nearly all of our emergency-lending programs have been closed.
We have incurred no losses and expect no losses.”
While the 18-month U.S. recession that ended in June 2009 after a 5.1
percent contraction in gross domestic product was nowhere near the
four-year, 27 percent decline between August 1929 and March 1933, banks and
the economy remain stressed.
Odds of Recession
The odds of another recession have climbed during the past six months,
according to five of nine economists on the Business Cycle Dating Committee
National Bureau of Economic Research, an academic panel that dates
Bank of America’s bond-insurance prices last week surged to a rate of
$342,040 a year for coverage on $10 million of debt, above where Lehman
Brothers Holdings Inc. (LEHMQ)’s bond insurance was priced at the start of
the week before the firm collapsed.
Citigroup’s shares are trading below the
split-adjusted price of $28 that they hit on the day the bank’s Fed loans
peaked in January 2009. The U.S. unemployment rate was at 9.1 percent in
July, compared with 4.7 percent in November 2007, before the recession
Homeowners are more than 30 days past due on their mortgage payments on 4.38
million properties in the U.S., and 2.16 million more properties are in
foreclosure, representing a combined $1.27 trillion of unpaid principal,
estimates Jacksonville, Florida-based Lender Processing Services Inc.
“Why in hell does the Federal Reserve seem to be able to find the way to
help these entities that are gigantic?” U.S. Representative Walter B. Jones,
a Republican from North Carolina, said at a June 1 congressional hearing in
Washington on Fed lending disclosure.
“They get help when the average
businessperson down in eastern North Carolina, and probably across America,
they can’t even go to a bank they’ve been banking with for 15 or 20 years
and get a loan.”
The sheer size of the Fed loans bolsters the case for minimum liquidity
requirements that global regulators last year agreed to impose on banks for
the first time, said Litan, now a vice president at the Kansas City,
Kauffman Foundation, which supports entrepreneurship
Liquidity refers to the daily funds a bank needs to operate,
including cash to cover depositor withdrawals.
The rules, which mandate that banks keep enough cash and easily liquidated
assets on hand to survive a 30-day crisis, don’t take effect until 2015.
Another proposed requirement for lenders to keep “stable funding” for a
one-year horizon was postponed until at least 2018 after banks showed they’d
have to raise as much as $6 trillion in new long-term debt to comply.
Regulators are “not going to go far enough to prevent this from happening
again,” said Kenneth Rogoff, a former chief economist at the International
Monetary Fund and now an
economics professor at Harvard University.
Reforms undertaken since the crisis might not insulate U.S. markets and
financial institutions from the sovereign budget and debt crises facing
Greece, Ireland and Portugal, according to the U.S. Financial Stability
Oversight Council, a 10-member body created by the Dodd-Frank Act and led by
Treasury Secretary Timothy Geithner.
“The recent financial crisis provides a stark illustration of how quickly
confidence can erode and financial contagion can spread,” the council said
in its July 26 report.
Any new rescues by the U.S. central bank would be governed by transparency
laws adopted in 2010 that require the Fed to disclose borrowers after two
Fed officials argued for more than two years that releasing the identities
of borrowers and the terms of their loans would stigmatize banks, damaging
stock prices or leading to depositor runs. A group of the biggest commercial
banks last year asked the U.S. Supreme Court to keep at least some Fed
borrowings secret. In March, the high court declined to hear that appeal,
and the central bank made an unprecedented release of records.
Data gleaned from 29,346 pages of documents obtained under the Freedom of
Information Act and from other Fed databases of more than 21,000
transactions make clear for the first time how deeply the world’s largest
banks depended on the U.S. central bank to stave off cash shortfalls.
as the firms asserted in news releases or earnings calls that they had ample
cash, they drew Fed funding in secret, avoiding the stigma of weakness.
Morgan Stanley Borrowing
Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley
countered concerns that it might be next to go by announcing it had “strong
capital and liquidity positions.”
The statement, in a Sept. 29, 2008, press
release about a $9 billion investment from Tokyo-based Mitsubishi UFJ
Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.
That was the same day as the firm’s $107.3 billion peak in borrowing from
the central bank, which was the source of almost all of Morgan Stanley’s
available cash, according to the lending data and documents released more
than two years later by the Financial Crisis Inquiry Commission. The amount
was almost three times the company’s total profits over the past decade,
data compiled by Bloomberg show.
Mark Lake, a spokesman for New York-based Morgan Stanley, said the crisis
caused the industry to “fundamentally re- evaluate” the way it manages its
“We have taken the lessons we learned from that period and applied them to
our liquidity-management program to protect both our franchise and our
clients going forward,” Lake said.
He declined to say what changes the bank
In most cases, the Fed demanded collateral for its loans - Treasuries or
corporate bonds and mortgage bonds that could be seized and sold if the
money wasn’t repaid.
That meant the central bank’s main risk was that
collateral pledged by banks that collapsed would be worth less than the
As the crisis deepened, the Fed relaxed its standards for acceptable
collateral. Typically, the central bank accepts only bonds with the highest
credit grades, such as U.S. Treasuries. By late 2008, it was accepting
“junk” bonds, those rated below investment grade. It even took stocks, which
are first to get wiped out in a liquidation.
Morgan Stanley borrowed $61.3 billion from one Fed program in September
2008, pledging a total of $66.5 billion of collateral, according to Fed
documents. Securities pledged included $21.5 billion of stocks, $6.68
billion of bonds with a junk credit rating and $19.5 billion of assets with
an “unknown rating,” according to the documents.
About 25 percent of the
collateral was foreign-denominated.
‘Willingness to Lend’
“What you’re looking at is a willingness to lend against just about
anything,” said Robert Eisenbeis, a former research director at the Federal
Reserve Bank of Atlanta and now chief monetary economist in Atlanta for
Sarasota, Florida-based Cumberland Advisors Inc.
The lack of private-market alternatives for lending shows how skeptical
trading partners and depositors were about the value of the banks’ capital
and collateral, Eisenbeis said.
“The markets were just plain shut,” said Tanya Azarchs, former head of bank
research at Standard & Poor’s and now an independent consultant in
Briarcliff Manor, New York.
“If you needed liquidity, there was only one
place to go.”
Even banks that survived the crisis without government capital injections
tapped the Fed through programs that promised confidentiality. London-based
Barclays Plc (BARC) borrowed $64.9 billion and Frankfurt-based Deutsche Bank
AG (DBK) got $66 billion.
Sarah MacDonald, a spokeswoman for Barclays, and
John Gallagher, a spokesman for Deutsche Bank, declined to comment.
While the Fed’s last-resort lending programs generally charge above-market
interest rates to deter routine borrowing, that practice sometimes flipped
during the crisis.
On Oct. 20, 2008, for example, the central bank agreed to
make $113.3 billion of 28-day loans through its
Term Auction Facility at a
rate of 1.1 percent, according to a
press release at the time.
The rate was less than a third of the 3.8 percent that banks were charging
each other to make one-month loans on that day. Bank of America and Wachovia
Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal
Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.
JPMorgan Chase & Co. (JPM), the New York-based lender that touted its
“fortress balance sheet” at least 16 times in press releases and conference
calls from October 2007 through February 2010, took as much as $48 billion
in February 2009 from TAF.
The facility, set up in December 2007, was a
temporary alternative to the discount window, the central bank’s 97-year-old
primary lending program to help banks in a cash squeeze.
‘Larger Than TARP’
Goldman Sachs Group Inc. (GS), which in 2007 was the most profitable
securities firm in Wall Street history, borrowed $69 billion from the Fed on
Dec. 31, 2008.
Among the programs New York-based Goldman Sachs tapped after
the Lehman bankruptcy was the Primary Dealer Credit Facility, or PDCF,
designed to lend money to brokerage firms ineligible for the Fed’s
Michael Duvally, a spokesman for Goldman Sachs, declined to comment.
The Fed’s liquidity lifelines may increase the chances that banks engage in
excessive risk-taking with borrowed money, Rogoff said. Such a phenomenon,
known as moral hazard, occurs if banks assume the Fed will be there when
they need it, he said.
The size of bank borrowings,
“certainly shows the Fed
bailout was in many ways much larger than TARP,” Rogoff said.
TARP is the Treasury Department’s Troubled Asset Relief Program, a $700
billion bank-bailout fund that provided capital injections of $45 billion
each to Citigroup and Bank of America, and $10 billion to Morgan Stanley.
Because most of the Treasury’s investments were made in the form of
preferred stock, they were considered riskier than the Fed’s loans, a type
of senior debt.
In December, in response to the
Dodd-Frank Act, the Fed released 18
databases detailing its temporary emergency-lending programs.
Congress required the disclosure after the Fed rejected requests in 2008
from the late Bloomberg News reporter Mark Pittman and other media companies
that sought details of its loans under the Freedom of Information Act. After
fighting to keep the data secret, the central bank released unprecedented
information about its discount window and other programs under court order
in March 2011.
Bloomberg News combined Fed databases made available in December and July
with the discount-window records released in March to produce daily totals
for banks across all the programs, including the,
The programs supplied loans from
August 2007 through April 2010.
The result is a timeline illustrating how the credit crisis rolled from one
bank to another as financial contagion spread.
Fed borrowings by Societe Generale (GLE), France’s second-biggest bank,
peaked at $17.4 billion in May 2008, four months after the Paris-based
lender announced a record 4.9 billion-euro ($7.2 billion) loss on
unauthorized stock-index futures bets by former trader Jerome Kerviel.
Morgan Stanley’s top borrowing came four months later, after Lehman’s
bankruptcy. Citigroup crested in January 2009, as did 43 other banks, the
largest number of peak borrowings for any month during the crisis. Bank of
America’s heaviest borrowings came two months after that.
Sixteen banks, including Plano, Texas-based Beal Financial Corp. and
Jacksonville, Florida-based EverBank Financial Corp., didn’t hit their peaks
until February or March 2010.
“At no point was there a material risk to the Fed or the taxpayer, as the
loan required collateralization,” said Reshma Fernandes, a spokeswoman for
EverBank, which borrowed as much as $250 million.
Banks maximized their borrowings by using subsidiaries to tap Fed programs
at the same time.
In March 2009, Charlotte, North Carolina-based Bank of
America drew $78 billion from one facility through two banking units and
$11.8 billion more from two other programs through its broker-dealer, Bank
of America Securities LLC.
Banks also shifted balances among Fed programs. Many preferred the TAF
because it carried less of the stigma associated with the discount window,
often seen as the last resort for lenders in distress, according to a
January 2011 paper by researchers at the New York Fed.
After the Lehman bankruptcy, hedge funds began pulling their cash out of
Morgan Stanley, fearing it might be the next to collapse, the Financial
Crisis Inquiry Commission said in a
January report, citing interviews with
former Chief Executive Officer John Mack and then-Treasurer David Wong.
Morgan Stanley’s borrowings from
the PDCF surged to $61.3 billion on Sept.
29 from zero on Sept. 14. At the same time, its loans from the Term
Securities Lending Facility, or TSLF, rose to $36 billion from $3.5 billion.
Morgan Stanley treasury reports released by the FCIC show the firm had $99.8
billion of liquidity on Sept. 29, a figure that included Fed borrowings.
“The cash flow was all drying up,” said Roger Lister, a former Fed economist
who’s now head of financial-institutions coverage at credit-rating firm
Inc. in New York. “Did they have enough resources to cope with it? The
answer would be yes, but they needed the Fed.”
While Morgan Stanley’s Fed demands were the most acute, Citigroup was the
most chronic borrower among the largest U.S. banks.
The New York-based
company borrowed $10 million from the TAF on the program’s first day in
December 2007 and had more than $25 billion outstanding under all programs
by May 2008, according to Bloomberg data.
Tapping Six Programs
By Nov. 21, when Citigroup began talks with the government to get a $20
billion capital injection on top of the $25 billion received a month
earlier, its Fed borrowings had doubled to about $50 billion.
Over the next two months the amount almost doubled again. On Jan. 20, as the
stock sank below $3 for the first time in 16 years amid investor concerns
that the lender’s capital cushion might be inadequate, Citigroup was tapping
six Fed programs at once. Its total borrowings amounted to more than twice
the federal Department of Education’s 2011 budget.
Citigroup was in debt to the Fed on seven out of every 10 days from August
2007 through April 2010, the most frequent U.S. borrower among the 100
biggest publicly traded firms by pre- crisis market valuation.
the bank had a daily balance at the Fed of almost $20 billion.
‘Help Motivate Others’
“Citibank basically was sustained by the Fed for a very long time,” said
Richard Herring, a finance professor at the University of Pennsylvania in
Philadelphia who has
studied financial crises.
Jon Diat, a Citigroup spokesman, said the bank made use of programs that,
“achieved the goal of instilling confidence in the markets.”
JPMorgan CEO Jamie Dimon said in a
letter to shareholders last year that his
bank avoided many government programs. It did use TAF, Dimon said in the
“but this was done at the request of the Federal Reserve to help
motivate others to use the system.”
The bank, the second-largest in the U.S. by assets, first tapped the TAF in
May 2008, six months after the program debuted, and then zeroed out its
borrowings in September 2008. The next month, it started using TAF again.
On Feb. 26, 2009, more than a year after TAF’s creation, JPMorgan’s
borrowings under the program climbed to $48 billion. On that day, the
overall TAF balance for all banks hit its peak, $493.2 billion.
later, the figure began declining.
“Our prior comment is accurate,” said Howard Opinsky, a spokesman for
‘The Cheapest Source’
Herring, the University of Pennsylvania professor, said some banks may have
used the program to maximize profits by borrowing,
“from the cheapest source,
because this was supposed to be secret and never revealed.”
Whether banks needed the Fed’s money for survival or used it because it
offered advantageous rates, the central bank’s lender-of-last-resort role
amounts to a free insurance policy for banks guaranteeing the arrival of
funds in a disaster, Herring said.
IMF report last October said regulators should consider charging banks
for the right to access central bank funds.
“The extent of official intervention is clear evidence that systemic
liquidity risks were under-recognized and mispriced by both the private and
public sectors,” the IMF said in a
separate report in April.
Access to Fed backup support,
“leads you to subject yourself to greater
risks,” Herring said. “If it’s not there, you’re not going to take the risks
that would put you in trouble and require you to have access to that kind of