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Report: Fed lent $1.2 trillion to banks during financial crisis

One of the Federal Reserve’s primary roles is to be the lender of last resort to banks. It played that role to the tune of stunning $1.2 trillion during the financial-system crisis that began in 2007, according to data compiled for the first time by Bloomberg News.

The Bloomberg probe of the Fed’s lending, published Sunday, showed that Morgan Stanley, Citigroup and Bank of America were the single largest borrowers from the central bank from August 2007 to April 2010.

FedeaglekarenbleierAFPGetty The Fed also lent heavily to foreign banks that were struggling to fund themselves: Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms, Bloomberg said. They included Royal Bank of Scotland, Switzerland’s UBS and Belgium’s Dexia.

The Fed, under Chairman Ben S. Bernanke, initially refused to disclose which banks had sought financial help during the crisis, asserting that publishing the information could trigger a run on the institutions by branding them as troubled.

But the Fed lost that argument in the courts after Bloomberg sued to force disclosure.

Bloomberg notes that the Fed has said it had “no credit losses” on any of the emergency lending programs, and that an internal Fed report in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 to 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,” James Clouse, deputy director of the Fed’s division of monetary affairs in Washington, told Bloomberg. “Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.”

Still, the Fed’s ability to lend in secret meant that bank shareholders weren’t privy to the full story about their companies’ funding troubles, Bloomberg notes.

“Even 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,” Bloomberg reporters Bradley Keoun and Phil Kuntz wrote.

There also are some interesting details about the kind of collateral banks put up for their Fed loans. From Bloomberg:

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% of the collateral was foreign-denominated.

-- Tom Petruno

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Photo: The Federal Reserve's headquarters in Washington. Credit: Karen Bleier / AFP / Getty Images

 
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