A POWERFUL government agency has just had a trove of its most sensitive interactions with key counterparties around the world thrown open to the public. I'm not talking about the State Department but the publication today of who got help from the Federal Reserve's emergency lending programmes during the crisis.
Unlike WikiLeaks’ release of diplomatic cables, it’s the Federal Reserve doing the releasing this time. Still, there are similarities, such as the Fed's initial resistance—it cited the confidentiality that normally surrounds such relationships (especially with foreign central banks)—and the future chilling effect. For the Fed to be an effective lender of last resort, borrowers cannot be cowed by the stigma of public disclosure.
Under the compromise contained in the Dodd-Frank Act, the Fed today released details of who borrowed what from its various emergency programmes from December 1st 2007 to July 21st 2010. Details of borrowing from regular discount-window and open-market operations will be published with a two year lag.
The details are interesting, even titillating, but not terribly surprising. The biggest banks tended to be the biggest borrowers. The data are a bit tricky to interpret: each loan is reported separately even when it represents the rollover of a maturing loan. Bank of America, Wells Fargo, Citibank and JPMorgan Chase all borrowed at least $15 billion each via the Fed’s Term Auction Facility; the total outstanding at any one moment exceeded $45 billion in the case of Bank of America and Wells Fargo, according to Bloomberg. One of the more intriguing revelations is how much support the Fed gave to Europe’s banks: an American unit of Belgium’s Dexia had at least $14 billion outstanding at one point; RBS Citizens, a unit of Royal Bank of Scotland, at least $14.5 billion, and Bank of Scotland (part of Lloyds), $12 billion. Is it a coincidence that the parents of all these banks had to be bailed out by their host governments? (The European Central Bank was also far and away the largest users of dollar swap lines from the Fed, at one point borrowing $171 billion. It then lent those dollars to euro-zone banks.)
Investment banks also became big borrowers when the discount window was opened to them. Bear Stearns borrowed up to $28 billion (no surprise there) as it fended off collapse in March of 2008. But the others did not borrow in size until that fall. Lehman borrowed $28 billion the day of its bankruptcy. (Why it didn’t borrow sooner is a bit puzzling. Was it too scared of looking like it needed the help? And should the Fed have lent to a dealer whose holding company had just sought bankruptcy protection?) Merrill Lynch borrowed up to $33 billion, Morgan Stanley $47 billion, and Goldman Sachs $18 billion.
These revelations reinforce what we already knew: that the Fed helped reinforce all these firms’ “too big to fail” status by lending them huge amounts when they needed it. Yes, this is moral hazard, but some moral hazard has always been the price of having a lender of last resort, and the alternative would certainly have been worse.
Just as the debate about the WikiLeaks release has been less about the content of the cables and more about the impact on relationships formerly shrouded in secrecy, the bigger debate about the Fed’s revelations ought to be how this changes its relationship with the financial industry going forward. For now, I don’t see it doing much damage; it’s hard to see any bank’s health or reputation being compromised by public acknowledgment of the fact that it borrowed from the Fed during one of the biggest crises in history, and the two-year delay in future disclosure should give a bank plenty of time to sort out whatever forced it to borrow in the first place. Disclosure also may make it less likely that the Fed’s offices will be abused in the first place. But when a future crisis begins, will a bank that would otherwise have borrowed from the Fed think twice and try to ride out a liquidity crunch, risking an exodus of funding until it’s too late?