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U.S. Fed Tapped For $1.2 Trillion In Secret Loans

 August 23, 2011 09:37 AM
 


Media groups have forced the Federal Reserve to release data pertaining to secret loans made during the peak of the financial crisis. Documents were requested under the Freedom of Information Act, and some information was made public through the Dodd-Frank Act.

Close to 29,000 pages of documents and 18 spreadsheets revealed that a staggering $1.2 trillion was loaned by the Fed from August 2007 through April 2010. This amount is the total sum loaned out through the various programs instated by the Fed. Many companies borrowed from multiple programs that they were eligible for.

Companies that top the list of borrowers include Morgan Stanley, Citigroup, and Bank of America. European banks also featured heavily on the list. Bloomberg, which revealed the findings, reported that half of the top 30 borrowers by peak balances were European. Royal Bank of Scotland was the largest overseas borrower, receiving $84.5 billion.

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Foreign governments, banks and industrial companies were also included in the data. Many Middle Eastern and Asian governments and firms show up on the report.

 The news report also mentions that the Fed has not suffered any credit losses on any of the emergency loans it made out under these programs. However, experts question the Fed's decision to lower its standards for collateral. At the height of the crisis, the U.S. central bank started accepting junk bonds and equity as collateral, much different from its usual standard of high credit-rating bonds.

The Fed has been reluctant to reveal the names of companies that received loans. Chairman Ben Bernanke said that making this information public could endanger these companies and would lead to investors perceiving them as distressed. The Fed conceded to a legal challenge by Bloomberg and revealed the data over several months.

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Morgan Stanley was the largest borrower, with a peak balance of $107.3 billion. The bank suffered an extreme liquidity crisis after hedge funds withdrew close to $128 billion in two weeks, prompting the Fed to provide emergency funds.

Banks tapped into funds from the Fed through different subsidiaries eligible for the program. For example, brokerage divisions of banks were eligible for the Term Securities Lending Facility (TSLF), which allowed them to swap mortgage securities and troubled assets for U.S. Treasury bonds.

This latest report is sure to put the Fed under further fire. It has already been accused of distorting the true position of banks during the crisis through secretive loans that kept investors in the dark. It allowed firms to cover up their weaknesses by not revealing how much funding was actually needed.

State Street Corp., JP Morgan (JPM), and Goldman Sachs (GS) were other American banks that received sizable loans from the Fed. A notable company  featured in the report was Hypo Real Estate Holding A, a German bank  that borrowed $28.7 billion, or $21 million for every one of its 1,366 employees.

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