Originally Posted by bloombergWire: BLOOMBERG News (BN) Date: Dec 11 2011 23:01:03
No One Says Who Took $586 Billion in Fed Swaps Done in Anonymity
By Scott Lanman and Bradley Keoun
Dec. 12 (Bloomberg) -- For all the transparency forced on
the Federal Reserve by Congress and the courts, one of the
central bank’s emergency-lending programs remains so secretive
that names of borrowers may be hidden from the Fed itself.
As part of a currency-swap plan active from 2007 to 2010
and revived to fight the European debt crisis, the Fed lends
dollars to other central banks, which auction them to local
commercial banks. Lending peaked at $586 billion in December
2008. While the transactions with other central banks are all
disclosed, the Fed doesn’t track where the dollars ultimately
end up, and European officials don’t share borrowers’ identities
outside the continent.
The lack of openness may leave the U.S. government and
public in the dark on the beneficiaries and potential risks from
one of the Fed’s largest crisis-loan programs. The European
Central Bank’s three-month dollar lending through the swap lines
surged last week to $50.7 billion from $400 million after the
Nov. 30 announcement that the Fed, in concert with the ECB and
four other central banks, lowered the interest rate by a half
“Increased transparency is warranted here,” given the
size of the Fed’s aid and current pressures on European banks,
said Representative Randy Neugebauer, a Texas Republican who
heads the House Financial Services Subcommittee on Oversight and
Whether the U.S. should make disclosure of the recipients a
condition of the swap lines is “probably a discussion we need
to have,” possibly in a hearing that includes Fed Chairman Ben
S. Bernanke, Neugebauer said.
The secrecy surrounding foreign central banks’ emergency
lending contrasts with unprecedented transparency at the Fed,
which was compelled by the 2010 Dodd-Frank Act and court-upheld
Freedom of Information Act requests to release details on more
than a dozen programs used to combat the U.S. financial crisis
from 2007 through 2010. Bernanke this year began holding regular
press conferences and has said he is considering ways to make
the Fed’s objectives more clear to the public.
Michelle Smith, a Fed spokeswoman, said there is “no
formal reporting channel” for the identities of borrowers from
other central banks, which are the Fed’s only counterparties on
the swap lines and assume any credit risk.
“U.S. taxpayers have never lost a penny” on the program,
she said. “Decisions about disclosure by foreign central banks
of their financial arrangements with financial institutions in
their jurisdictions is an issue for the foreign central banks.”
Americans may have to accept nondisclosure as a condition
of protecting the U.S. economy from turmoil overseas, said Dean
Baker, co-director of the Center for Economic and Policy
Research in Washington.
“As much as we might like to say they should have at least
as much transparency as the Fed, I don’t know if we want to say,
‘Well, if you don’t, you’re not going to get the money,’” Baker
said. U.S. policy makers should encourage international
standards for disclosure through talks at forums such as
meetings of the Group of 20 nations, he added.
The swaps are separate from Fed emergency loans to banks
and other businesses that peaked at $1.2 trillion in December
2008, including about $538 billion that European financial
companies borrowed directly, according to a Bloomberg News
examination of available data.
The Fed last week released a letter from Bernanke and a
staff memo criticizing recent news articles for portraying its
crisis-lending efforts as secret, saying that it made aggregate
amounts of the loans public. Bloomberg, which published a Nov.
28 article on the topic, said in a point-by-point response that
it considered the data secret because the terms of the loans and
names of borrowers were withheld. The Fed had resisted
disclosing them for more than two years.
The Dodd-Frank Act overhauling U.S. financial law included
legislation proposed by Senator Bernard Sanders, a Vermont
independent, that required the Fed in December 2010 to disclose
recipients of aid it provided during the crisis, except for
banks that used the liquidity-swap lines or the discount window
-- a century-old emergency-lending program. Under Dodd-Frank,
new Fed borrowers from the discount window are subject to
identification with a two-year delay.
Bloomberg LP and News Corp.’s Fox News Network LLC won a
court case forcing the Fed last March to name the crisis
discount-window borrowers. There hasn’t been any case or law
requiring disclosure of banks that borrowed via the swap lines.
“That is certainly a legitimate piece of information for
the American people,” and “we’re going to be vigilant in
increasing transparency,” said Warren Gunnels, Sanders’ senior
Foreign central banks borrowed dollars from the Fed for
terms as long as three months in return for euros, pounds and
yen. The ECB accounted for 80 percent of total swap-line loans
during the mortgage-induced financial crisis, according to the
U.S. Government Accountability Office, the congressional
auditor. The ECB won’t publicly disclose names of borrowers
under any circumstances and doesn’t share the identities outside
the 17 euro-area central banks, a spokesman wrote in an e-mail.
“These banks have a right to enjoy the standard
confidentiality attached to banking transactions,” the
European officials may be concerned that future lending
might be inhibited by a “stigma phenomenon” if past borrowers
are made public, said Ralph Bryant, former director of the Fed’s
international-finance division and now a senior fellow at the
Brookings Institution in Washington. The concept is “usually
overplayed by people, but it’s not something that’s trivial.”
‘Matter of Principle’
The Bank of Japan, which tapped 3.9 percent of the
aggregate swap dollars according to the GAO, has no plans to
publicize borrowers’ identities and declined to comment on
whether it shares the names with the Fed, a spokesman said. The
Swiss National Bank, which accounted for 4.6 percent, “as a
matter of principle” doesn’t publish counterparties, said
Walter Meier, a spokesman.
The Bank of England doesn’t publish details of individual
financial institutions’ use of its facilities. Confidence in
banks “can best be sustained” if support is disclosed “only
when conditions giving rise to potentially systemic disturbance
have improved,” it said in its annual report.
Fed policy makers let the program expire in February 2010
then revived it after three months to try to contain Europe’s
debt crisis. Nineteen months later, European officials still
struggle to contain the market turmoil, which has spread to
sovereign bonds in France and Italy as investors increasingly
question governments’ ability to repay debt.
The expanding crisis spurred the Fed and other central
banks in November to extend the program by six months to Feb. 1,
2013, and lower borrowing costs by half a percentage point to
make them more attractive. Last week, European leaders agreed to
make loans of as much as 200 billion euros ($267.7 billion) to
the International Monetary Fund and tightened rules to curb
The Fed swap program had a combined balance of $2.3 billion
in loans outstanding as of Dec. 7 for all five participating
central banks. That doesn’t account for the ECB’s latest dollar
auction because the loans hadn’t settled yet.
The GAO, which released its emergency-lending report in
July, wasn’t required to delve into the final destinations of
the swap dollars, said Orice Williams Brown, the agency’s lead
official on Fed audits. As a result of the study, the GAO
learned that UBS AG’s October 2008 bailout from the Swiss
government included an “atypical use” of swap-line dollars
“generally not exceeding about $13 billion,” the report said.
Bernanke didn’t know which financial institutions got
dollar loans, he said during a July 2009 House Financial
Services Committee hearing.
Not having the identities would restrict the Fed’s ability
to understand the “overall risk exposure of the institutions
it’s supervising,” said Robert Eisenbeis, a former research
director at the Federal Reserve Bank of Atlanta who’s now chief
monetary economist for Sarasota, Florida-based Cumberland
The Fed may not need all the details, said Al Broaddus,
former president of the Federal Reserve Bank of Richmond. The
ECB and other central banks “are obliged to pay the Fed back.
They’re the ones that are taking the credit risk with the
institutions that are actually being lent to.”
In 2008, the dollar-based money markets that many foreign
banks used to finance their holdings of U.S. mortgage-backed
securities froze, forcing them to turn to the Fed to fill the
funding gap. Much of the borrowing was done through U.S.
branches that are legally eligible to draw emergency loans from
the Fed’s lender-of-last-resort programs, according to the
Biggest Foreign Borrower
The U.K.’s Royal Bank of Scotland Group Plc was the biggest
foreign borrower, drawing $84.5 billion in October 2008. UBS,
based in Zurich, got $77.2 billion, while Frankfurt-based
Deutsche Bank AG took $66 billion and London-based Barclays Plc
borrowed $64.9 billion, according to the Bloomberg data.
One of the borrowers, Dexia SA, is being broken up after
running out of short-term funding. The French-Belgian lender had
120.6 billion euros of central-bank liabilities on Dec. 31,
2008, according to a company report; $58.5 billion came directly
from the Fed, the Bloomberg examination showed.
Fed officials, including Governor Daniel Tarullo, have
emphasized the need for improved monitoring and control of risks
throughout the banking system, as well as global coordination
among financial-policy makers. Regulators “must not lose sight
of the importance of supervisory cooperation in pursuit of the
shared goal of a stable international financial system,” he
said in a Nov. 4 speech.
Ohio Senator Sherrod Brown, a Democrat who heads the
Banking Subcommittee on Financial Institutions and Consumer
Protection, said he isn’t sure swap-line borrowers should be
made public. Still, the Fed “should follow the money in terms
of disclosure, period,” he said. “Full disclosure from start
to finish is the goal.”
Massachusetts Representative Barney Frank, the senior
Democrat on the House Financial Services Committee, said he saw
no need for the disclosure because the Fed has no role in
approving the ultimate borrowers.
“What the Fed is doing with regard to the ECB is very
important for the American economy,” Frank said. “Our interest
is to make sure we get paid back. I think the ECB is a pretty
good debtor and a pretty reliable one.”
Joseph Stiglitz, a Nobel Prize-winning economist who led
President Bill Clinton’s Council of Economic Advisers, said the
“fundamental problem” is that capital markets need information
to work properly, yet the Fed is saying, “we believe in
capital-market discipline without information.”
“It would be very useful to see” those names, said
Stiglitz, a professor at Columbia University in New York. With
the dollar auctions of foreign central banks shielded from
disclosure, “what we have now is a very partial picture.”