2010 December 05 Sunday
Federal Reserve Lent Big To Foreign Banks And Companies

One might have the impression that during the 2008 financial crisis the US Federal Reserve forced about a dozen big US banks to take loans so that a few weak ones would not stand out and that a few financial institutions that lent for car purchases also got money to keep car sales going. But it went so much deeper and wider. Not just US banks. Not just US financial institutions. The Fed lend to foreign banks and even foreign car companies. Also, it lent in the trillions. The Fed lent $6.2 billion to BMW and $4.6 billion to Toyota during the financial crisis. Yes, the Fed lent billions to companies that compete with US car companies, which import cars from Germany and Japan. The mind boggles.

In the depths of the financial collapse, the U.S. Federal Reserve pumped $3.3 trillion into keeping credit moving through the economy. It eventually lent $57.9 billion to the auto industry — including $26.8 billion to Ford, Toyota and BMW.

$6.2 billion to BMW? How can that be justified for a small foreign luxury brand? What was the Fed trying to prevent? Did all the credit markets freeze up? If so, why did the US have to bail out companies from around the world? I dug thru lots of articles on this (just a subset linked to here) and could find no explanation. Anyone come across a real insider view on this?

The US even lent billions to European banks as Schmuck Superpower. The US Federal Reserve, yes, lent big to banks from Germany and other Euro zone members who have their own central bank.

With the news this week that the Fed pumped money into European institutions during the darkest hours of the recent and continuing economic crisis without so much as a press release or a demand for better cheese prices, it is clear that even with all those big geopolitical shifts we have been hearing so much about, the United States remains the world's sole Schmuck Superpower.

Oh sure, whoever it was that was stamping "Approved" on all those requests at the Fed's "Foreign Banks Only" teller window no doubt thought it was in the self-interest of the United States to keep the global economy from imploding. But look at all the grumbling that Europeans do when asked to help preserve their own common currency and the economic health of their own neighborhood.

The borrowing by some non-US banks was massive.

The presence of foreign banks in the program underscores the squeeze in dollar liquidity after the collapse of Lehman Brothers Holdings Inc. on Sept. 15, 2008. UBS, Switzerland’s largest bank, was the biggest borrower from the Commercial Paper Funding Facility, tapping the program 11 times for $74.5 billion.

Japanese, German, French, British, Swiss, and other foreign banks lined up for cheap money.

While the Federal Reserve helped companies that had never before received Fed assistance, including several U.S. firms that are not financial institutions, the central bank lent billions to foreign banks that operate in the U.S., including Germany's Deutsche Bank Securities, which got $290 billion in mortgage securities; London-based Barclay's, which received a $47.9 billion loan; France's BNP Paribas Securities, Switzerland's UBS Securities LLC and Daiwa Securities America, a subsidiary of one of Japan's largest brokerage houses.

Why? That's not just a rhetorical question. Also, why the Fed by itself? There are other central banks in the world.

Loans were being doled out in the trillions per bank.

B of. A’s Merrill Lynch unit tapped the primary dealer facility for $2.02 trillion, according to tabulations made by Raymond Stone of Stone & McCarthy Research Associates. Citi borrowed $2.02 trillion, and Morgan Stanley /quotes/comstock/13*!ms/quotes/nls/ms (MS 25.64, +0.03, +0.12%) used the same facility to borrow $1.9 trillion, Stone said, though Morgan Stanley’s borrowings slowed after the Fed granted the bank holding company status.


Share |      By Randall Parker at 2010 December 05 11:47 AM  Economics Stampeding Herd

JackC said at December 6, 2010 10:49 PM:

And no one ever even voted for these people. What kind of country do we live in? "Just who the hell do [these] people think they are?"

WJ said at December 7, 2010 6:05 PM:

Well, both BMW and Toyota have large operations in the US - BMW in South Carolina, and Toyota in 5 different states. Granted these are only assembly plants, and it's not quite like being a US-based automaker, but it ain't nothing, either. And BMW may be small by GM/Toyota standards, but it's still a $50 billion company.

I'm not keyed in enough to high finance to know whether or not these loans were in our best interest, but I sorta wish the Fed would give me a bottomless pool of cheap money whenever I'm in dire need. If they'd loaned me a few billion back in early 2009 I could've snatched up a lot of undervalued stocks and turned a nice profit.

bbartlog said at December 8, 2010 6:36 AM:

Why? That's not just a rhetorical question. Also, why the Fed by itself?

My assumption is that this is essentially a money laundering program to facilitate the purchase of US Treasuries (i.e. fund the national debt). At the beginning of this year, I saw an analysis which suggested that the governments of the world needed to borrow $4-5 trillion to fund their combined deficits, but that world aggregate savings amounted to only about $1 trillion annually. Obviously this would have been a train wreck for governments (bond yields through the roof as governments competed over the limited pool of available investment money), albeit potentially a bonanza for anyone with actual money to invest. I'm assuming that the Fed lent this money out with the explicit understanding that the banks and companies in question would turn around and buy Treasuries with it (or perhaps bonds of other governments as well). The fact that there was *not* a disaster in the world bond markets certainly suggests that something of the kind happened, since I have not seen too many actual government austerity programs implemented.
In the short term, this is a huge win for the companies involved. Borrow $2 trillion at 0% (or near to it), get a ~3-4% return annually - hey, it's a free $60-80 billion in annual profits! Or so it seems. There's just this little problem with unwinding your bond position and/or realizing the losses when it goes bad, as indeed it must. I do wonder what kinds of things the banks will try to buy once inflation starts to run and/or bond yields increase; they're in a position where they will have a lot of paper money and a great need to turn it into something that isn't going to lose all its value. Land and stocks would be the logical targets. But they will be at cross purposes with the US Government, since they will be wanting to sell the same bonds that the government needs to sell to finance its deficit spending. I am not sure whether the Fed would be able to bail them out with pure cash.
As for 'why the Fed' (and not say the European central bank), I expect it has something to do with the currencies involved. Maybe the Germans vetoed the idea of sacrificing the value of the Euro to finance Irish and Spanish deficits, so the Fed stepped up. Maybe it's just less suspicious and disruptive when a whole lot of dollars (rather than Euros) materialize. Maybe the ECB is more transparent and so can't undertake these shenanigans as effectively. Maybe they operate under other constraints.

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