European Banks Dominated Use of Fed’s Paper Program

The U.S. subsidiaries of European financial institutions, led by Zurich-based UBS AG (UBSN) and Brussels-based Dexia SA (DEXB), were some of the largest users of a government program to provide emergency short-term funding to companies during the credit crisis.

Six European banks were among the top 11 companies that sold the most debt overall -- a combined $274.1 billion -- to the Commercial Paper Funding Facility. UBS sold $74.5 billion, the most of any of the borrowers, according to data made public today by the Federal Reserve. The largest U.S.-based user was insurer American International Group Inc. (AIG), at $60.2 billion.

The $74.5 billion represents total sales by UBS over the life of the program. The bank’s CPFF borrowings peaked at $37.2 billion, an amount the company rolled over, or re-sold at maturity, once, according to Karina Byrne, a UBS spokeswoman. Other companies also rolled over debt in the program.

Byrne said the bank’s tapping the Fed fund “should be seen in the context of our overall desire to maintain flexibility and diversification in our funding sources, even during the crisis.” She said the company’s use of all the central bank programs “was relatively modest.”

The CPFF was the only Fed effort during the crisis that lent directly to non-financial companies, including Harley-Davidson Inc. (HOG) in Milwaukee. None of the debt purchased defaulted, and the Fed earned $6.1 billion in interest income and usage fees through CPFF, according to the central bank.

Dexia’s $53.5 Billion

The Fed released the details to meet disclosure requirements in the Dodd-Frank financial-oversight law signed by President Barack Obama in July. The central bank has never before revealed transaction-level aspects of its lending.

Dexia tapped CPFF for $53.5 billion. Other European users included Barclays Plc (BARC) in London at $38.8 billion; Royal Bank of Scotland Group Plc (RBS) at $38.5 billion; and Paris-based Natixis (KN) at $27 billion.

“Given the importance of Natixis in the U.S., it was, for us, natural that we participate in this program like all the banks,” said Victoria Eideliman, a spokeswoman for Natixis, in a phone interview. “When we participated, the liquidity situation was very tense.”

The Fed listed borrowing for Paris-based BNP Paribas at $41.8 billion, which includes funding to Fortis Bank, which joined the French company in 2009.

Extra Liquidity

“BNP Paribas Fortis has not needed any extra liquidity assistance from any Federal Reserve program for almost one year,” the company said in a statement.

RBS has repaid the Fed with interest, said Michael Strachan, a spokesman for the bank. Mark Lane of Barclays declined to comment. Ulrike Pommee of Dexia didn’t return a message.

The Fed started the special fund on Oct. 27, 2008, to unlock the flow of commercial paper, short-term notes companies sell to raise cash for day-to-day expenses such as payroll and rent. The market -- at the time was valued at $1.4 trillion -- had seized up after the Sept. 15 bankruptcy of investment bank Lehman Brothers Holdings Inc. and the subsequent run by investors on money market funds, the largest collective buyers of commercial paper.

‘Enormous Jolt’

During the initial week of the program’s operation, the amount of outstanding commercial paper rose for the first time in seven weeks. That provided “an enormous jolt of not just liquidity but stimulus to the economy,” Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey, said in an Oct. 30, 2008, Bloomberg Television interview.

Harley-Davidson participated in the CPFF program to help fund its consumer-finance unit, which supplies loans and insurance to its dealers and customers, Bob Klein, a spokesman, said in an interview.

Fed data also show funds went to Caterpillar Financial Services. The leasing arm is the guarantor of commercial paper issued by about 20 dealers, said Jim Dugan, a spokesman for Peoria, Illinois-based Caterpillar Inc., the world’s largest maker of construction and mining equipment.

“This is very different than other corporate entities” that took funds, Dugan said.

Administered by the Federal Reserve Bank of New York, the fund purchased approximately $740 billion of debt over its life, according to Fed data. Holdings peaked at $350 billion in the week ended Jan. 22, 2009.

Cheaper Financing

The Fed bought 90-day debt at rates below those demanded by private investors, initially paying 1.88 percent for unsecured and 3.88 percent for asset-backed commercial paper. The rates were 1.15 percent and 3.15 percent, respectively, when the fund expired on Feb. 1.

Commercial paper, usually an unsecured promissory note maturing in one to 270 days, can provide cheaper financing than a line of credit from a bank. Maturities average 30 days, according to the Fed. Financial institutions typically issue collateralized, or asset-backed, commercial paper.

There was $1.05 trillion in outstanding commercial paper, not seasonally adjusted, in the U.S. as of Nov. 17, according to central bank data.

To contact the reporters on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

To contact the editor responsible for this story: John Voskuhl at jvoskuhl@bloomberg.net

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