UBS, Merrill Among Biggest Borrowers of Treasuries From Fed

UBS AG and Merrill Lynch & Co. were among the biggest users of a Federal Reserve emergency-lending program that temporarily provided securities firms with Treasuries in exchange for assets including mortgage debt.

A U.S. unit of Zurich-based UBS borrowed $15 billion of Treasuries from the Fed’s Term Securities Lending Facility in the program’s first round on March 27, 2008, while Merrill Lynch, now owned by Bank of America Corp., borrowed $10 billion that day, according to documents released today by the Fed to comply with orders from Congress to identify recipients of $3.3 trillion in emergency aid for companies and markets.

The TSLF was the first program the Fed authorized during the financial crisis in which the central bank invoked its emergency powers to lend to non-banks in “unusual and exigent circumstances.” Stocks rallied the most in five years the day the program was announced.

The TSLF was announced as the tumbling value of U.S. housing debt made it more difficult for financial firms to borrow, which forced the Fed a few days later to rescue Bear Stearns Cos. by helping JPMorgan Chase & Co. buy the New York- based investment bank.

Bear Stearns was one of 20 banks and securities firms, known as primary dealers, which traded directly with the Fed and were eligible for the program. Borrowing peaked at $235.5 billion in October 2008.

UBS Pledged

Under the TSLF, dealers could place investment-grade securities, including bonds backed by souring home loans, with the central bank and in return receive U.S. Treasuries for 28 days. During that period, they could in turn use the government bonds as collateral for private borrowing.

In the program’s first round, UBS pledged securities valued at $18 billion, all of which were mortgage bonds lacking government backing, the data released today showed. That enabled the Swiss bank to obtain $15 billion of Treasuries with a market value of $16.8 billion, when including items such as accrued interest.

UBS renewed the $15 billion loan of Treasuries the next month, with slightly different collateral. That loan and a similarly sized draw in July 2008 by Lehman Brothers Holdings Inc. were the largest uses of the program, Fed data show.

Lehman, which collapsed two months later, pledged $22.1 billion of securities, more than 73 percent of which were government-backed mortgage bonds with the rest being mortgage securities without such guarantees.

UBS also obtained a $12 billion loan in May 2008.

‘Financial Crisis’

“Like other banks, UBS also accessed some of the facilities provided during the financial crisis,” said Karina Byrne, a spokeswoman for the company. “UBS’s usage of those facilities should be seen in the context of our overall desire to maintain flexibility and diversification in our funding sources, even during the crisis.”

A unit of New York-based Merrill Lynch, which agreed to sell itself to Bank of America the weekend that Lehman Brothers failed, pledged about $12 billion of securities to borrow $10 billion of Treasuries with a market value of $11.2 billion in the TSLF’s first round, Fed data show.

About 93 percent of Merrill’s pledged assets were government-backed mortgage obligations, with the rest mostly other mortgage securities.

‘Financial Turmoil’

The Fed also loaned Treasuries of $10 billion to a unit of Morgan Stanley in September 2008; a division of Royal Bank of Scotland Group Plc in April 2009, and a unit of Citigroup Inc. in May 2009. All other uses of the program were smaller.

New York-based Morgan Stanley pledged collateral with a value of $38.3 billion, including $19 billion of corporate securities and $2.9 billion of municipal debt.

“As we have previously disclosed, Morgan Stanley utilized some of the Federal Reserve’s emergency lending facilities during a time of immense financial turmoil throughout the banking sector and the broader market,” Mark Lake, a Morgan Stanley spokesman, said. “The loans, which were fully collateralized to the requirements of each Fed facility, were fully repaid.”

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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