(Corrects figure in fourth paragraph to billion.)
The deed is done, and the world is a better place. At least the stock market is higher.
The Federal Reserve, complying with a provision of the Dodd-Frank Act on financial regulation, posted detailed information on its website yesterday on loan transactions that took place between Dec. 1, 2007, and July 21, 2010.
We now know who was on the receiving end of Fed credit during the financial panic of 2008 and its aftermath; how much these institutions borrowed; when they borrowed it; what interest rate they paid; and how much and what kind of collateral they pledged to secure the Fed loans.
For example, we learned that Bank of America Corp. posted the largest share of crappy collateral (Ba-rated or lower) for loans totaling $688.9 billion from the Primary Dealer Credit Facility.
Now that most of the loans have been repaid and financial markets are functioning on their own, there was little threat from disclosing crisis-lending data.
We have yet to learn any details of bank borrowings at the Fed’s discount window, a lender-of-last-resort facility operational since 1914. The Fed has always guarded information on its counterparties closely, and for good reason.
In the old days -- in the 1970s and 1980s, for example -- traders and analysts would scour the Fed’s Thursday night data releases for signs of a spike in discount window borrowings on the final day of the two-week settlement period. (That’s when banks have to reconcile their required reserves with their deposits.) If the numbers showed unusually large borrowings on that Wednesday in a particular Fed district, traders would whittle down the potential candidates and settle on one. Rumor or fact, that bank could have trouble funding itself.
That sort of information had the power to create dislocations in the market, says Ward McCarthy, chief financial economist at Jefferies & Co. in New York. “It did increase the speculative nature of the funding market at that time.”
I remember one occasion during the first Gulf War in 1991 when the funds rate spiked to 100 percent (that’s an annualized rate) on settlement day. Yet some bank paid the price rather than incur the stigma of going to the discount window. The Fed had to practically beg banks to avail themselves of discount window loans during the financial crisis.
Yesterday’s release of about 21,000 transactions totaling $3.3 trillion was a data-maven’s delight. For the foes of central banking, it was a triumph of good over evil. For opponents of Fed secrecy, it was a victory for transparency.
For most of us, I’d venture to say the data were ancient history: nice to have when you want to regale your grandchildren with stories about the Week the World Almost Ended, but nothing that’s going to make you change your behavior or cause you to take your money out of the bank.
Sure, there were hard numbers to upend soft stories. For example, Goldman Sachs Group Inc. has maintained it didn’t need emergency Fed loans to survive following the collapse of Lehman Brothers Holdings Inc. in September 2008. The Fed data show that Goldman had $35.4 billion of borrowings outstanding through the Term Securities Lending Facility and Primary Dealer Credit Facility on Oct. 21, 2008. That represented more than 70 percent of the firm’s book value.
The Fed’s data dump, which is being perused by journalists and bloggers for gotcha items, is less embarrassing to financial institutions than WikiLeaks’ release of State Department cables -- referring to French President Nicolas Sarkozy as an “emperor with no clothes” -- was to foreign dignitaries.
Sun Shines In
Most of the crisis-lending facilities have been closed -- without the Fed incurring any credit losses, the central bank noted in its press release.
Over the years the Fed has gradually lifted the veil on its inner workings. It wasn’t that long ago (pre-1994) financial markets had to guess at policy changes. Now they’re announced at the time.
Dodd-Frank, passed in July, requires disclosure of discount window borrowings, starting with July 2010 transactions, with a two-year lag. That’s long enough to protect wobbly financial institutions from bank runs and destabilize financial markets yet still young enough to be of some historical value.
The world didn’t end with yesterday’s disclosure of financial crisis lending yesterday. Delayed data on discount window borrowings should be equally benign.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
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