The U.S. Federal Reserve mounted an unprecedented campaign to head off a depression by providing as much as $1.2 trillion in public money to banks and other companies from August 2007 through April 2010, exceeding the $700 billion Troubled Asset Relief Program.
(View the Bloomberg interactive graphic to chart the Fed’s financial bailout.)
Here’s a breakdown of the facilities the central bank used or created to combat the credit crunch:
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
The bankruptcy of Lehman Brothers Holdings Inc. in September 2008 triggered losses at the world’s oldest money-market mutual fund, the Reserve Primary Fund, threatening to touch off an industrywide rout as investors began withdrawing from other money funds.
To keep the funds from realizing losses as they liquidated assets to meet customers’ redemption requests, the Fed created the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or AMLF, on Sept. 19, 2008. Under the program, the Fed loaned money to banks so they could buy asset-backed commercial paper -- collateralized bonds with a maturity of 270 days or less -- from the money funds.
At its peak on Oct. 1, 2008, the program had $152.1 billion of loans outstanding. Because the Fed agreed to make banks whole for any losses as long as they bought eligible securities, the program offered almost risk-free profit. JPMorgan Chase & Co., the biggest bank participant, borrowed and bought $111 billion of securities under the program.
Commercial Paper Funding Facility
Three weeks after Lehman Brothers collapsed, companies that financed themselves by selling commercial paper -- bonds with a maturity of 270 days or less that are considered among the safest investments because of their relatively short terms -- were frozen out of the market. The Fed unveiled the Commercial Paper Funding Facility, or CPFF, on Oct. 7, 2008, to “help provide liquidity to term funding markets.”
When the program began later that month, banks including Citigroup Inc., Bank of America Corp. and Switzerland’s UBS AG participated. So did companies such as General Electric Co., the maker of light bulbs and jet engines, and bulldozer builder Caterpillar Inc.
Because non-banks usually aren’t eligible to borrow from the Fed, central-bank officials had to invoke Section 13(3) of the Federal Reserve law, which allows such loans “in unusual and exigent circumstances.” By January 2009, the Fed had bought $348 billion of commercial paper. The program wasn’t closed until February 2010, with balances paid off two months later.
The Fed was created by Congress in 1913 after banking panics in the late 1800s and early 1900s. The centerpiece of the central bank’s plan to head off future crises was the discount window, an emergency-lending program that could supply institutions with cash if customers rushed to withdraw more money than banks had in their vaults.
The program also could make up for funding gaps that might occur if a lender’s own creditors decided not to refinance debt coming due. Both U.S. banks and foreign banks with U.S. branches are eligible to tap the program.
Until 2008, the record for discount-window borrowing was in the aftermath of the Sept. 11 terrorist attacks in the U.S., when all banks got a combined $46 billion of loans from the Fed. As the biggest financial crisis in U.S. history loomed in August 2007, former Fed Chairman Alan Greenspan reminded economists in Jackson Hole, Wyoming: “Even if banks find that borrowing from the discount window is not immediately necessary, the knowledge that liquidity is available should help alleviate concerns about funding.”
It didn’t work out that way. Bank creditors pulled their funding en masse, and discount-window borrowing surged to a record of $113.7 billion on Oct. 28, 2008. To get the money, banks had to pay 0.25 to 0.5 percentage point more than the Fed funds rate at which banks normally lend to each other on an overnight basis. They also had to pledge collateral, ranging from government bonds and investment-grade corporate bonds to agricultural loans and commercial leases.
Primary Dealer Credit Facility
The philosophy underpinning last-resort lending programs comes from Walter Bagehot, a 19th-century journalist and son of a banker who argued that central banks could quell panics by lending freely to worthy borrowers against good collateral. With the Primary Dealer Credit Facility, or PDCF, the Fed began to lower its standards for eligible borrowers and for the collateral needed to secure the loans.
The program supplied liquidity to large brokerage firms, including Goldman Sachs Group Inc. and Morgan Stanley. Previously, the Fed had restricted emergency loans to banks whose capital and loan quality were monitored by banking regulators. Acceptable collateral under the new program included junk bonds and stocks, off-limits at the discount window.
It was announced on March 16, 2008, the same day Bear Stearns Cos. agreed to sell itself to JPMorgan in a government-assisted transaction. The program peaked at $156 billion on Sept. 29, 2008.
Single-Tranche Open Market Operations
Relative yields on mortgage-backed securities surged to the highest in 22 years in March 2008, signaling reluctance by banks to lend against assets perceived as riskier than the safest U.S. Treasury bonds. To ease market strains, the Fed announced it would make as much as $100 billion of loans to Wall Street firms through auctions and accept mortgage bonds guaranteed by government-sponsored Fannie Mae and Freddie Mac as collateral.
The Fed didn’t need emergency authority to set up the program, identified in internal documents as single-tranche open market operations, or ST OMO, since it was structured as an extension of operations used by the Fed to keep interbank lending rates close to the central bank’s benchmark target.
The program had $80 billion of loans outstanding from April 30, 2008, through Jan. 6, 2009. One borrower, Zurich-based Credit Suisse Group AG, took more than half of that, $45 billion, for the week beginning Aug. 27, 2008. The last auction was Dec. 30, 2008, when one borrower, Goldman Sachs, got $200 million of loans at an interest rate of 0.01 percent.
Term Auction Facility
In December 2007, as subprime-mortgage losses spread and banks grew reluctant to lend to each other, the Fed created the Term Auction Facility, or TAF. The program, which provided collateralized loans to banks, aimed to “help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress,” the Fed said in a press release at the time.
Fed officials have since said that the real concern was with the discount window, the central bank’s primary last-resort lending program. Banks were loath to use it because they didn’t want to be branded as weak, according to a January 2011 paper by researchers at the Federal Reserve Bank of New York. To avoid the problem, the central bank designed the TAF so interest rates on the loans would be set through auctions rather than the fixed penalty rate applied to discount-window loans.
The Fed increased the size of the auctions as liquidity grew scarcer and more banks bid. The program peaked on Feb. 26, 2009, at $493 billion, more than four times the record for discount-window borrowing.
Term Securities Lending Facility
In March 2008, as investors faced mounting losses related to mortgage bonds, the Fed started a program that would allow brokerage firms to temporarily relieve themselves of the securities. Under the Term Securities Lending Facility, or TSLF, the Fed allowed banks to swap mortgage bonds and other toxic assets for U.S. Treasuries. Banks could then turn to the market or to other Fed lending programs and pledge the Treasuries as collateral for cash loans.
Lending fees were set through weekly auctions, and winning bidders were awarded loans of Treasuries for 28-day periods. The program was announced five days before Bear Stearns, Wall Street’s top mortgage-bond underwriter for most of the 2000s, almost collapsed and had to sell itself to JPMorgan. The fees ranged from 0.3 percent initially to as high as 3.2 percent in October 2008, following Lehman Brothers’ bankruptcy.
Banks including Citigroup and Bank of America, which already had access to Fed emergency-lending programs such as the discount window, got additional liquidity by tapping the TSLF through their brokerage divisions.