No One Says Who Took $586 Billion in Fed Swaps Done in AnonymityScott Lanman and Bradley Keoun
For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank’s emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself.
As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December
2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent.
The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.
“Increased transparency is warranted here,” given the size of the Fed’s aid and current pressures on European banks, said Representative Randy Neugebauer, a Texas Republican who heads the House Financial Services Subcommittee on Oversight and Investigations.
Whether the U.S. should make disclosure of the recipients a condition of the swap lines is “probably a discussion we need to have,” possibly in a hearing that includes Fed Chairman Ben S. Bernanke, Neugebauer said.
The secrecy surrounding foreign central banks’ emergency lending contrasts with unprecedented transparency at the Fed, which was compelled by the 2010 Dodd-Frank Act and court-upheld Freedom of Information Act requests to release details on more than a dozen programs used to combat the U.S. financial crisis from 2007 through 2010. Bernanke this year began holding regular press conferences and has said he is considering ways to make the Fed’s objectives more clear to the public.
Michelle Smith, a Fed spokeswoman, said there is “no formal reporting channel” for the identities of borrowers from other central banks, which are the Fed’s only counterparties on the swap lines and assume any credit risk.
“U.S. taxpayers have never lost a penny” on the program, she said. “Decisions about disclosure by foreign central banks of their financial arrangements with financial institutions in their jurisdictions is an issue for the foreign central banks.”
Americans may have to accept nondisclosure as a condition of protecting the U.S. economy from turmoil overseas, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
“As much as we might like to say they should have at least as much transparency as the Fed, I don’t know if we want to say, ‘Well, if you don’t, you’re not going to get the money,’” Baker said. U.S. policy makers should encourage international standards for disclosure through talks at forums such as meetings of the Group of 20 nations, he added.
The swaps are separate from Fed emergency loans to banks and other businesses that peaked at $1.2 trillion in December 2008, including about $538 billion that European financial companies borrowed directly, according to a Bloomberg News examination of available data.
The Fed last week released a letter from Bernanke and a staff memo criticizing recent news articles for portraying its crisis-lending efforts as secret, saying that it made aggregate amounts of the loans public. Bloomberg, which published a Nov. 28 article on the topic, said in a point-by-point response that it considered the data secret because the terms of the loans and names of borrowers were withheld. The Fed had resisted disclosing them for more than two years.
The Dodd-Frank Act overhauling U.S. financial law included legislation proposed by Senator Bernard Sanders, a Vermont independent, that required the Fed in December 2010 to disclose recipients of aid it provided during the crisis, except for banks that used the liquidity-swap lines or the discount window -- a century-old emergency-lending program. Under Dodd-Frank, new Fed borrowers from the discount window are subject to identification with a two-year delay.
Bloomberg LP and News Corp.’s Fox News Network LLC won a court case forcing the Fed last March to name the crisis discount-window borrowers. There hasn’t been any case or law requiring disclosure of banks that borrowed via the swap lines.
“That is certainly a legitimate piece of information for the American people,” and “we’re going to be vigilant in increasing transparency,” said Warren Gunnels, Sanders’ senior policy adviser.
Foreign central banks borrowed dollars from the Fed for terms as long as three months in return for euros, pounds and yen. The ECB accounted for 80 percent of total swap-line loans during the mortgage-induced financial crisis, according to the U.S. Government Accountability Office, the congressional auditor. The ECB won’t publicly disclose names of borrowers under any circumstances and doesn’t share the identities outside the 17 euro-area central banks, a spokesman wrote in an e-mail.
“These banks have a right to enjoy the standard confidentiality attached to banking transactions,” the spokesman wrote.
European officials may be concerned that future lending might be inhibited by a “stigma phenomenon” if past borrowers are made public, said Ralph Bryant, former director of the Fed’s international-finance division and now a senior fellow at the Brookings Institution in Washington. The concept is “usually overplayed by people, but it’s not something that’s trivial.”
‘Matter of Principle’
The Bank of Japan, which tapped 3.9 percent of the aggregate swap dollars according to the GAO, has no plans to publicize borrowers’ identities and declined to comment on whether it shares the names with the Fed, a spokesman said. The Swiss National Bank, which accounted for 4.6 percent, “as a matter of principle” doesn’t publish counterparties, said Walter Meier, a spokesman.
The Bank of England doesn’t publish details of individual financial institutions’ use of its facilities. Confidence in banks “can best be sustained” if support is disclosed “only when conditions giving rise to potentially systemic disturbance have improved,” it said in its annual report.
Fed policy makers let the program expire in February 2010 then revived it after three months to try to contain Europe’s debt crisis. Nineteen months later, European officials still struggle to contain the market turmoil, which has spread to sovereign bonds in France and Italy as investors increasingly question governments’ ability to repay debt.
The expanding crisis spurred the Fed and other central banks in November to extend the program by six months to Feb. 1, 2013, and lower borrowing costs by half a percentage point to make them more attractive. Last week, European leaders agreed to make loans of as much as 200 billion euros ($267.7 billion) to the International Monetary Fund and tightened rules to curb future debts.
The Fed swap program had a combined balance of $2.3 billion in loans outstanding as of Dec. 7 for all five participating central banks. That doesn’t account for the ECB’s latest dollar auction because the loans hadn’t settled yet.
The GAO, which released its emergency-lending report in July, wasn’t required to delve into the final destinations of the swap dollars, said Orice Williams Brown, the agency’s lead official on Fed audits. As a result of the study, the GAO learned that UBS AG’s October 2008 bailout from the Swiss government included an “atypical use” of swap-line dollars “generally not exceeding about $13 billion,” the report said.
Bernanke didn’t know which financial institutions got dollar loans, he said during a July 2009 House Financial Services Committee hearing.
Not having the identities would restrict the Fed’s ability to understand the “overall risk exposure of the institutions it’s supervising,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors Inc.
The Fed may not need all the details, said Al Broaddus, former president of the Federal Reserve Bank of Richmond. The ECB and other central banks “are obliged to pay the Fed back. They’re the ones that are taking the credit risk with the institutions that are actually being lent to.”
In 2008, the dollar-based money markets that many foreign banks used to finance their holdings of U.S. mortgage-backed securities froze, forcing them to turn to the Fed to fill the funding gap. Much of the borrowing was done through U.S. branches that are legally eligible to draw emergency loans from the Fed’s lender-of-last-resort programs, according to the Bloomberg examination.
Biggest Foreign Borrower
The U.K.’s Royal Bank of Scotland Group Plc was the biggest foreign borrower, drawing $84.5 billion in October 2008. UBS, based in Zurich, got $77.2 billion, while Frankfurt-based Deutsche Bank AG took $66 billion and London-based Barclays Plc borrowed $64.9 billion, according to the Bloomberg data.
One of the borrowers, Dexia SA, is being broken up after running out of short-term funding. The French-Belgian lender had
120.6 billion euros of central-bank liabilities on Dec. 31, 2008, according to a company report; $58.5 billion came directly from the Fed, the Bloomberg examination showed.
Fed officials, including Governor Daniel Tarullo, have emphasized the need for improved monitoring and control of risks throughout the banking system, as well as global coordination among financial-policy makers. Regulators “must not lose sight of the importance of supervisory cooperation in pursuit of the shared goal of a stable international financial system,” he said in a Nov. 4 speech.
Ohio Senator Sherrod Brown, a Democrat who heads the Banking Subcommittee on Financial Institutions and Consumer Protection, said he isn’t sure swap-line borrowers should be made public. Still, the Fed “should follow the money in terms of disclosure, period,” he said. “Full disclosure from start to finish is the goal.”
Massachusetts Representative Barney Frank, the senior Democrat on the House Financial Services Committee, said he saw no need for the disclosure because the Fed has no role in approving the ultimate borrowers.
“What the Fed is doing with regard to the ECB is very important for the American economy,” Frank said. “Our interest is to make sure we get paid back. I think the ECB is a pretty good debtor and a pretty reliable one.”
Joseph Stiglitz, a Nobel Prize-winning economist who led President Bill Clinton’s Council of Economic Advisers, said the “fundamental problem” is that capital markets need information to work properly, yet the Fed is saying, “we believe in capital-market discipline without information.”
“It would be very useful to see” those names, said Stiglitz, a professor at Columbia University in New York. With the dollar auctions of foreign central banks shielded from disclosure, “what we have now is a very partial picture.”
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