Thanks to tremendous public pressure and the recently passed Wall Street reform bill, the U.S. Federal Reserve was forced to reveal the details of its emergency bailout of the financial sector for the first time yesterday. From a quick review of the data now available on the Federal Reserve website, we can see that the Fed took an expansive internationalist view of its role, prompting U.S. Senator Bernie Sanders to ask: “Has the Federal Reserve Become the Central Bank of the world?”
When AIG was bailed out out in Sept. 2008 and immediately passed on huge sums to overseas counterparties including Société Générale (France) and Deutsche Bank (Germany), there was a public uproar. The Fed data out today confirms what many suspected. This back-door bailout of foreign banks was just the tip of the iceberg. The Fed data covers 13 programs amounting to some $3.3 trillion in loans, we could only look at a few, but in every program examined foreign banks were huge beneficiaries of a taxpayer-funded lifeline.
Central Bank Liquidity Swap Lines Aided Foreign Central Banks
Central banks around the world, the governmental entities that serve as a nation’s primary monetary authority, drew heavily on the Fed’s currency swap lines beginning in December of 2007. The Fed says “to address severe strains in global short-term dollar funding markets, the Federal Reserve established temporary central bank liquidity swap lines (also referred to as reciprocal currency arrangements) with a number of foreign central banks.” In other words, the Federal Reserve loaned a boatload of cash to central banks around the globe including billions to the European Central Bank and at least 10 others – Australia, Britain, Denmark, Japan, Mexico, Norway, South Korea, Sweden, Switzerland and England.
Mortgage-Backed Securities Purchase Program Aided Foreign Private Banks
Private foreign banks also received billions from the Fed in exchange for mortgage backed securities (MBS). The Fed created its MBS program in November 2008 and eventually paid out $1.25 trillion. These facts were known. What we did not know was that approximately half of these purchases were from overseas financial firm including billions from Barclays Capital (U.K.), Credit Suisse (Switzerland), Deutsche Bank (Germany), Royal Bank of Scotland (England), UBS (Switzerland) and Nomura Securities (Japan). The numbers are huge. Deutsche Bank sold some $290 billion worth of MBS to the Fed.
Term Securities Lending Facility Loaned Free Money
The Huffington Post reported that like U.S. banks, major European firms benefited from the [http://www.federalreserve.gov/newsevents/reform_talf.htm Term Securities Lending Facility]. Under this program the banks were loaned securities for four-week intervals while paying fees that amounted to a whopping 0.0078 percent. Five EU firms took advantage of this free money:
Credit Suisse (Switzerland), Deutsche Bank (Germany), Royal Bank of Scotland (U.K.), Barclays (U.K.), and BNP Paribas (France) — borrowed $5.2-6.2 billion in Treasuries 20 different times. The one-time fees they paid on each transaction ranged from $403,277.78 to $481,110. Deutsche led the way with seven such deals.
Commercial Paper Funding Facility Aided Firms Around the Globe
In the fall of 2008, the Fed created the Commercial Paper Funding Facility to help companies that had trouble getting short-term loans called commercial paper. While most Americans can understand loans to General Electric, Ford Motor, and Harley-Davidson, they are going to be having a harder time understanding billions of dollars worth of loans to overseas banks. UBS (Switzerland) was the big winner with $74.6 billion in paper bought according to the New York Times. The list of banks is eclectic from uber-performing Royal Bank of Canada to underperforming Allied Bank of Ireland. Also included Robobank (Netherlands) and Banco Espirito Santo (Portugal.)
When AIG sent $24 billion to Société Générale and Deutsche Bank, Congress launched an investigation. Now these amounts look relatively small.
Why lend to foreign banks who could petition for help from their central banks overseas? How did these loans benefit the American taxpayer? How much has been paid back? From our accounting at the Center for Media and Democracy, approximately $2 trillion in Fed loans are still outstanding. (The Fed accounted for 13 programs, we accounted for 21).
When asked why Canadian banks were getting aided by the Federal Reserve, Canadian trade analyst Ellen Gould pointed out, “the United States is a signatory to the World Trade Organization’s Agreement on Financial Services. Under that pact, the Fed cannot favor a U.S. bank with 20,000 employees over a foreign bank with 20 employees. It is required to treat all banks with a subsidiary in the United States the same.”
While our treaty obligations are clear and well-known to the administration — Tim Geithner was a key negotiator of the WTO financial service agreement back in the late 1990’s — I favor Gould’s second theory. With a little more digging we might find out that all these foreign banks are in fact Goldman Sachs counterparties.