In April, Bloomberg News revealed that foreign banks were the biggest recipients of the Fed’s discount loan program during the height of the financial crisis. And if foreign banks getting emergency cash wasn’t bad enough, Bloomberg has uncovered another absurdity from the recession-era financial markets: it’s now estimated that the Fed dolled out $80 billion in secretive loans to banks, and some locked in interest rates as low as 0.01 percent.
The loan program is called single-tranche open- market operations, or ST OMO. Bloomberg explains what went down:
The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.
Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent.
Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. told Bloomberg it’s obvious what happened.
“This was a pure subsidy,” he said. “The Fed hasn’t been forthcoming with disclosures overall. Why should this be any different?”
According to Bloomberg, details of the program “weren’t revealed to shareholders, members of Congress or the public.” And it also found that the Dodd-Frank financial overhaul overlooked the program entirely:
Congress overlooked ST OMO when lawmakers required the central bank to publish its emergency lending data last year under the Dodd-Frank law.
“I wasn’t aware of this program until now,” said U.S. Representative Barney Frank, the Massachusetts Democrat who chaired the House Financial Services Committee in 2008 and co- authored the legislation overhauling financial regulation. The law does require the Fed to release details of any open-market operations undertaken after July 2010, after a two-year lag.
Records of the 2008 lending, released in March under court orders, show how the central bank adapted an existing tool for adjusting the U.S. money supply into an emergency source of cash. Zurich-based Credit Suisse borrowed as much as $45 billion, according to bar graphs that appear on 27 of 29,000 pages the central bank provided to media organizations that sued the Fed Board of Governors for public disclosure.
The Fed defends the loans by toeing the government line, mainly claiming that the money given to banks kept the banks above water and secured cash flow for regular Americans.
Jeffrey V. Smith, a spokesman for the New York Fed told Bloomberg that “this program helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses.”
But John H. Cochrane, a finance professor at the University of Chicago Booth School of Business, says the program was beyond the Fed’s reach.
“The Fed was slamming the pedal to the metal in the lender-of-last-resort category,” he told Bloomberg. “What they did was so far from what we conventionally think of as monetary policy.”
Read the full article from Bloomberg News.