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Politics

Wall Street Aristocracy Got $1.2 Trillion in Secret
Loans

By Bradley Keoun and Phil Kuntz
-

Enlarge image

Finance ‘Aristocracy’ Took $1.2
Trillion in Loans

Brendan Smialowski/Bloomberg

Chief executive officers from eight of the largest U.S.
banks receiving government aid testify at a House Financial Services Committee
hearing in Washington, D.C on Feb. 11, 2009.

Chief executive officers from eight of the largest U.S. banks
receiving government aid testify at a House Financial Services Committee hearing
in Washington, D.C on Feb. 11, 2009. Photographer: Brendan Smialowski/Bloomberg

Play Video

Aug. 22 (Bloomberg) -- The Federal Reserve's unprecedented
effort to keep the economy from plunging into depression included lending banks
and other companies as much as $1.2 trillion of public money. The largest
borrower, Morgan Stanley, got as much as $107.3 billion, while Citigroup Inc.
took $99.5 billion and Bank of America Corp. $91.4 billion, according to a
Bloomberg News compilation of data obtained through Freedom of Information Act
requests, months of litigation and an act of Congress. Erik Schatzker and Sara
Eisen report on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Play Video

Aug. 22 (Bloomberg) -- Robert Eisenbeis, chief monetary
economist at Cumberland Advisors Inc., talks about $1.2 trillion of public money
the U.S. Federal Reserve secretly loaned to Wall Street banks and other
companies. Eisenbeis, speaking with Mark Crumpton on Bloomberg Television's
"Bottom Line," also discusses the outlook for Fed monetary policy and the U.S.
economy. (Source: Bloomberg)

Play Video

Aug. 21 (Bloomberg) -- Robert E. Litan, a former Justice
Department official who in the 1990s served on a commission probing the causes
of the savings and loan crisis, now vice president at the Kansas City,
Missouri-based Kauffman Foundation, Richard Herring, a finance professor at the
University of Pennsylvania, Roger Lister, a former Fed economist who’s now head
of financial-institutions coverage at credit-rating firm DBRS Inc., and Kenneth
Rogoff, a former chief economist at the International Monetary Fund and now an
economics professor at Harvard University, talk about the U.S. government's $1.2
trillion bailout of the banking system and the outlook for regulatory overhaul
of the industry. (Source: Bloomberg)

Play Video

Aug. 22 (Bloomberg) -- Neil Barofsky, former special inspector
general for the Troubled Asset Relief Program and a Bloomberg Television
contributing editor, talks about the Federal Reserve's emergency loans during
the financial crisis. Fed Chairman Ben S. Bernanke’s effort to keep the economy
from plunging into depression included lending banks and other companies as much
as $1.2 trillion of public money, according to a Bloomberg News compilation of
data obtained through Freedom of Information Act requests, months of litigation
and an act of Congress. Barofsky speaks with Erik Schatzker on Bloomberg
Television's "InsideTrack." (Source: Bloomberg)

Play Video

Aug. 22 (Bloomberg) -- Charles Peabody, an analyst at Portales
Partners LLC, and Bloomberg reporter Bradley Keoun discuss the Federal Reserve's
emergency lending programs and the capital position of U.S. banks. They speak
with Erik Schatzker and Michael McKee on Bloomberg Television's "InsideTrack."
(Source: Bloomberg)

Enlarge image

Fed data chart

Bloomberg

To view the Bloomberg interactive graphic of the Fed's
financial bailout, click on the link in the seventh paragraph of the
story.

To view the Bloomberg interactive graphic of the Fed's
financial bailout, click on the link in the seventh paragraph of the story.
Source: Bloomberg

Enlarge image

Wall Street Aristocracy Got $1.2
Trillion From Fed

Bloomberg

Citigroup Inc. and Bank of America Corp. were the reigning
champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S.
banks and brokerage firms to their best year ever with $104 billion of
profits.

Citigroup Inc. and Bank of America Corp. were the reigning
champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S.
banks and brokerage firms to their best year ever with $104 billion of profits.
Source: Bloomberg

Enlarge image

Wall Street Aristocracy Got $1.2
Trillion

Scott J. Ferrell/Congressional Quarterly/Getty
Images

Lloyd Blankfein, CEO of Goldman Sachs; Jamie Dimon, CEO of
JPMorgan Chase and Co.; Robert P.Kelly, CEO of the Bank of New York; Ken Lewis,
CEO of the Bank of America; Ronald E. Logue, CEO of State Street; John Mack, CEO
of Morgan Stanley; Vikram Pandit, CEO of Citigroup; and John Stumpf, CEO of
Wells Fargo, testify during the House Financial Services oversight hearing of
the Troubled Assets Relief Program (TARP).

Lloyd Blankfein, CEO of Goldman Sachs; Jamie Dimon, CEO of
JPMorgan Chase and Co.; Robert P.Kelly, CEO of the Bank of New York; Ken Lewis,
CEO of the Bank of America; Ronald E. Logue, CEO of State Street; John Mack, CEO
of Morgan Stanley; Vikram Pandit, CEO of Citigroup; and John Stumpf, CEO of
Wells Fargo, testify during the House Financial Services oversight hearing of
the Troubled Assets Relief Program (TARP). Photographer: Scott J.
Ferrell/Congressional Quarterly/Getty Images

Enlarge image

Finance ‘Aristocracy’ Took $1.2
Trillion in Loans

Jeremy Bales/Bloomberg

Two weeks after Lehman Brothers Holdings Inc.'s bankruptcy
triggered a global credit crisis, Morgan Stanley countered concerns that it
might be next to go by announcing it had 'strong capital and liquidity
positions.'

Two weeks after Lehman Brothers Holdings Inc.'s bankruptcy
triggered a global credit crisis, Morgan Stanley countered concerns that it
might be next to go by announcing it had 'strong capital and liquidity
positions.' Photographer: Jeremy Bales/Bloomberg

Enlarge image

Wall Street Aristocracy Got $1.2T in
Loans

JB Reed/Bloomberg

A Wall Street sign stands outside the New York Stock
Exchange in New York, U.S. The loans dwarfed the $160 billion in public bailouts
the top 10 got from the U.S. Treasury, yet until now the full amounts have
remained secret.

A Wall Street sign stands outside the New York Stock Exchange
in New York, U.S. The loans dwarfed the $160 billion in public bailouts the top
10 got from the U.S. Treasury, yet until now the full amounts have remained
secret. Photographer: JB Reed/Bloomberg

Enlarge image

Wall Street Aristocracy Got $1.2T in
Loans

Robert Caplin/Bloomberg

Citigroup Inc., along with Morgan Stanley and Citigroup
Inc., were the biggest borrowers under seven U.S. Federal Reserve
emergency-lending programs.

Citigroup Inc., along with Morgan Stanley and Citigroup Inc.,
were the biggest borrowers under seven U.S. Federal Reserve emergency-lending
programs. Photographer: Robert Caplin/Bloomberg

Enlarge image

The Fed’s Secret Liquidity Lifelines

Bloomberg

The Federal Reserve provided as much as $1.2 tillion in
public money to banks and other companies from August 2007 through April 2010 to
head off a depression.

The Federal Reserve provided as much as $1.2 tillion in public
money to banks and other companies from August 2007 through April 2010 to head
off a depression. Source: Bloomberg

Enlarge image

Finance ‘Aristocracy’ Took $1.2
Trillion in Loans

Peter Foley/Bloomberg

Morgan Stanley, along with Citigroup Inc., and Bank of
America Corp., were the biggest borrowers under seven Fed emergency-lending
programs. The three banks' combined $298.2 billion in hidden Fed loans was
triple what they received in publicly disclosed bailouts from the U.S.
Treasury.

Morgan Stanley, along with Citigroup Inc., and Bank of America
Corp., were the biggest borrowers under seven Fed emergency-lending programs.
The three banks' combined $298.2 billion in hidden Fed loans was triple what
they received in publicly disclosed bailouts from the U.S. Treasury.
Photographer: Peter Foley/Bloomberg

Enlarge image

Finance ‘Aristocracy’ Took $1.2
Trillion in Loans

Jeremy Bales/Bloomberg

Bank of America Corp., along with Morgan Stanley and
Citigroup Inc. was one of the biggest borrowers under the U.S. Federal Reserve's
emergency-lending programs. The three banks' combined $298.2 billion in hidden
Fed loans was triple what they received in publicly disclosed bailouts from the
U.S. Treasury.

Bank of America Corp., along with Morgan Stanley and Citigroup
Inc. was one of the biggest borrowers under the U.S. Federal Reserve's
emergency-lending programs. The three banks' combined $298.2 billion in hidden
Fed loans was triple what they received in publicly disclosed bailouts from the
U.S. Treasury. Photographer: Jeremy Bales/Bloomberg

Enlarge image

Finance ‘Aristocracy’ Took $1.2
Trillion in Loans

Simon Dawson/Bloomberg

The Royal Bank of Scotland took $84.5 billion in loans
from the U.S. Federal Reserve's emergency-lending
programs.

The Royal Bank of Scotland took $84.5 billion in loans from the
U.S. Federal Reserve's emergency-lending programs. Photographer: Simon
Dawson/Bloomberg

Enlarge image

Finance ‘Aristocracy’ Took $1.2
Trillion in Loans

Gianluca Colla/Bloomberg

UBS AG, Switzerland's biggest bank, got $77.2 billion in
loans from the U.S. Federal Reserve's emergency-lending
programs.

UBS AG, Switzerland's biggest bank, got $77.2 billion in loans
from the U.S. Federal Reserve's emergency-lending programs. Photographer:
Gianluca Colla/Bloomberg

Enlarge image

Finance ‘Aristocracy’ Took $1.2
Trillion in Loans

Scott Eells/Bloomberg

Goldman Sachs Group Inc., the fifth-biggest U.S. bank by
assets.

Goldman Sachs Group Inc., the fifth-biggest U.S. bank by
assets. Photographer: Scott Eells/Bloomberg

Enlarge image

Finance ‘Aristocracy’ Took $1.2
Trillion in Loans

Judith White/Bloomberg

U.S. Federal Reserve borrowings by Societe Generale SA,
France's second-biggest bank, peaked at $17.4 billion in May 2008, four months
after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion)
loss on unauthorizedstock-index futures bets by former trader Jerome
Kerviel.

U.S. Federal Reserve borrowings by Societe Generale SA,
France's second-biggest bank, peaked at $17.4 billion in May 2008, four months
after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion)
loss on unauthorizedstock-index futures bets by former trader Jerome Kerviel.
Photographer: Judith White/Bloomberg

Enlarge image

Finance ‘Aristocracy’ Took $1.2
Trillion in Loans

Antoine Antoniol/Bloomberg

U.S. Federal Reserve borrowings by Societe Generale SA,
France's second-biggest bank, peaked at $17.4 billion in May 2008, four months
after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion)
loss on unauthorized stock-index futures bets by former trader Jerome
Kerviel.

U.S. Federal Reserve borrowings by Societe Generale SA,
France's second-biggest bank, peaked at $17.4 billion in May 2008, four months
after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion)
loss on unauthorized stock-index futures bets by former trader Jerome Kerviel.
Photographer: Antoine Antoniol/Bloomberg

Citigroup Inc. (C)
and Bank of America
Corp. (BAC) were the reigning champions of finance in 2006 as home prices
peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year
ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more
than six times as much, $669 billion, in emergency loans from the U.S. Federal
Reserve. The loans dwarfed the $160 billion in public bailouts the top 10
got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from
plunging into depression included lending banks and other companies as much as
$1.2 trillion of public money, about the same amount U.S. homeowners currently
owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan
Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5
billion and Bank of America $91.4 billion, according to a Bloomberg News
compilation of data obtained through Freedom of Information Act requests, months
of litigation and an act of Congress.

“These are all whopping numbers,” said Robert
Litan, a former Justice Department official who in the 1990s served on a
commission probing the causes of the savings and loan crisis. “You’re talking about the
aristocracy of American finance going down the tubes without the federal money.”

(View the Bloomberg interactive graphic to chart the Fed’s financial
bailout.)

Foreign Borrowers

It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers,
measured by peak balances, were European firms. They included Edinburgh-based
Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S.
lender, and Zurich-based UBS AG
(UBSN), which got $77.2 billion. Germany’s Hypo Real Estate Holding AG
borrowed $28.7 billion, an average of $21 million for each of its 1,366
employees.

The largest borrowers also included Dexia SA
(DEXB), Belgium’s biggest bank by assets, and Societe Generale SA, based in
Paris, whose bond-insurance prices have surged in the past month as investors
speculated that the spreading sovereign debt crisis in Europe might increase
their chances of default.

The $1.2 trillion peak on Dec. 5, 2008 -- the combined outstanding balance
under the seven programs tallied by Bloomberg -- was almost three times the size
of the U.S. federal budget deficit that year and more than the total earnings of
all federally insured banks in the U.S. for the decade through 2010, according
to data compiled by Bloomberg.

Peak Balance

The balance was more than 25 times the Fed’s pre-crisis lending peak of $46
billion on Sept. 12, 2001, the day after terrorists attacked the World Trade
Center in New
York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill
539 Olympic-size swimming pools.

The Fed has said it had “no credit losses” on any of the emergency programs,
and a report by Federal Reserve Bank of New York staffers in February said the
central bank netted $13 billion in interest and fee income from the programs
from August 2007 through December 2009.

“We designed our broad-based emergency programs to both effectively stem the
crisis and minimize the financial risks to the U.S. taxpayer,” said James
Clouse, deputy director of the Fed’s division of monetary affairs in Washington.
“Nearly all of our emergency-lending programs have been closed. We have incurred
no losses and expect no losses.”

While the 18-month U.S. recession that ended in June 2009 after a 5.1 percent
contraction in gross domestic product was nowhere near the four-year, 27 percent
decline between August 1929 and March 1933, banks and the economy remain
stressed.

Odds of Recession

The odds of another recession have climbed during the past six months,
according to five of nine economists on the Business Cycle Dating Committee of
the National Bureau of Economic Research, an academic panel that dates
recessions.

Bank of America’s bond-insurance prices last week surged to a rate of
$342,040 a year for coverage on $10 million of debt, above where Lehman
Brothers Holdings Inc. (LEHMQ)’s bond insurance was priced at the start of
the week before the firm collapsed. Citigroup’s shares are trading below the
split-adjusted price of $28 that they hit on the day the bank’s Fed loans peaked
in January 2009. The U.S. unemployment rate was at 9.1 percent in July, compared
with 4.7 percent in November 2007, before the recession began.

Homeowners are more than 30 days past due on their mortgage payments on 4.38
million properties in the U.S., and 2.16 million more properties are in
foreclosure, representing a combined $1.27 trillion of unpaid principal,
estimates Jacksonville, Florida-based Lender Processing Services Inc.

Liquidity Requirements

“Why in hell does the Federal Reserve seem to be able to find the way to help
these entities that are gigantic?” U.S. Representative Walter B. Jones, a
Republican from North Carolina, said at a June 1 congressional hearing in
Washington on Fed lending disclosure. “They get help when the average
businessperson down in eastern North Carolina, and probably across America, they
can’t even go to a bank they’ve been banking with for 15 or 20 years and get a
loan.”

The sheer size of the Fed loans bolsters the case for minimum liquidity
requirements that global regulators last year agreed to impose on banks for the
first time, said Litan, now a vice president at the Kansas City, Missouri-based
Kauffman Foundation, which supports entrepreneurship
research. Liquidity refers to the daily funds a bank needs to operate, including
cash to cover depositor withdrawals.

The rules, which mandate that banks keep enough cash and easily liquidated
assets on hand to survive a 30-day crisis, don’t take effect until 2015. Another
proposed requirement for lenders to keep “stable funding” for a one-year horizon
was postponed until at least 2018 after banks showed they’d have to raise as
much as $6 trillion in new long-term debt to comply.

‘Stark Illustration’

Regulators are “not going to go far enough to prevent this from happening
again,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard University.

Reforms undertaken since the crisis might not insulate U.S. markets and
financial institutions from the sovereign budget and debt crises facing Greece,
Ireland and Portugal, according to the U.S. Financial Stability Oversight
Council, a 10-member body created by the Dodd-Frank Act and led by Treasury
Secretary Timothy Geithner.

“The recent financial crisis provides a stark illustration of how quickly
confidence can erode and financial contagion can spread,” the council said in
its July 26 report.

21,000 Transactions

Any new rescues by the U.S. central bank would be governed by transparency
laws adopted in 2010 that require the Fed to disclose borrowers after two years.

Fed officials argued for more than two years that releasing the identities of
borrowers and the terms of their loans would stigmatize banks, damaging stock
prices or leading to depositor runs. A group of the biggest commercial banks
last year asked the U.S. Supreme Court to keep at least some Fed borrowings
secret. In March, the high court declined to hear that appeal, and the central
bank made an unprecedented release of records.

Data gleaned from 29,346 pages of documents obtained under the Freedom of
Information Act and from other Fed databases of more than 21,000 transactions
make clear for the first time how deeply the world’s largest banks depended on
the U.S. central bank to stave off cash shortfalls. Even as the firms asserted
in news releases or earnings calls that they had ample cash, they drew Fed
funding in secret, avoiding the stigma of weakness.

Morgan Stanley Borrowing

Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley
countered concerns that it might be next to go by announcing it had “strong
capital and liquidity positions.” The statement, in a Sept. 29, 2008, press
release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial
Group Inc., said nothing about Morgan Stanley’s Fed loans.

That was the same day as the firm’s $107.3 billion peak in borrowing from the
central bank, which was the source of almost all of Morgan Stanley’s available
cash, according to the lending data and documents released more than two years
later by the Financial Crisis Inquiry Commission. The amount was almost three
times the company’s total profits over the past decade, data compiled by
Bloomberg show.

Mark Lake, a spokesman for New York-based Morgan Stanley, said the crisis
caused the industry to “fundamentally re- evaluate” the way it manages
its cash.

“We have taken the lessons we learned from that period and applied them
to our liquidity-management program to protect both our franchise and our
clients going forward,” Lake said. He declined to say what changes the bank had
made.

Acceptable Collateral

In most cases, the Fed demanded collateral for its loans -- Treasuries or
corporate bonds and mortgage bonds that could be seized and sold if the money
wasn’t repaid. That meant the central bank’s main risk was that collateral
pledged by banks that collapsed would be worth less than the amount borrowed.

As the crisis deepened, the Fed relaxed its standards for acceptable
collateral. Typically, the central bank accepts only bonds with the highest
credit grades, such as U.S. Treasuries. By late 2008, it was accepting “junk”
bonds, those rated below investment grade. It even took stocks, which are first
to get wiped out in a liquidation.

Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008,
pledging a total of $66.5 billion of collateral, according to Fed documents.
Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with
a junk credit rating and $19.5 billion of assets with an “unknown rating,”
according to the documents. About 25 percent of the collateral was
foreign-denominated.

‘Willingness to Lend’

“What you’re looking at is a willingness to lend against just about
anything,” said Robert Eisenbeis, a former research director at the Federal
Reserve Bank of Atlanta and now chief monetary economist in Atlanta for
Sarasota, Florida-based Cumberland Advisors Inc.

The lack of private-market alternatives for lending shows how skeptical
trading partners and depositors were about the value of the banks’ capital and
collateral, Eisenbeis said.

“The markets were just plain shut,” said Tanya Azarchs, former head of bank
research at Standard & Poor’s and now an independent consultant in
Briarcliff Manor, New York. “If you needed liquidity, there was only one place
to go.”

Even banks that survived the crisis without government capital injections
tapped the Fed through programs that promised confidentiality. London-based Barclays
Plc (BARC) borrowed $64.9 billion and Frankfurt-based Deutsche Bank AG
(DBK) got $66 billion. Sarah MacDonald, a spokeswoman for Barclays, and John
Gallagher, a spokesman for Deutsche Bank, declined to comment.

Below-Market Rates

While the Fed’s last-resort lending programs generally charge above-market interest
rates to deter routine borrowing, that practice sometimes flipped during the
crisis. On Oct. 20, 2008, for example, the central bank agreed to make $113.3
billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to
a press release at the time.

The rate was less than a third of the 3.8 percent that banks were charging
each other to make one-month loans on that day. Bank of America and Wachovia
Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank
of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.

JPMorgan Chase
& Co. (JPM), the New York-based lender that touted its “fortress balance
sheet” at least 16 times in press releases and conference calls from October
2007 through February 2010, took as much as $48 billion in February 2009 from
TAF. The facility, set up in December 2007, was a temporary alternative to the
discount window, the central bank’s 97-year-old primary lending program to help
banks in a cash squeeze.

‘Larger Than TARP’

Goldman Sachs
Group Inc. (GS), which in 2007 was the most profitable securities firm in
Wall Street history, borrowed $69 billion from the Fed on Dec. 31, 2008. Among
the programs New York-based Goldman Sachs tapped after the Lehman bankruptcy was
the Primary Dealer Credit Facility, or PDCF, designed to lend money to brokerage
firms ineligible for the Fed’s bank-lending programs.

Michael Duvally, a spokesman for Goldman Sachs, declined to comment.

The Fed’s liquidity lifelines may increase the chances that banks engage in
excessive risk-taking with borrowed money, Rogoff said. Such a phenomenon, known
as moral hazard, occurs if banks assume the Fed will be there when they need it,
he said. The size of bank borrowings “certainly shows the Fed bailout was in
many ways much larger than TARP,” Rogoff said.

TARP is the Treasury Department’s Troubled Asset Relief Program, a $700
billion bank-bailout fund that provided capital injections of $45 billion each
to Citigroup and Bank of America, and $10 billion to Morgan Stanley. Because
most of the Treasury’s investments were made in the form of preferred stock,
they were considered riskier than the Fed’s loans, a type of senior debt.

Dodd-Frank Requirement

In December, in response to the Dodd-Frank Act, the Fed released 18 databases
detailing its temporary emergency-lending programs.

Congress required the disclosure after the Fed rejected requests in 2008 from
the late Bloomberg News reporter Mark Pittman and other media companies that
sought details of its loans under the Freedom of Information Act. After fighting
to keep the data secret, the central bank released unprecedented information
about its discount window and other programs under court order in March 2011.

Bloomberg News combined Fed databases made available in December and July
with the discount-window records released in March to produce daily totals for
banks across all the programs, including the Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility,
discount window, PDCF, TAF, Term Securities Lending Facility and single-tranche open
market operations. The programs supplied loans from August 2007 through April
2010.

Rolling Crisis

The result is a timeline illustrating how the credit crisis rolled from one
bank to another as financial contagion spread.

Fed borrowings by Societe Generale
(GLE), France’s second-biggest bank, peaked at $17.4 billion in May 2008,
four months after the Paris-based lender announced a record 4.9 billion-euro
($7.2 billion) loss on unauthorized stock-index futures bets by former trader
Jerome Kerviel.

Morgan Stanley’s top borrowing came four months later, after Lehman’s
bankruptcy. Citigroup crested in January 2009, as did 43 other banks, the
largest number of peak borrowings for any month during the crisis. Bank of
America’s heaviest borrowings came two months after that.

Sixteen banks, including Plano, Texas-based Beal Financial Corp. and
Jacksonville, Florida-based EverBank Financial Corp., didn’t hit their peaks
until February or March 2010.

Using Subsidiaries

“At no point was there a material risk to the Fed or the taxpayer, as the
loan required collateralization,” said Reshma Fernandes, a spokeswoman for
EverBank, which borrowed as much as $250 million.

Banks maximized their borrowings by using subsidiaries to tap Fed programs at
the same time. In March 2009, Charlotte, North Carolina-based Bank of America
drew $78 billion from one facility through two banking units and $11.8 billion
more from two other programs through its broker-dealer, Bank of America
Securities LLC.

Banks also shifted balances among Fed programs. Many preferred the TAF
because it carried less of the stigma associated with the discount window, often
seen as the last resort for lenders in distress, according to a January 2011
paper by researchers at the New York Fed.

After the Lehman bankruptcy, hedge funds began pulling their cash out of
Morgan Stanley, fearing it might be the next to collapse, the Financial Crisis
Inquiry Commission said in a January report,
citing interviews with former Chief Executive Officer John Mack and
then-Treasurer David Wong.

Borrowings Surge

Morgan Stanley’s borrowings from the PDCF surged to $61.3 billion on Sept. 29 from zero on Sept.
14. At the same time, its loans from the Term Securities Lending Facility, or
TSLF, rose to $36 billion from $3.5 billion. Morgan Stanley treasury reports
released by the FCIC show the firm had $99.8 billion of liquidity on Sept. 29, a
figure that included Fed borrowings.

“The cash flow was all drying up,” said Roger Lister, a former Fed economist
who’s now head of financial-institutions coverage at credit-rating firm DBRS Inc. in New York. “Did they have enough resources to
cope with it? The answer would be yes, but they needed the Fed.”

While Morgan Stanley’s Fed demands were the most acute, Citigroup was the
most chronic borrower among the largest U.S. banks. The New York-based company
borrowed $10 million from the TAF on the program’s first day in December 2007
and had more than $25 billion outstanding under all programs by May 2008,
according to Bloomberg data.

Tapping Six Programs

By Nov. 21, when Citigroup began talks with the government to get a $20
billion capital injection on top of the $25 billion received a month earlier,
its Fed borrowings had doubled to about $50 billion.

Over the next two months the amount almost doubled again. On Jan. 20, as the
stock sank below $3 for the first time in 16 years amid investor concerns that
the lender’s capital cushion might be inadequate, Citigroup was tapping six Fed
programs at once. Its total borrowings amounted to more than twice the federal
Department of Education’s 2011 budget.

Citigroup was in debt to the Fed on seven out of every 10 days from August
2007 through April 2010, the most frequent U.S. borrower among the 100 biggest
publicly traded firms by pre- crisis market valuation. On average, the bank had
a daily balance at the Fed of almost $20 billion.

‘Help Motivate Others’

“Citibank basically was sustained by the Fed for a very long time,” said
Richard Herring, a finance professor at the University of Pennsylvania in
Philadelphia who has studied financial crises.

Jon Diat, a Citigroup spokesman, said the bank made use of programs that
“achieved the goal of instilling confidence in the markets.”

JPMorgan CEO Jamie Dimon said in a letter to shareholders last year that his bank
avoided many government programs. It did use TAF, Dimon said in the letter, “but
this was done at the request of the Federal Reserve to help motivate others to
use the system.”

The bank, the second-largest in the U.S. by assets, first tapped the TAF in
May 2008, six months after the program debuted, and then zeroed out its
borrowings in September 2008. The next month, it started using TAF again.

On Feb. 26, 2009, more than a year after TAF’s creation, JPMorgan’s
borrowings under the program climbed to $48 billion. On that day, the overall
TAF balance for all banks hit its peak, $493.2 billion. Two weeks later, the
figure began declining.

“Our prior comment is accurate,” said Howard
Opinsky, a spokesman for JPMorgan.

‘The Cheapest Source’

Herring, the University of Pennsylvania professor, said some banks may have
used the program to maximize profits by borrowing “from the cheapest source,
because this was supposed to be secret and never revealed.”

Whether banks needed the Fed’s money for survival or used it because it
offered advantageous rates, the central bank’s lender-of-last-resort role
amounts to a free insurance policy for banks guaranteeing the arrival of funds
in a disaster, Herring said.

An IMF report last October said regulators should consider charging banks
for the right to access central bank funds.

“The extent of official intervention is clear evidence that systemic
liquidity risks were under-recognized and mispriced by both the private and
public sectors,” the IMF said in a separate report in April.

Access to Fed backup support “leads you to subject yourself to greater
risks,” Herring said. “If it’s not there, you’re not going to take the risks
that would put you in trouble and require you to have access to that kind of
funding.”

To contact the reporters on this story: Bradley Keoun in New York at [email-masked]; Phil Kuntz in New York at [email-masked].

To contact the editor responsible for this story: David Scheer
in New York at [email-masked].

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