The Federal Reserve has made public an enormous trove of data about the emergency measures it took during the worst of the credit crunch and the ensuing recession. It’s confusing stuff: arcane spreadsheets showing more than 21,000 transactions totaling more than $3.3 trillion via an alphabet soup of programs. (Gratuitous example: the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or, well, ABCPMMMFLF.) Still, the revelations provide a fascinating glimpse into the workings of the Fed in the apocalyptic days of 2008, when the world economy was on the verge of collapse. They also leave one major question unanswered.
First things first: Why did the notoriously shy Fed post the detailed data this week? Because Congress forced it to. The Dodd-Frank financial-reform law included a provision, authored by longtime critic of Fed secrecy Sen. Bernie Sanders, requiring the disclosure of the information by Dec. 1. Right on deadline, the central bank opened up.
During its multitrillion-dollar rescue of the financial system, the Fed continued its usual policy of omertà, shrugging off requests from politicians and journalists for information about the trillions in emergency loans it was making. By way of explanation, the Fed told Bloomberg at the time that the country was facing “an unprecedented crisis” wherein “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.” Essentially, the Fed worried that more information might make a very bad situation even worse.
But now—with the recovery under way and bank profits healthy again—the Fed has coughed the data up. The trove shows which firms used what facilities, when, for how much, and on what terms. (The Wall Street Journal has a handy tool so that the curious don’t need to wade through spreadsheets.)
It makes for interesting reading—or, at least, holds some interesting revelations even for those not tickled by the sight of spreadsheets. Consider the case of investment-banking giant Goldman Sachs, whose transactions with the Fed are here. The company, among the most profitable on Wall Street, has boasted that it would have been able to survive the crisis without government assistance. President Gary Cohn said it explicitly in Vanity Fair last year, in a piece by my fellow Moneybox columnist Bethany McLean. “I think we would not have failed,” he said. “We had cash.”
That always seemed disingenuous at best. And we now know the firm borrowed more, earlier, and for longer than its executives would at the time admit. In more than 60 transactions before the collapse of Lehman Bros., starting in earnest in April, the firm went to the government for cash. “At that time, the market had not recognized the depth of the problems,” says Karen Shaw Petrou of Federal Financial Analytics. “It really shows how ill-prepared they were for a liquidity crisis.”
The day after Lehman failed—the epicenter of the credit crunch, when the entire global market panicked—the Goldman Sachs’ broker-dealer borrowed $18 billion, while its London subsidiary borrowed an additional $6 billion. Its daily borrowing peaked in October at more than $35 billion. Other revelations confirm suspicions about how weak the biggest banks became. Barclays, the British bank that absorbed much of Lehman, owed the central bank nearly $50 billion at one point. Citi sought help more than 170 times.
The cache also shows that a much broader range of companies used the Fed facilities than previously imagined. For instance, the Fed, via its commercial paper facility, aided hog-builder Harley Davidson, Japanese carmaker Toyota, and construction equipment giant Caterpillar. It also helped a plethora of foreign banks, from the Swiss bank UBS to the government-owned Korean Development Bank.
Some are now questioning whether the Fed should have bailed out foreign entities. But “bail out” is probably the wrong term. The Fed took on risk by providing loans, but it says it expects to incur no losses. And the risk-reward calculus was pretty easy, since what the Fed was facing was the collapse of the global banking system.
“We knew the Fed helped foreign companies,” Petrou says. “But this speaks to the Fed’s credit. In the midst of a global financial crisis, the Fed mustered liquidity support when all of the other central banks were acting slowly. The Fed became the global central bank—and that was a very good call, given that everyone’s backs were against the wall.”
Supersecret hedge funds also availed themselves of the Fed’s help. Indeed, firms like Magnetar—of the infamously skeezy Magnetar trade—borrowed billions from the government via the Term Asset-Backed Securities Loan Facility. The main purpose of TALF was to help ease the market for assets backed by things like student loans and credit cards, with the goal of restoring the flow of credit to consumers. Now we know that TALF also provided low-cost loans to firms like Magnetar and Pacific Investment Management Co., or PIMCO.
So, what don’t we know? One missing piece is a complete set of details about collateral—what firms gave the Fed in exchange for the loans—Bloomberg notes. That’s important stuff. To provide an admittedly silly example, say I offered to give you an asset worth $1.1 million in exchange for $1 million in cash. You might do it if I handed you a pillowcase filled with diamonds. But you might not if I handed you a finger painting, insisting it was a Picasso.
Starting on Sept. 15, 2008, when Lehman collapsed, the Fed announced it would start accepting the equivalent of finger paintings in exchange for cash—something it previously had not had to do. The Primary Dealer Credit Facility took more than $1 trillion in junk-rated assets—hundreds of billions rated CCC or lower, the real risky sludge. (Notably, all loans extended under the facility were paid back in full, with interest.) But details on the collateral remain incomplete. The Dodd-Frank law required “information identifying the types and amounts of collateral pledged or assets transferred.” For three of six facilities, the Fed only provides general information about the type and rating of the collateral. (Obviously, that information can be useless.)
And there will be many more such questions to come. The trove is enormous. And a lot of people—investors, politicians, economists, bankers, Fed watchers—are working their way through it. Among them is Sanders. Other “members of Congress and I will be taking a very extensive look at all aspects of how the Federal Reserve functions,” he promised in a press release. That means more headaches for the now slightly-less-secretive Fed.