IN August 2007, as world financial markets were seizing up, domestic and foreign banks began lining up for cash from the Federal Reserve Bank of New York.
That Aug. 20, Commerzbank of Germany borrowed $350 million at the Fed's discount window. Two days later, Citigroup, JPMorgan Chase, Bank of America and the Wachovia Corporation each received $500 million. As collateral for all these loans, the banks put up a total of $213 billion in asset-backed securities, commercial loans and residential mortgages, including second liens.
Thus began the bank run that set off the financial crisis of 2008. But unlike other bank runs, this one was invisible to most Americans.
Until last week, that is, when the Fed pulled back the curtain. Responding to a court ruling, it made public thousands of pages of confidential lending documents from the crisis.
The data dump arose from a lawsuit initiated by Mark Pittman, a reporter at Bloomberg News, who died in November 2009. Upon receiving his request for details on the central bank's lending, the Fed argued that the public had no right to know. The courts disagreed.
The Fed documents, like much of the information about the crisis that has been pried out of reluctant government agencies, reveal what was going on behind the scenes as the financial storm gathered. For instance, they show how dire the banking crisis was becoming during the summer of 2007. Washington policy makers, meanwhile, were saying that the subprime crisis would subside with little impact on the broad economy and that world markets were highly liquid.
For example, on July 23, 2007, Henry M. Paulson Jr., the Treasury secretary at the time, said the housing slump appeared to be "at or near the bottom." Two days later, Timothy F. Geithner, then the president of the New York Fed, declared in a speech before the Forum on Global Leadership in Washington: "Financial markets outside the United States are now deeper and more liquid than they used to be, making it easier for companies to raise capital domestically at reasonable cost."
Within about a month's time, however, foreign banks began thronging to the Fed's discount window — its mechanism for short-term lending to banks. Over four days in late August and early September, foreign institutions, through their New York branches, received a total of almost $1.7 billion in Fed loans.
As the global run progressed, banks increased their borrowings, the documents show. For example, on Sept. 12, 2007, Citibank drove up to the New York Fed's window. It extracted $3.375 billion of cash in exchange for $23 billion worth of assets, including commercial mortgage-backed securities, residential mortgages and commercial loans.
THAT transaction seemed to get the Fed's attention. At 1:30 that afternoon, Mr. Geithner spent half an hour on the phone with Gary L. Crittenden, Citi's chief financial officer at the time, Mr. Geithner's calendar shows. A few weeks later, Citigroup announced that it was writing off $5.9 billion in the third quarter, causing its profit to drop 60 percent from a year earlier — and that was only the beginning.
Perhaps the biggest revelation in the Fed documents is the extent to which the central bank was willing to lend to foreign institutions. On Nov. 8, 2007, Deutsche Bank took out a $2.4 billion overnight loan secured by $4 billion in collateral. And on Dec. 5, 2007, Calyon of France borrowed $2 billion, providing $16 billion in collateral.
When the crisis was full-on in 2008, foreign institutions became even bigger beneficiaries of the Fed's credit programs. On Nov. 4 of that year, the Fed extended $133 billion through various facilities. Two foreign institutions — the German-Irish bank Depfa and Dexia Credit of Belgium — received 39 percent of the money that day.
"The striking thing was the large amount of borrowing that the New York Fed accepted during the crisis from European banks that had only a minimal presence in the U.S. and arguably posed no threat to the U.S. payment system," said Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland. Such a thing would never have occurred 20 years ago, he added.
All of the discount-window borrowings extended to institutions during the debacle have been repaid. But the precedent was set: The Fed was the financial backstop to the world.
Since 2000 or so, the mind-set at the Fed in New York and Washington has been that the central bank must step in when there is a global crisis, Mr. Todd said, even if it appears to exceed its mandate.
Ben S. Bernanke, the Fed chairman, seemed to foreshadow this view early in the crisis. Addressing the Fed's annual symposium at Jackson Hole, Wyo., on Aug. 17, 2007, Mr. Bernanke said: "It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy."
Protecting global lenders and investors from the effects of their financial decisions was exactly what the Fed decided it had to do. Bankers and investors on the receiving end of this largess have long known the extent to which the Fed rescued them in their time of need. Now, thanks to these Fed documents, the rest of us can see it, too.
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