The discount window provided by the Federal Reserve attracted a hoard of banks heretofore unknown as the financial system melted down. Thanks to a Freedom of Information Act request enforced by the Supreme Court the other day, data showing the true level of discount window lending has been released. The information provides a window on the severity and extent of the 2008 financial turmoil.
Bailing out banks throughout world
The discount window was created by the Fed a century ago to help healthy banks caught in a money crunch with short-term loans. When the Fed has to help out a financial institution, generally that bank's identity is kept secret. This is due to the stigma surrounded by a bank that needs some help. However the Fed was forced to make the details public by the Supreme Court after it ruled in favor of a Freedom of Information Act request filed by Bloomberg and Fox Business. Nobody was worried about the stigma anymore after the report was released Thursday by the Fed. This was because almost every financial institution in the world during the financial turmoil needed a bit of help. More than 25,000 pages of documents show the Fed lent as much as $110 billion through the discount window in one day as the financial crisis peaked.
European banks borrowing more than others
During the financial turmoil, Wall Street financial institutions got lots of criticism for taking government bailout funds. All of the data showed that European banks borrowed probably the most. The Fed report was clear about this. On Oct. 29, 2008, Belgian-French bank Dexia borrowed $26.5 billion and Dublin-based financial institution Depfa, owned by German mortgage lender Hypo Real Estate, borrowed $24.6 billion. There were other European banks to get billions from the discount window. These incorporated France's Societe Generale, Austria's Erste Group and Bank of Scotland. On this side of the pond, before it became the biggest bank failure in history, Washington Mutual borrowed $2 billion on Thursday, Sept. 18, 2008, to get through the weekend. Until Wamu was taken over by J.P. Morgan Chase on Thursday, September 25, 2008, it kept taking out the $2 billion loan overnight as it could not be paid back.
Details shows global degree of financial turmoil
When the collapse of Lehman Brothers in September 2008 triggered the financial turmoil, the global economy went into a tailspin, the financial system froze and banks worldwide begged the Fed for help. The release of the discount window data shows just how bad the damage was and the way quickly it spread. During testimony to a congressional panel investigating the financial turmoil in November 2009, Fed chairman Ben Bernanke said of all the financial institutions lined up at the discount window, only one was not at risk of total collapse. About two years after the loan has been released, the discount window lending information must be released in the future. This was part of the 2010 Dodd-Frank financial reform bill.
Information from
Fox Business
foxbusiness.com/industries/2011/03/31/demystifying-feds-secretive-discount-window/
Wall Street Journal
online.wsj.com/article/SB10001424052748703712504576234700412932330.html
Reuters
reuters.com/article/2011/03/31/usa-fed-lending-idUSN3126104220110331?pageNumber=2
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