Federal Reserve May Be `Central Bank of the World' After UBS, Barclays Aid
UBS was the biggest borrower under the Commercial Paper Funding Facility, with $74.5 billion overall, more than twice as much as Citigroup Inc., the top U.S. bank recipient, according to the data released yesterday. Photographer: Reto Andreoli/Bloomberg
Federal Reserve data showing UBS AG
and Barclays Plc ranked among the top users of $3.3 trillion
from emergency programs is stoking debate on whether U.S.
regulators bear responsibility for aiding other nations’ banks.
UBS was the biggest borrower under the Commercial Paper
Funding Facility, with $74.5 billion overall, more than twice as
much as Citigroup Inc., the top U.S. bank recipient, according
to the data released yesterday. London-based Barclays Plc took
the biggest single amount under another program that made
overnight loans, when it got $47.9 billion on Sept. 18, 2008.
“We’re talking about huge sums of money going to bail out
large foreign banks,” said Senator Bernard Sanders, the Vermont
independent who wrote the provision in the Dodd-Frank Act that
required the Fed disclosures. “Has the Federal Reserve become
the central bank of the world? I think that is a question that
needs to be examined.”
The first detailed accounting of U.S. efforts to spare
European banks may add to scrutiny of the central bank, already
at its most intense in three decades. The Fed, which released
data on 21,000 transactions, said in a statement that its 11
emergency programs helped stabilize markets and support economic
recovery. The Fed said there have been no credit losses on
rescue programs that have been closed.
The growth of the U.S. mortgage-backed securities market
and the dollar’s status as the world’s reserve currency enticed
overseas banks such as Zurich-based UBS to buy assets in the
country before 2008. They paid for the holdings with U.S.
dollars, and when funding seized up, the Federal Reserve refused
to take the risk that European firms would unload the assets and
further depress markets for housing-related investments.
‘Much Worse’
“Things would have been worse if they hadn’t lent to
foreigners,” said Perry Mehrling, senior fellow at the Morin
Center for Banking and Financial Law at Boston University and
author of “The New Lombard Street: How the Fed became the
Dealer of Last Resort.” “We’re finally getting to understand
the role of the Fed in the world.”
Fed spreadsheets showed the central bank became the world’s
lender of last resort as dollars flowed to European banks as
well as Bank of America Corp. and Wells Fargo & Co., among top
borrowers from the Term Auction Facility at $45 billion each.
Goldman Sachs Group Inc., which posted record profit last
year, borrowed more than $24 billion from another program.
Milwaukee-based Harley-Davidson Inc. and Fairfield, Connecticut-
based General Electric Co. sold commercial paper, a form of
short-term debt, to the Fed under a program that lent as much as
$348.2 billion at its peak.
Sanders, the Vermont senator, said yesterday he plans to
investigate whether banks profited by borrowing from the Fed and
investing the funds in Treasuries, benefiting from the
difference in interest rates.
‘Bailout Protection Act’
U.S. Representative Mike Pence, an Indiana Republican, said
he planned to introduce a “European Bailout Protection Act” to
restrict the flow of International Monetary Fund loans to
European countries. He said he was responding to reports that
U.S. officials might bolster a European fund designed to deal
with this year’s debt crisis, which has spread from Greece to
Ireland.
Edwin Truman, a former Fed official who is a senior fellow
at the Peterson Institute for International Economics in
Washington, said any push to confine the Fed’s role to U.S.
banks would create a “massive exercise in financial
protectionism.”
“It would lead to retaliation, so U.S. banks in London or
Tokyo would expect the same kind of treatment,” Truman said.
William Poole, senior economic adviser to Merk Investments
LLC and a former Federal Reserve Bank of St. Louis president,
said he was surprised by the extent of non-U.S. bank borrowing.
Commercial Paper
“I was under the impression that each country bore the
responsibility for supervising the banks headquartered in their
borders,” Poole said in an interview.
The $74.5 billion received by UBS through the CPFF, which
bought short-term debt, represents total borrowings by UBS over
the life of the program. The total outstanding at any point in
time never exceeded about half that sum, said Karina Byrne, a
UBS spokeswoman.
Byrne said the bank’s tapping the Fed fund “should be seen
in the context of our overall desire to maintain flexibility and
diversification in our funding sources.”
The loan to a Barclays unit came from the Primary Dealer
Credit Facility, created to make sure U.S. securities firms and
foreign firms’ U.S. affiliates had cash to satisfy clients’
financing demands.
‘A Big Operation’
Paris-based Natixis borrowed $27 billion under the
commercial paper program. “We’ve got a big operation in the
U.S.A.,” Victoria Eideliman, a spokeswoman for the bank said.
“It was, for us, natural that we participate in this program
like all the banks. When we participated, the liquidity
situation was very tense.”
The $182.3 billion rescue of American International Group
Inc. spared European banks that traded with the New York-based
insurer from having to raise as much as $16 billion in capital,
according to a June report from the Congressional Oversight
Panel, which reviews bailout spending.
Fed Chairman Ben S. Bernanke addressed questions in a 2009
Congressional hearing about why non-U.S. banks benefited from
the AIG rescue.
‘The Obligation’
“I would point out that the Europeans have also saved a
number of major financial institutions, and the issue of whether
those institutions owed American companies money has not come
up,” Bernanke said. “So I think that there is a sense that we
all have the obligation to address the problems of companies in
our own jurisdictions.”
Three of the top seven borrowers under the CPFF program
were private firms. New York-based Hudson Castle received $53.3
billion in aggregate, BSN Holdings took $42.8 billion, and
Liberty Hampshire Co., a unit of Guggenheim Partners LLC, drew
$41.4 billion, Fed data show.
Hudson’s website says it develops “customized debt
products.” A person who answered its phone said no one was
available to comment. A Guggenheim spokesman didn’t return phone
calls.
BSN Capital Partners Ltd., which was associated with BSN
Holdings according to a 2006 Standard & Poor’s note, was founded
by John Burgess, a former Deutsche Bank AG managing director.
Burgess declined to comment.
To contact the reporters on this story:
Bradley Keoun in New York at
bkeoun@bloomberg.net;
Hugh Son in New York at hson1@bloomberg.net
To contact the editor responsible for this story:
David Scheer at dscheer@bloomberg.net
