Bloomberg News

Goldman Sachs Took Biggest Loan From Undisclosed Fed Program

July 06, 2011

(Updates with comment in fourth and 13th paragraphs.)

July 6 (Bloomberg) -- Goldman Sachs & Co., a unit of the most profitable bank in Wall Street history, took $15 billion from the U.S. Federal Reserve on Dec. 9, 2008, the biggest single loan from a lending program whose details have been secret until today.

The program, which peaked at $80 billion in loans outstanding, was known as the Fed’s single-tranche open-market operations, or ST OMO. It made 28-day loans to units of 19 banks between March 7, 2008, and Dec. 30, 2008. Bloomberg reported on ST OMO in May, after the Fed released incomplete records on the program. In response to a subsequent Freedom of Information Act request for details, the central bank disclosed borrower names, amounts borrowed and interest rates.

ST OMO is the last known Fed crisis lending program to have its details made public. The central bank resisted previous FOIA requests on emergency lending for more than two years, disclosing details in March of its oldest loan facility, the discount window, only after the U.S. Supreme Court ruled it had to. When Congress mandated the December 2010 release of data on special initiatives the Fed created in its unprecedented $3.5 trillion response to the 2007-2009 collapse in credit markets, ST OMO -- an expansion of a longstanding program -- wasn’t included.

“The Fed has come a long way over a long period of time as far as transparency,” said Raymond W. Stone, managing director and economist with Stone & McCarthy Research Associates in Princeton, New Jersey. “They thought counterparties might be harmed, but now so much time has passed that the information is not as sensitive anymore.”

Primary Dealers

The 19 borrowers from the program are known as primary dealers, which are designated to trade government securities directly with Federal Reserve Bank of New York. They bid at auctions for ST OMO’s cash. While the rates they paid generally tracked the federal funds rate, the rate for some dipped as low as 0.01 percent in December 2008.

The New York Fed conducted 44 ST OMO auctions, according to its website. Banks bid the interest rate they were willing to pay for the loans and pledged mortgage-backed securities guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac as collateral for the Fed’s cash. The transactions were known as repurchase agreements, or repos.

Longstanding Program

ST OMO was an expansion of longstanding open-market operations, which offered cash for up to two weeks and were used as a tool of monetary policy. In March 2008, the Fed adapted the program to alleviate pressures in short-term credit markets, according to a news release the central bank issued at the time.

The program shouldn’t be grouped with the Fed’s other crisis lending initiatives because it was “not outside of the Fed’s standard authorities,” David E. Altig, senior vice president and director of research at the Federal Reserve Bank of Atlanta, said in his blog in May.

The New York Fed posted aggregate data about the program on its website after each auction, said Jeffrey Smith, a New York Fed spokesman. By increasing the availability of short-term financing when private lenders were under pressure, “this program helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses,” he said. All of the ST OMO loans were repaid.

Some primary dealers used the program to help customers, such as hedge funds, finance their holdings of mortgage-backed securities, Stone said.

MBS Market

“The Fed didn’t want to just finance the primary dealers, they wanted the mortgage-backed securities market to become more fluid,” Stone said.

Credit Suisse Securities USA LLC, a unit of Switzerland’s second-biggest bank, had $45 billion in loans outstanding on Aug. 27, 2008 -- the largest peak borrowing amount, the data show.

“Credit Suisse was a net creditor throughout the crisis and made between $30 and $70 billion of liquidity available to central banks each day,” said Victoria Harmon, a spokeswoman for the bank in New York.

Six of the program’s top seven borrowers were units of foreign banks, the data show.

Goldman Sachs’s peak outstanding loans were the second- highest at $34.5 billion on Dec. 31, 2008, when interest rates were at their lowest, according to the data. Michael DuVally, a spokesman for New York-based Goldman Sachs Group Inc., the parent company of the primary dealer, declined to comment.

Lehman Brothers

Lehman Brothers Inc. had two loans totaling $2 billion outstanding when its parent investment bank filed the biggest bankruptcy in U.S. history on Sept. 15, 2008, the data show. Those loans were repaid on Sept. 18, 2008, under a separate agreement, the Fed’s release said. Lehman’s peak borrowings from ST OMO reached $18 billion on June 25, 2008, according to the data.

Kimberly Macleod, a Lehman spokeswoman, didn’t immediately respond to an e-mail seeking comment.

RBS Securities Inc., a unit of Britain’s second-biggest bank by market capitalization, had $31.5 billion in loans outstanding on Oct. 8, 2008, and UBS Securities LLC, part of Switzerland’s biggest bank, borrowed as much as $20.5 billion on Nov. 26, 2008, the Fed said.

Among the smallest loans was one to Bear Stearns & Co., the primary-dealer unit of Bear Stearns Cos. The primary dealer took one loan from ST OMO for $500 million, on March 12, 2008, according to the release. JPMorgan Chase & Co. bought the New York-based investment bank four days later. The loan was repaid on April 9, 2008, the data show.

The information on ST OMO is available on the central bank’s Web site: www.federalreserve.gov/monetarypolicy/bst_tranche.htm

--With assistance from Caroline Salas Gage, Linda Sandler and Christine Harper in New York and John Veidis in Princeton, New Jersey. Editors: John Voskuhl, Christopher Wellisz.

To contact the reporters on this story: Bob Ivry in New York at bivry@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net;

To contact the editors responsible for this story: Gary Putka at gputka@bloomberg.net; David Scheer at dscheer@bloomberg.net;


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